Dubai - Linking East With West
By Lowtax Editorial
05 April, 2016
Dubai may have had its fingers burnt in the financial crisis of 2009 as its booming property sector slumped and the emirate was effectively bailed out by the parent government of the UAE. However, the crisis hasn't deterred foreign investors who continue to establish in Dubai's many tax-free zones in large numbers, and the "City of Gold," as it is sometimes dubbed, seems to have regained its confidence.
Petroleum has traditionally dominated the economy of the UAE. At one time an underdeveloped area, by 1985 the region had the highest per capita income in the world. This immense wealth has been invested in huge infrastructure projects in all seven of the emirates. It has also allowed the government to keep taxes low (in most cases, practically non-existent) which has attracted thousands of corporate investors and millions of foreign workers and investors into the country, resulting in some of the highest pre-crisis economic growth rates anywhere in the world.
Petroleum production is centered in Abu Dhabi and Dubai. Ras Al Khaimah is the industrial heart of the UAE, and it also has a small but rapidly-growing offshore center which serves as a conduit for investment in the emirate's industrial zone. Offshore activities in Dubai are centered on the Jebel Ali Free Zone and the Dubai International Financial Centre, which are explained in more detail later in this feature, although there are now more than 20 free zones catering to business in specific sectors, including e-commerce, commodities trading, education and finance.
Dubai From Sleepy Fishing Port To Concrete Jungle
The emirate of Dubai extends along the Arabian Gulf coast of the UAE for approximately 72 kilometres and constitutes just 5 percent of the UAE's total area. Dubai city is built along the edge of a narrow 10-kilometre long, winding creek. The scale of capital investment in Dubai over the past two decades has been truly staggering and Dubai city, once a small fishing town, now rises out the desert like an Arabian Manhattan. Dubai's port is one of the largest and busiest in the region, and more than USD30bn is being pumped into a new international airport, named the Al Maktoum International Airport after the emirate's ruling dynasty, which, when fully operational, will have six runways and as many concourses.
A lack of trained personnel has resulted in a huge influx of expatriate workers to; of the almost 2m people currently living in Dubai, only 22 percent are ethnically emirati in a population mixture that has to be one of the world's most cosmopolitan. While there is a considerable population of non-resident Indians in Dubai, the emirate has also attracted large numbers of highly-skilled people from Europe and North America, lured there by high pay, low (or no) taxes, and year-round sun and warmth. And it is to the emirate's major tax advantages that we now turn.
Tax (The Lack Of...)
The UAE's enormous oil revenues mean that the government, at national and local level, has no need to raise income through direct taxation. Accordingly Dubai and Ras Al Khaimas are "no tax" emirates characterized by an almost complete absence of taxation. There are no withholding or capital taxes, although business properties in Dubai pay a municipal tax set at 10 percent of annual rental value.
With the exception of banks and oil companies no corporate income tax is payable by businesses in the UAE. Oil companies pay up to 55 percent tax on UAE-sourced taxable income whereas banks pay 20 percent tax on taxable income. The taxable income of banks is based on audited financial statements whereas that of oil companies is according to their concession agreements. Oil companies also pay royalties on production.
Double taxation treaties (negotiated and signed by the federal government) are in place aimed at making the emirates a more attractive territory in which to operate by reducing taxation levied in foreign jurisdictions on profits remitted abroad by foreign corporations operating locally. The extensive and growing list of treaties currently numbers more than 60 countries, including China, France, Germany, India, Indonesia, Italy, Luxembourg, Malta, Malaysia, the Netherlands, Singapore and South Korea.
Under these treaties profits derived from shares, dividends, interest, royalties and fees are taxable only in the contracting state where the income is earned. Although corporate income tax is not levied in the UAE the provisions of the treaties do not state that such income must be taxed to qualify for benefits. Thus dividend income paid by a UAE company to a company which has a double taxation treaty with UAE may not be taxable in the hands of the foreign parent corporation. However, it is wise to study the text of the treaties themselves before assuming anything about the tax treatment of untaxed income flows originating in Dubai.
The Free Zones
While commercial and economic free zones, whereby investors are granted exemption from certain taxes and legal and regulatory, are growing in numbers around the world, doubtless few match the incentives on offer in Dubai's free zones, of which there are now more than 20.
Companies in Dubai's free zones are granted a number of fiscal and regulatory benefits, including freedom from corporate taxation for a period of 50 years a concession which is renewable; exemption from all import duties; 100 percent repatriation of capital and profits; and 100 percent foreign ownership.
Dubai's network of free zones now covers a comprehensive range of economic sectors, and includes the following:
- Dubai Academic City
- Dubai Airport Free Zone
- Dubai Biotechnology & Research Park
- Dubai Car and Automotive City Free Zone
- Dubai Gold and Diamond Park
- Dubai Healthcare City
- Dubai Industrial City
- Dubai International Academic City
- Dubai International Financial Centre
- Dubai Internet City
- Dubai Knowledge Village
- Dubai Logistics City
- Dubai Media City
- Dubai Multi Commodities Centre
- Dubai Outsource Zone
- Dubai Silicon Oasis
- Dubai Studio City
- Dubai Techno Park
- Dubai Technology and Media Free Zone
- Economic Zones World
- Jumeirah Lakes Towers Free Zone
What's more, new free zones are coming on stream on a regular basis. For instance, in March 2016, Dubai's ruler, Mohammed bin Rashid Al Maktoum, announced that a new free trade zone called Dubai Wholesale City is being planned. And in 2015, a law was issued establishing the Dubai World Trade Centre as a free zone.
Some of Dubai's more well established and popular free zones are discussed next.
Jebel Ali Free Zone
The Jebel Ali Free Zone (JAFZ) was established in 1985 and spreads over an area of about 50 square kilometres. Home to well over 7,000 companies from over 100 countries, it is claimed to be the world's largest free zone. More than 135,000 people are employed in the JAFZ, which attracts over 20 percent of Dubai's foreign direct investment and accounts for more than half of the emirate's total exports.
According to the JAFZ, 679 new companies were registered in 2014, an increase of 17 percent against 2013 activity. Asia Pacific firms accounted for 29 percent of the new companies formed. The Americas and Europe together accounted for 27 percent. 14 percent of the new companies came from India, six percent from China, and eight percent were from either the US or the UK. Company revenues grew by 10 percent, and profits were up more than 13 percent to AED1.18bn. The free zone authority says that companies generated trade worth an estimated AED370bn in 2014.
The JAFZ was set up with the specific purpose of facilitating investment. Accordingly, the procedures for setting up in the zone are relatively simple. Its legal status is quite distinct: companies operating there are treated as being "offshore", or outside the UAE for legal purposes.
The option of setting up in Jebel Ali is therefore most suitable for companies intending to use Dubai as a regional manufacturing or distribution base and where most or all of their turnover is going to be outside the UAE.
As mentioned above, there is freedom from corporate taxation for a period of 50 years, a concession which is renewable. In addition, there are no import or re-export duties, no personal income taxes, no currency restrictions, and no restriction on hiring foreign employees. 100 percent foreign ownership is permitted and there is exemption from all import duties, plus 100 percent repatriation of capital and profits is guaranteed.
A Free Zone Establishment or FZE is an entity formed and registered in Jebel Ali and regulated solely by the Free Zone Authority. Such establishments must have a capital of at least AED1m (USD272,000) and liability will be limited to the amount of paid-up capital. A FZE need only have a single shareholder and is an independent legal entity.
Companies approved for operation in the Jebel Ali Free Zone are granted one of the following types of licences, renewable annually for as long as the company holds a valid lease from the Free Zone Authority (Jafza):
- A General Trading Licence allows the holder to import, distribute and store all items as per Jafza rules and regulations.
- A Trading Licence allows the holder to import, export, distribute and store items specified on the licence.
- An Industrial Licence allows the holder to import raw materials, carry out the manufacture of specified products and export the finished product to any country.
- A Service Licence allows the holder to carry out the services specified in the licence within the Free Zone. The type of service must conform to the parent company's licence, issued by the Economic Department or Municipality of the relevant Emirate in the UAE.
- A National Industrial Licence is designed for manufacturing companies with an ownership or shareholding of at least 51 percent in GCC hands.
The JAFZ and Dubai Ports Authority (DPA) are inextricably linked, with the former built around the DPA's Jebel Ali terminal, enabling customers to take full advantage of the port's ISO-certified container and general cargo operations. Specialized unloading facilities and purpose-built storage such as the cool and cold stores are also at the disposal of JAFZ companies. Jebel Ali terminal offers efficient cargo handling, and with rates among the lowest in the world, the prospects for exporting are good.
The Dubai International Financial Centre (DIFC)
During 2002, the Dubai authorities developed plans for the Dubai International Financial Centre (DIFC), which was launched in 2003 and began operations in late 2004. The UAE Federal Cabinet approved a Federal Decree allowing the DIFC a large degree of sovereignty in July 2003, and a year later the ruler of Dubai guaranteed the legal independence of the DIFC, signing a decree officially establishing the DIFC in September 2004.
With DIFC companies enjoying the same tax benefits as other free zone firms in Dubai, the Centre has grown rapidly and it is now considered the pre-eminent financial centre between the European and Asian time zones.
It was announced in February 2016 that the number of new company registrations at the DIFC increased at a record rate of more than a quarter (27 percent) in 2015 compared with 2014, from 242 to 309. The number of active registered firms in the financial services and non-financial services sectors in the DIFC grew 13 percent and 22 percent, respectively, compared with 2014. Among active registered firms, financial services account for 408 firms while the non-financial services sector is made up of 835 companies. The size of the total workforce employed within the DIFC also grew, to 19,808, in 2015, an 11 percent increase compared with 2014.
The leadership of the DIFC also have ambitious plans to expand the size and influence of financial center as part of a 10-year plan announced in 2015. Under the new strategy, the free zone plans to grow three-fold and aims to become one of the top-10 financial centers in the world. Assets under the management of fund managers and financial institutions are expected to grow rapidly to an estimated USD250bn from USD10.4bn over the same period. In addition, the DIFC expects the combined workforce of DIFC-registered companies to grow to 50,000.
Asset management companies, banks, and other financial service providers which establish headquarters in the DIFC are permitted to do business with locally-based high net worth individuals but are not allowed to trade in the retail market in Dubai.
The DIFC has a separate set of laws called the Commercial Code, comprising a comprehensive set of regulations such as company law, legislation on property rights, including laws on security and collateral, title to goods and securities, commercial transactions and contracts, and insolvency.
The regulatory authority (the Dubai Financial Services Authority) is a "one-stop for everything" regulator: financial institutions are granted an umbrella licence covering all services, but with separate permissions for discrete activities such as wholesale banking, asset management, insurance, re-insurance, securities underwriting, broking, dealing, corporate finance advice, investment advice, derivatives trading, etc.
In December 2013, a series of amendments to the DIFC's company laws were enacted to ensure that they comply with the requirements set out by the OECD Global Forum on Transparency and the Exchange of Information for Tax Purposes. The amendments include provisions pertaining to the availability, access and exchange of information.
Dubai Internet City
In February 2000, Dubai's then ruler Sheikh Maktoum bin Rashid Al Maktoum issued a decree setting up a free-trade zone for electronic commerce and technology. The decree established an independent body, the free zone authority headed by Crown Prince Sheikh Mohammed bin Rashid Al Maktoum, which would operate under the Dubai government to spearhead the emirate's drive to become a regional centre for electronic commerce, technology and information.
The DIC got off to a flying start. In September 2000 Dubai officials announced that more than a hundred information technology companies had been granted licences to operate in the City. The companies, which included industry giants Microsoft, Oracle and Compaq, invested USD250m in the technology, e-commerce and media free zone, according to DIC director-general Mohammed Al Gergawi. By 2016, office space in the DIC covered an area of more than 1.5m square feet and was home to 1,400 companies and over 10,000 workers.
In April 2013, the DIC and Dubai Outsource Zone (DOZ), the world's first free zone dedicated to the outsourcing industry, announced growth of 15 percent as 160 new companies registered in the business parks throughout 2012. Sectors that saw new additions within the DIC in 2012 included internet and multimedia software, telecommunications, and IT services. More than 60 business partners including Fortune 500 companies MasterCard, GE, Qualcomm, EMC and Google significantly increased their presence in the DIC in 2012.
The free zone authority oversees the establishment of the necessary infrastructure at the zone, licenses companies wishing to set up shop there and leases land and property to them for up to 50 years. The authority also runs the zone, and levies fees for its services.
Companies are allowed 100 percent foreign ownership in the zone, while goods imported to the zone and products for export are exempt from custom duties and companies are exempt from taxes, including income tax. In line with Dubai's liberal economic policies, the DIC regulations also provide for 100 percent repatriation of capital and profits, easy registration and licensing, stringent cyber regulations and protection of intellectual property; there are no currency restrictions.
Companies can choose to incorporate in one of three ways:
- Branch of Foreign Company;
- Branch of UAE-based Company (including other UAE Free Zone licensees);
- Free Zone Limited Liability Company (FZ LLC).
Submission of the License application form can be done electronically through the Dubai Internet City site.
Dubai Multi Commodities Center (DMCC)
Established in 2002 by Royal Decree, the Dubai Multi Commodities Centre Authority (DMCC) is a strategic initiative of the Government of Dubai, with a mandate to enhance commodity trade flows through the Emirate by providing the appropriate physical, market, financial infrastructure and services required. Enjoying the same fiscal privileges, legal autonomy and regulatory freedoms as Dubai's other free zones, the DMCC is the master developer and licensing authority for the Jumeirah Lakes Towers (JLT) Free Zone, the fastest growing free zone development in Dubai.
The DMCC announced in July 2015 that the number of registered companies operating from the zone grew 10 percent to 10,624 in the first half of 2015. The free zone said that the substantial growth rate is due to its digital transformation initiative. The initiative, launched in 2013, made all the free zone's services available online, including the company registration process.
Ahmed Bin Sulayem, the Executive Chairman of the DMCC, said: "Our transformation has enabled us to outperform our growth targets whilst allowing us to interconnect our entire community. You can find all our services and products online. Innovation and technology play a major role in how we at DMCC interact with our stakeholders and facilitate trade across the world."
The DMCC was the first UAE free zone authority to offer freehold business premises in addition to all the usual incentives, including exemption from corporate tax, full foreign ownership and 100 percent repatriation of capital.
Dubai has all the attributes and more of a modern, sophisticated financial center; combined with the emirate's mineral wealth, the government's liberal attitude to business and readiness to invest heavily in essential infrastructure, the almost complete absence of taxes, and its location at the cross-roads of Europe, Africa and Asia, Dubai has become the most attractive and dynamic offshore jurisdiction in the region, if not globally.
However, there have been a number of signs recently to suggest that Dubai's and the wider UAE's days as a fiscal paradise are limited. This is partly because falling oil prices have left the UAE with insufficient revenue to cover expenditure. But the oil-rich emirates are of course also facing up to a future without hydrocarbons, even if that eventuality seems a fairly long way off.
The six members of the Gulf Cooperation Council have been discussing the introduction of a bloc-wide revenue-raising value-added tax, probably at a relatively low rate of 5 percent, for a number of years. And while the implementation of VAT has been put off numerous times, mainly due to technical and administrative deficiencies in certain GCC states, UAE Deputy Ministry of Finance, Younis Al-Khouri, told reporters in January 2016 that an agreement is near that would see VAT introduced in each of the members of the bloc by 2018.
What's more, the day when the UAE introduces some form of income tax also seems to be drawing closer. Indeed, it looks as if the UAE could follow in the footsteps of Kuwait a fellow GCC member and soon introduce a corporate income tax. It is not known at what rate the corporate tax would be set, although the UAE Finance ministry has indicated that companies would get at least 12 months to prepare for the new tax regime.
The likely introduction of new taxes in the UAE won't of course affect companies registered in the country's numerous free zones, which are guaranteed exemption from corporate tax. For this reason, we are unlikely to see speculation about taxes, or even their actual introduction, diminish the strong lure of Dubai's free zones for foreign investors.
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