Lowtax Review Dubai and Ras Al Khaimah
Sponsored by Charterhouse Lombard Limited
09 January, 2012
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 emirates 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 a number of other free zones catering to business in specific sectors, the Dubai Internet City being a notable example. Banking facilities throughout the UAE are well-developed; indeed, it can be said that the country is somewhat overbanked. At the end of 2010 there were 867 domestic banks, including 732 branches, 23 head offices, 86 pay offices, and 26 electronic banking services units; and 162 foreign banks including 83 branches and 28 head offices.
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% of the UAEs 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. Dubais 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 emirates 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% are ethnically emirati in a population mixture that has to be one of the worlds 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 emirates 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 emirates major tax advantages that we now turn.
Tax (or Lack of It)
The UAEs 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% 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% tax on UAE-sourced taxable income whereas banks pay 20% 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 52 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 (CGG). 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 timeframe of 2012 to 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 6,400 companies, including over 120 Fortune Global 500 enterprises, it is one of the worlds 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% foreign ownership is permitted and there is exemption from all import duties, plus 100% repatriation of capital and profits is guaranteed.
A Free Zone Establishment - or FZE - is an establishment 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 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% 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 prospect for exporting is good.
Dubai International Financial Centre
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 almost ten years ago and is now considered the pre-eminent financial centre between the European and Asian time zones. A total of 64 companies joined DIFC in the first six months of 2011, bringing the number of active registered companies operating in the Centre up to 813. 44% of new regulated companies in the first half of 2011 came from the Middle East and Asia, 50% from Europe and North America, and 6% from the rest of the world.
Commenting on these figures, Abdulla Mohammed Al Awar, Chief Executive of the DIFC Authority, said: In 2010, DIFC focused on developing and implementing its new business strategy which centred on growing our existing client partnerships. We have successfully carried this through into 2011 and have seen the evolution of DIFC continue, adapting to the rapidly-changing environment around us. The outlook for economic growth in the region continues to be strong due to the long-term fundamentals, particularly its abundance of natural resources and youthful populations, as well as the benefits of economic integration through the GCC Common Market and larger Free Trade Area. DIFC, with its modern infrastructure, free zone status and self-governing laws and courts, is uniquely positioned to support this growth in the region and to continue to be a major contributor to the UAE and wider region economies.
Marwan Ahmad Lutfi, Deputy Chief Executive and Managing Director of Business Development and Services added: ?2011 marked the beginning of a new phase in DIFCs development as one of the leading global financial centres. We are focused on expanding our existing client partnerships and on attracting new players to drive the development of the financial services market in the region. This has translated in the number of existing clients expanding their presence in the Centre, and the strong pipeline of companies and applications currently being processed."
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 enter into 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.
As 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.
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.
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 USD250 million in the technology, e-commerce and media free zone, according to DIC director-general Mohammed Al Gergawi. Another 350 firms were awaiting approval, he said. By mid-2004, the number of companies operating out of the DIC had risen to more than 500. This number had risen to almost 1,000 by October 2007, when the DIC notched up its seventh-year of operation. A further 150 companies set up operations in the DIC in 2010, including Cable and Wireless Europe, ADP Dealer Services Gulf, Pitney Bowes Software, China Communication Service, and Versata. 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% 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 Dubais liberal economic policies, the DIC regulations also provide for 100% 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.
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 address. 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 years rent must be paid at the time of registering the company.
The 100 hectare Technology Park is situated to the south of Ras Al Kahimah 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.
Defying the challenging economic environment, the RAK FTZ continued to achieve steady growth during 2010 its 10th year in operation. The RAK FTZ registered 1,740 new free zone companies during the year, while its International Companies (IC) division registered a record number of 1,499, a 14.65% increase in the total number of registrations compared to 2009. Licence renewals also achieved significant growth of 16.49% in 2010, with 3,271 companies renewing their business licences, reinforcing the free zones reputation as one of the most attractive investment zones in the Middle East. As of the end of 2010, the total number of actively operational registered companies in RAK FTZ stood at over 5,000.
A total of 1,509 companies registered in the period January-September 2011, compared to 1,173 companies registered in the same period in the previous year - a 28.65% year-on-year increase. Licence renewals also showed impressive growth with 828 licences renewed between July and September 2011, compared to 753 renewals in the same period in 2010.
The vast majority of the new companies originate from UAE and India, with other new registrants originating from Afghanistan, France, the Netherlands and Pakistan. Together with new registrations, the total number of registered companies operational at RAK FTZ by the end of Q3 2011 is well over 5,000.
Commenting on these numbers, Oussama El Omari, RAK FTZ CEO, said: The tremendous increase in new registrations and licence renewals in the third quarter of 2011 reflects investor confidence in our business model. We have always believed in offering a transparent and open door investor-friendly environment at RAK FTZ and this has helped us build our reputation as one of the most attractive investment zones in the region.
He added: The fact that this achievement came amidst a volatile business atmosphere, and covered the traditionally slow summer months, is even more commendable. We are looking ahead confidently to achieve record growth in our registrations by the end of this year. More importantly, we are thrilled and privileged to be playing a pivotal role in contributing to the economic growth of the emirate, and the UAE as a whole.
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% 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.
Employment and Residence in Ras Al Khaimah
There are no restrictions on the employment of foreign nationals in Ras Al Kaimah, although the UAE authorities are keen to see more local participation in the workforce through a policy of emiritisation. The easiest and fastest way to set up a new business in the UAE is through a free trade zone. Otherwise, it is a mandatory requirement to register a new companys name with the Immigration Department and the Ministry of Labour and Social Affairs. Since most companies recruit their employees from abroad, they need to register a file at the Ministry of Labour and Social Affairs and Immigration Department once they have received their trade licence.
However, the RAK Free Trade Zone provides visa sponsorship to licensed clients so they can operate a business in the UAE. The number of visas that can be issued to a company is dependent on the scale of operation, type and size of facility, type of licence and activity undertaken. Commercial and Consultancy Licences can apply for up to four visas. For Industrial Licences, the number of visas is to be decided as per project requirements. There are four different types of visas for which RAK FTZ clients can apply, depending upon their individual requirements and eligibility criteria, as follows:
- Investors or Partner Employment Visa: This is issued to a RAK FTZ Establishment owner (Investor Visa) or to a shareholder / partner in a RAK Free Zone Company where the value of shares held by the applicant is not less than AED 50,000 (Partner Visa). This type of visa is normally valid for three years; the visa holder is not allowed to stay outside the UAE for more than six consecutive months. Investors / shareholders / partners who wish to sponsor their families need to have a minimum shareholding of AED 75,000. There is no upper age limit stipulated for Investor or Partner Visa applicants.
- Manager Employment Visa: This visa is issued to managers or employees of companies established at RAK FTZ, falling within the age group of 20 - 60 years. This type of visa is normally valid for three years, but the visa holder must not stay outside the UAE for more than six consecutive months.
- Family Visa: Males already holding Employment Visas issued by RAK FTZ may apply for Family Visas to sponsor their dependents. This type of visa is normally valid for three years.
- Visit Visa: This is a permit to enter the UAE for short periods of time and is either valid for 30 days or for 90 days, depending on the visa type applied for.
Property Holding Companies
It may not have been the original intention of Dubai's rulers to create a major international real estate centre; but it happened to them nonetheless, originally because of the need to provide accommodation for the swelling numbers of expatriate workers sucked in by the infrastructure construction programs. Eventually the real estate sector took on a life of its own, and the financial problems which now beset the Emirate can be traced to this cause. Nonetheless, despite the gloomy economic outlook in Europe and the United States, the Dubai economy is expected to have grown by as much as 5% in 2011, and despite depressed prices, there could be long-term demand for real estate from the expat community, especially now that foreigners can buy freehold property in certain situations.
Buying property in Dubai is a relatively straightforward business, and there are many estate agencies and consultancy services catering for international buyers such as expats, those in search of a second home and investors hoping to earn rental income and/or capital appreciation. However, there are legal and geographical limitations on the ability of foreigners to own freehold property in Dubai. In March 2006, a long-awaited Dubai property law was issued, but Law No.7 of 2006 stipulated that freehold is limited to UAE and GCC citizens and companies wholly owned by them, as well as public shareholding companies. The law also stipulated that upon approval of Dubai's ruler, non-UAE nationals may be given the right to own properties in some parts of Dubai.
The legislation identifies freehold, usufruct, and commonhold as types of property ownership. The law characterises 'usufruct' as the right to use another's property for not less than five years and not more than 99 years.
The law calls for the establishment of a real estate register at the Dubai Land and Properties Department. Expatriates who have already bought properties are able to register their titles with the Dubai Lands and Properties Department.
Law No 7 of 2006 doesn't provide for 'floating freeholds', and it appears that in practice foreigners are limited to buying whole developments in the nominated areas. While this may be a disappointment for individual expatriates, it may still encourage further foreign investment into development projects.
Expats also have the option of buying into real estate in Dubai through an offshore holding company, and this is especially advantageous in terms of estate planning because a jointly-owned property may not automatically pass to the surviving spouse after one of the joint owners dies as it would under most common law and civil law legal systems. Seeking advice from an impartial local expert is, of course, essential for expats, most of whom will be unfamiliar with the UAEs laws and practices.
In August 2006, the Dubai International Financial Centre Authority (DIFCA) published draft legislation that would allow foreign freehold ownership of property in the DIFC. The laws included the DIFC Real Property Law 2006 and the Strata Title Law 2006. These laws, enacted in June 2007, allow for foreign companies and individuals to hold freehold ownership of real estate within the Dubai International Financial Centre.
Dubai has all the attributes and more of a modern, sophisticated financial centre; combined with the emirates mineral wealth, the governments liberal attitude to business and readiness to invest heavily in essential infrastructure, the almost complete absence of the 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 the more traditional offshore jurisdictions in the not-too-distant future.
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