The financial crisis was perhaps not so bad for the UAE - property prices and rental prices are down, there are less people and consequently less traffic congestion and it is easy to catch a cab nowadays. VAT plans are off the table for now. Infrastructure keeps on improving. There are five bridges crossing the Creek that separates the north and south of Dubai now; with two more being completed. Riding the Dubai metro is as pleasant a ride as any metro-ride can conceivably be. ADSL has been replaced by 40 Mbps fibre-optics connections; and the price is lower. Add these lifestyle benefits to the fact that direct taxes are still non-existent and not even on the table for discussion and it would be hard not to conclude that setting up business in the Emirates is an attractive proposition.
Operating a business in the UAE
Under UAE federal law foreign businesses have three main entities to choose from in order to conduct business in the UAE: a local limited liability company; a branch of a foreign company; a representative office of a foreign company
Alternatively, six out of seven Emirates (the exception is Abu Dhabi) offer the possibility to conduct business out of a free zone. And two emirates, Dubai and Ras al Khaimah (RAK), offer an IBC-regime.
A local Limited Liability Company
A limited liability company (LLC) can be formed with a minimum of two and a maximum of 50 persons whose liability is limited to their shares in the company's capital. Companies with expatriate partners typically opt for this form of company. The voting rights in the company may not exceed 49 per cent, profit and loss distribution, and the share in allocation of liquidation proceeds can be mutually agreed upon. LLCs can sell directly to the local market.
If the scope of the activities in the UAE is limited, a branch or representative office can be considered. Such an office would also need a local sponsor, however, the sponsor in this case does not gain any voting rights - the role is typically limited to dealing with local and federal government requirements.
A branch of a foreign company
Foreign companies can establish a branch office in the UAE. A branch office may not carry out any commercial activity in its own name, it may only negotiate and enter into contracts on behalf of the parent company, and if goods and services are required to fulfil that contract, they have to come directly from the parent. Support activities by the branch are allowed.
A foreign company may also establish a representative office in the UAE. Such representative offices may undertake marketing and promotional activities on behalf of their parent company, but are not permitted to trade.
International business companies
Dubai, through its Jebel Ali Free Zone, and Ras al Khaimah, through the RAKIA Free Zone and the RAK Free Trade Zone, offer an International Business Company (IBC) regime. These companies are ideal for any type of business that does not require a local office. This includes any passive investment activity, eg holding shares in local or free zone companies, holding UAE real estate, or trading activities outside the UAE. IBCs cannot rent office space nor can they apply for staff visas and they are not allowed to trade with parties inside the UAE. RAK IBCs have the following features:
· There is no requirement for the owner or manager to visit the UAE in person;
· There is no requirement to deposit capital in a bank account;
· The only data on public record is the name of the company and date of incorporation.
· There is no audit requirement or requirement to submit financial statements
Just like local and free zone companies, these offshore companies can benefit from some of the tax treaties concluded by the UAE. If a local corporate bank account is required, for instance in order to benefit from the strong client confidentiality rules applicable in the UAE, then an offshore company from another jurisdiction is simply not a feasible option. There are very few banks in the UAE that even allow foreign entities to open bank accounts, and for the ones that do, the attestation fees are high.
Offshore companies can only be incorporated through a licensed Registered Agent
If there is no need to sell goods directly to the local market, but office space and local staff are required, then setting up in a free zone is often more attractive than using a local company. Free zone companies also meet the growing necessity in international tax planning of having necessary substance. This is often impossible to deliver from the traditional offshore jurisdictions since they typically only offer an IBC regime.
The main advantages of setting up in one of the free zones in the UAE are as follows:
· 100 per cent foreign ownership is allowed;
· Guarantee for 15-50 years against the future imposition of corporation tax. It is not clear whether the guarantee would provide exemption against an imposition of VAT as well;
· Import of goods duty free, provided the goods are not supplied to the local market;
· Streamlined procedures: all formalities are typically dealt with through the free zone authorities instead of the various government departments;
· No restrictions on hiring expatriates.
The main disadvantages as compared to operating as a local business are that there is higher rent than outside the free zones and it is not possible to supply goods directly to the local market. Goods can be supplied to the local market through a local commercial agency which has to be wholly owned by a UAE national and after paying the import duty (which is normally five per cent). Note that the practice is to allow the provision of services through a free zone entity to the local market as long a significant proportion of the turnover is realised abroad.
The free zones each have their own free zone authority. These are profit making entities. Their main source of income is derived from renting office space, collecting license fees, and providing services to the companies operating in the free zone. All share the features outlined above but differ along the following lines:
· Focus of the free zone: free zones often focus on attracting businesses from a particular sector although there is considerable flexibility. Some free zones do not have a particular focus
· Office rent; rents outside Dubai are significantly lower;
· Minimum office space required to be rented;
· Support facilities provided by the free zone;
· Annual trade license fees;
· Paperwork involved in forming the business;
· Capital requirement;
· Number of visas allocated per square meter office space.
In all free zones financial statements need to be submitted to the free zone authorities annually.
The financial crisis has probably helped the UAE in realising what makes it so unique. Various recent developments have improved the business climate further.
Attestation charges of foreign documents have always been very significant in the UAE. Although still substantial, these have recently come down.
Whereas it was an absolute requirement to rent office space until a few years ago, now there are several free zones outside Dubai that have introduced a flexi-desk concept. This means that a room is shared or a desk is rented for a number of hours a month. If office space is not absolutely necessary, such as for a consultant operating out of the UAE, then this is ideal because this naturally translates into a much lower annual cost. Among others the Ajman Free Zone, RAKIA Free Zone, RAK Free Trade Zone, and the VirtuZone in Fujairah offer this option.
Capital requirement have been falling in all free zones. Five-hundred thousand Dirhams (appr. €100000) used to be the absolute minimum capitalisation requirement in the free zones located in Dubai; now there are several which do not require any capitalisation at all, (for example: RAKIA Free Zone), and others have lowered it significantly (eg Silicon Oasis, a free zone aimed at technological companies in Dubai, reduced the requirement to 100000 Dhs).
Free zones are also competing with each other on speed and customer service. In this respect the Ajman Free Zone sticks out. Ajman is a tiny emirate a 30 minute drive from Dubai through Sharjah. An Ajman Free Zone company can be up and running within one day of receiving the initial paperwork for setting up the company. The paperwork required also compares favourably with that of other free zones and once set up many of the requests for the free zone authority can be filed online. They are very pleasant to deal with and eager for business
The UAE has concluded approximately 50 tax treaties, many of them with OECD countries. While most of the tax treaties are not very attractive because of the limitation of benefits clauses, inclusion of liable to tax clauses and uncertainty as to whether UAE residents are considered to be liable to tax in the context of the treaty, some restrict the benefits for individuals to UAE nationals, and some can only be accessed by government entities.
However there are several treaties that stick out: the treaties with India, New Zealand, Austria and the Netherlands. None of these have a liable to tax requirement. A treaty with the Netherlands was ratified in June 2010. Its most important effect for outbound investment is that it limits the dividend withholding tax rate to five per cent. The Netherlands is a particularly attractive country for inward investment into the UAE now because for most items of income the Netherlands will exempt UAE income even though it has not been subject to tax: UAE real estate gains and income, income from a UAE PE, and employment income from a UAE employer are exempt from tax in the Netherlands. Gains and dividends derived from a UAE subsidiary are exempt under domestic legislation in the Netherlands, provided it is not mainly holding passive invesments.
Interestingly, none of the tax treaties the UAE has concluded require it to assist in the collection of taxes of the other contracting state. An exchange of information article, however, is normally included. It has managed to stay off the FATF list of uncooperative jurisdictions; is not on the list of so-called secrecy jurisdictions in proposed US legislation; and has managed to stay out of the European Savings Directive zone.
Currently there are various initiatives under discussion to make the Emirates an even more attractive place to do business. One of them is to do away with the sponsorship system altogether.
A more moderate initiative would entail reducing the local ownership requirement to below the magical 50 per cent limit. All in all, the UAE offers something that seems out of this world: an attractive lifestyle, no direct taxation, very minimal direct taxation, a strategic location, and it is constantly working on improving its business climate even further.