Dubai/Ras Al Khaimah Focus
By Lowtax Editorial
16 January, 2014
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 centred 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 centre which serves as a conduit for investment in the emirate's industrial zone, and as a vehicle for tax minimisation for businesses and investors with operations in one or more high-tax countries. ?Offshore activities in Dubai are centred 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. Banking facilities throughout the UAE are well-developed; indeed, it can be said that the country is somewhat overbanked. At the end of 2012 there were 945 domestic banks, including 805 branches, 23 head offices, 89 pay offices, and 28 electronic banking services units; and 166 foreign banks including 85 branches, 52 electronic banking services units, one pay office and 28 head offices. Federal law restricts foreign banks to no more than eight branches each. There are a number of Islamic banks in Dubai.
There are no elections or legal political parties in the UAE. Power rests with the seven hereditary sheikhs - also known as emirs, and hence the area ruled by an emir is known as an emirate - who control the seven traditional sheikhdoms (Abu Dhabi, Dubai, Sharjah, Ajman, Umm Al Qaiwain, Ras Al Khaimah and Fujairah - each emirate being named after its principal town) and choose a president from among themselves.
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.
Ras Al Kaimah is the northern-most of the emirates in the UAE, bordering Oman to the north and east. Its coastline runs for 65 kilometers along the eastern end of the Arabian Gulf and it is the fourth-largest emirate. It is less developed than Dubai, but nevertheless benefits from good transport infrastructure and has its own well-connected airport close to Ras Al Kaimah town, the major population centre, which is also a short drive (30 to 40 minutes) from Sharjah and Dubai.
A lack of trained personnel has resulted in a huge influx of expatriate workers to Dubai and to a lesser extent to Ras Al Khaimah; 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. The number of expats among the 240,000 people who live in Ras Al Khaimah is lower, but is still about half of the emirate's population. 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.
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.
Value-added tax (VAT) has been discussed for a number of years in the UAE, and is likely to be introduced sooner or later in unison with the other members of the Gulf Cooperation Council (GCC). The introduction of a sales tax had been discussed in Dubai for a number of years, but it is becoming apparent that the GCC member states want to roll out VAT simultaneously to replace revenues derived from trade taxes, which are due to be phased out as a number of free trade agreements are signed by the GCC. A date of 2015 has been tentatively proposed for the imposition of VAT, but there is currently no consensus on an implementation date.
There are no personal income taxes in either emirate.
Despite calls from the likes of the International Monetary Fund for the UAE to think about imposing new taxes to compensate for falling revenues from oil wealth, which will inevitably begin to run dry at some point in the future, the region appears to be sticking to its low tax path and both emirates will at least remain free from income taxes for non-oil firms and individuals for the foreseeable future. Companies established in the emirates free zones in any case have legal guarantees that they will not be taxed for many years. And it is the major free zones in Dubai and Ras Al Khaimah which we will now explore.
Jebel Ali Free Zone (JAFZ)
The JAFZ, located in Dubai, was established in 1985 and spreads over an area of 48 square kilometres. Home to over 7,100 companies, including 100 Fortune Global 500 enterprises, it is one of the world's largest and fastest-growing free zones.
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.
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 AED 1m 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 Free Zone and Dubai Ports Authority (DPA) are inextricably linked; they are led by one chairman and share a strong, symbiotic relationship. The Free Zone is 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 Free Zone companies. Jebel Ali terminal offers efficient cargo handling, and with rates among the lowest in the world, the prospects for exporting are good.
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 since its birth ten years ago and it is now considered the pre-eminent financial centre between the European and Asian time zones. Over 1,000 companies now operate from the DIFC with a combined workforce of over 15,000 people.
Asset management companies, banks, and other financial service providers which establish headquarters in the Dubai International Financial Centre (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.
However, the DIFC authorities do not expect these new transparency laws to quell demand for office space in the financial district. Indeed, in October 2013 plans were announced to add AED15bn (USD4bn) worth of new buildings to accommodate high occupancy demand.
"The latest plan is in line with DIFC's long-term growth strategy and reflects the growing demand for space, from both existing and potential clients, who wish to expand their operations in the Center. DIFC is now evaluating development proposals for a limited amount of plots, with a view to joint venturing with qualified developer and investor groups, to build and form mutually beneficial long-term partnerships," a press release from DIFC said.
Work on the next phase of the development is expected to commence in early 2014.
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. This number had risen to almost 1,000 by October 2007.
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. Currently, more than 25,000 ICT professionals are employed within DIC as part of technical teams and support staff.
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.
In 2013, the DMCC overtook the Jebel Ali Free Zone to become Dubai's largest free trade zone.The DMCC is also the fastest growing free zone in the UAE. An average of 200 companies join each month, with 94 percent staying. The center now has more than 7,330 active registered companies.
About 95 percent of the newly registered companies in the first half of 2013 were newcomers to Dubai, indicating that the free zone is highly attractive to foreign investors. About one-third of those companies were from other parts of the Middle East, while South Asia, the Americas and the UK accounted for 28 percent, 14 percent and 14 percent respectively.
"We are well on our way to achieving our target of 10,000 companies by 2015, at which point we anticipate to be almost at capacity," said DMCC executive chairman, Ahmad Bin Sulayem in 2013. "Our expansion plans, including the DMCC business park and the world's tallest commercial tower, will cater to large corporations looking to access new markets and will be the next phase in the DMCC's and Dubai's growth."
Ras Al Khaimah Free Trade Zone (RAK FTZ)
As the industrial heart of the UAE, the RAK FTZ, established in 2000, is home to a number of manufacturing concerns, including the largest pharmaceutical manufacturer in the UAE. Glass and steel making are also important industries. However, the RAK FTZ also welcomes investment from "clean" industries, e-commerce firms and educational institutions.
The zone is divided into five parks, located in various parts of the emirate. These include the Industrial Park, Business Park, Technology Park, Aviation Park and Academy Zone.
As well as heavy industry, the Industrial Park also contains extensive warehouse space in units sized from 150 square meters up to 500 square meters which are suitable for light manufacturing and assembly, as well as for storage. The industrial zone is under constant expansion, and a much larger industrial area, known as the Al Ghayl Industrial Park is being developed for heavy industry and currently covers 223 hectares.
The Business Park is located in the centre of Ras Al Khaimah city and provides modern office facilities equipped with power, phone, internet and fax access, air conditioning, housekeeping services, 24 hour security and private postal addresses. Rental costs start at AED1,200 per square meter per year, and may include electricity costs. Lease terms are for one year and are renewable annually. A full year's rent must be paid at the time of registering the company.
The 100 hectare Technology Park is situated to the south of Ras Al Khaimah city, close to Dubai in an area that is seeing rapid growth in light industry and of automated manufacturing plants.
The 75,000 square meter Aviation Park is located at Ras Al Khaimah International Airport and specializes in maintenance, repair and overhaul operations.
The Academy Zone is a dedicated facility from which educational organisations can offer academic programmes to the community of Ras Al Khaimah. Educational organisations can either manage their operations at an allocated building or build their own campuses at an assigned location in Ras Al Khaimah.
Branches of foreign universities may operate in the Academy Zone. Other authorized activities include the provision of infrastructure and facilities to educational institutions, in-house training activities and distance learning. Student visas are available for university students. These last for 18 months and are applicable to students aged from 18 to 21.
The RAK FTZ reported a 70 percent year-on-year increase in new company registrations for the first half of 2013 a period in which a record-breaking 1,994 new companies have joined the free zone, a substantial increase over the 1,170 companies registered in the same period in 2012. Revenues from the new company registrations increased by 23 percent year-on-year in the period under review. The number of licences renewed in the first half of 2013 also increased to 2,696, from 2,298 in the first half of 2012, representing growth of 17 percent.
New companies registered in the RAK FTZ during H1 2013 included business from the United Kingdom, India, Turkey, and Germany, among others. A broad range of industries were represented in the new registrations including consultancy, general trading, logistics, and industrial manufacturing.
Commenting on the results, Peter Fort, CEO, RAK FTZ, said: "This growth reflects investor confidence from across the globe in our cost-effective free zone and business-friendly approach and re-emphasises the world-class facilities and services we offer. Businesses are increasingly realising that RAK FTZ is less than an hour from the logistical hub of Dubai and offers the same advantages as other free zones in the UAE. Our full commitment to quality, excellence and customer satisfaction will, as usual, be the driving force for our continued growth this year."
Free Zone Licensees are not permitted to display or sell their products or services themselves directly in the local market. However, the holder is permitted to operate outside the UAE. Retail trading is not allowed inside the Free Zone Parks.
A Free Zone Company (FZCO) is a limited liability company incorporated with the RAK Investment Authority, by more than one shareholder. The capital requirement for setting up an FZCO in the RAK Investment Authority Free Zone is AED250,000.
A Free Zone Establishment (FZE) is 100 per cent owned by either a person or a corporate body. It enjoys the status of a separate legal entity. The capital requirement for setting up a FZE in the RAK Investment Authority Free Zone is AED150,000.
Local or UAE Branch Licences are issued to companies holding a valid licence from any UAE licencing authority except from other free zones.
Foreign Branch Licences are issued to companies outside the UAE seeking to open a branch in the RAK Investment Authority Free Zone. The ownership of the company must be 100 percent foreign and sales can be made through a UAE-registered agent or a distributor only. The activity may be industrial, commercial or professional/services-based.
RAK Free Zone companies must obtain one of the following types of licences:
- An Industrial Licence allows the holder to import raw materials in addition to manufacturing, processing, assembling, packaging, and exporting finished products.
- A Commercial Licence allows the import, export, distribution, consolidation, storage or warehousing of items specified in the licence.
- A Consulting and Services Licence allows the holder to offer consulting services in management, finance, investment, legal issues, labour relations, economics (including feasibility studies), industrial development, marketing, and related subjects. Other services include logistical support such as: restaurants or food outlets, catering services, travel agencies, leisure and social activities, insurance, cargo and freight forwarding, accounting, and audition services.
- A Commercial General Trading Licence can be obtained under a Commercial License, which allows for more than seven product lines.
Dubai has all the attributes and more of a modern, sophisticated financial centre; 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. Although Dubai suffered an economic setback at the start of the financial crisis, the continuing growth of its free zones and its emergence as the wealth management centre for the largely untapped wealth of the Middle East shows that its foundations remain strong.
While Ras Al Khaimah may not have the same resources at its disposal as its noisy neighbour, as a 'no tax' emirate with a similarly business-friendly administration, it is beginning to attract significant interest from international investors, particularly in high-tech and services-based industries. The rapid growth of the recently-launched offshore company facility, which appeals to investors wanting strong confidentiality protections in addition to low taxes, could well eclipse more traditional offshore jurisdictions in the not-too-distant future.
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