Company Formation United Arab Emirates

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Company Formation United Arab Emirates: Forms of Offshore Operation

Introduction / summary

Dubai has a unique set of selling propositions, namely:

  1. No corporate tax
  2. No income tax
  3. No capital gains tax
  4. No property tax
  5. No wealth tax
  6. Low property transaction cost
  7. Ease of access to home finance

 Dubai/UAE has double taxation agreements = DTA with most other countries. EU freedom of establishment is not applicable. For approval of the permanent establishment according to tax laws, a commercially equipped business operation must be installed in Dubai/UAE, and active business must be transacted in UAE/Dubai.

Since only oil companies and banks are subject to taxation in the UAE/Dubai, and any other companies do not pay any taxes, this results in interesting opportunities for investment in Dubai/UAE. In order to be able to use the tax advantages, a permanent establishment according to DTA must be installed in Dubai. On the one hand, a Dubai company is no offshore company in this sense, since the UAE/Dubai also maintain double taxation agreements with many countries – including Sweden and Denmark – but on the other hand, the EU freedom of establishment is not applicable. Therefore, the following prerequisites for approval of a permanent establishment according to tax laws in Dubai must be met:

  • Place of management: A manager resident in the UAE/Dubai according to tax laws must – at least on the outside – control the company’s businesses.
  • There must be a commercially equipped business operation, i.e. at least one office and one employee.
  • It must be demonstrated that the Dubai company does actively transact business in the UAE.

Under the stated conditions, for example the Swedish could be a majority shareholder of the Dubai company, but nevertheless Dubai/UAE has the sole right of taxation, provided that the Articles of Association state that all relevant decisions are made at the shareholders’ meetings, which exclusively take place in Dubai, at which the Swedish shareholder must be present. However, the UAE company law stipulates that 51% of the company shares must be held by persons resident in Dubai. As a rule, the founder will use a “sponsor”. This requirement may be omitted in case of company formations in the free zones. In the free zones, 100 % of the shareholders may be foreigners.

Dubai Forms of Offshore Operation

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:

  • 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 anycountry.
  • 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% AGCC (Arabian Gulf Co-operation Council).

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 Dh 1 million 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.

Any company, organisation or individual wishing to form a Free Zone Establishment must submit a completed application form to the FZE Department of the Free Zone Authority. A decision on whether permission has been granted will be given within 30 days of receipt of the application and any other information and documentation required.

If permission is granted, the Authority will record all relevant details in the FZE Register and issue a Certificate of Formation. This will specify the date of registration after which the FZE will be free to conduct any such business as is permitted in its Special Licence.

The Dubai Internet City is regulated by a law passed in 2000, and is formally known as Dubai Technology, Electronic Commerce and Media Free Zone. The privileges offered to its occupants are very similar to those applying in Jebel Ali. In line with Dubai’s liberal economic policies and regulations, Dubai Internet City offers foreign companies 100% tax-free ownership, 100% repatriation of capital and profits, no currency restrictions, easy registration and licensing, stringent cyber regulations, protection of intellectual property.

The Dubai International Financial Centre (DIFC) was launched in 2003 and began operations in late 2004. lt was intended to fill a significant gap in the market for international Shariah banking, fund management and life assurance. The proposed regulatory framework was published for industry consultation in June, 2003. Philip Thorpe, chief executive of the DIFC Regulatory Authority, explained that: ‘We have…made good use of our freedom to create a single, logical framework – in contrast to older-established jurisdictions, who often have to make (do) and mend within existing frameworks which may gradually become more complex and less relevant.’

In July, 2003, the UAE Federal Cabinet approved a Federal Decree allowing the DIFC a large degree of sovereignty. In addition to confirming the appointment of General Sheikh Mohammed bin Rashid Al Maktoum, UAE Defence Minister and then-Crown Prince of Dubai (now Ruler) as the President of the DIFC, the decree officially created the DIFC Financial Services Authority, the DIFC Judicial Establishments and the DIFC Registrar of Companies.

The DIFC has a separate set of laws called the Commercial Code, comprising a comprehensive set of regulations like company law, legislation on property rights, including laws on security and collateral, title to goods and securities, commercial transactions and contracts, and insolvency.

In January, 2004, the Dubai Financial Services Authority (DFSA) announced that 12 new laws relating to operations within the Dubai International Finance Centre (DIFC) were now in place. Chief executive officer of the DFSA, Philip Thorpe explained that:

“The 12 new laws have been drafted by the DFSA to world-class standards, using the best examples of legislation from around the globe. They are clear and concise, and will provide certainty as to the rights and obligations of the financial institutions and other companies who will operate in or from the DIFC.”

The laws (to which the DFSA has provided access on its website) are:

Regulatory Law;
Companies Law;
Law on the Application of Civil and Commercial Laws in the DIFC;
Law Relating to the application of DIFC Laws;
Limited Liability Partnership Law;
Contract Law;
Insolvency Law;
Arbitration Law;
Data Protection Law;
Commercial Court Law;
General Partnership Law; and
Markets Law.

In June 2005, five new laws dealing with legal obligations, employment and security interests in relation to the Dubai International Financial Centre were enacted.

The new legislation comprised:

  • Employment Law No. 4 of 2005. This law provides for minimum employment practices comparable to established international standards, so as to promote fair treatment of employees and employers;
  • Law of Obligations No. 5 of 2005. This law creates a framework for claimants to seek recovery for non-contractual claims and sets out the rules as to when obligations arise and how disputes involving them are resolved;
  • Implied Terms in Contract and Unfair Terms Law No. 6 of 2005. This law provides for fairness and certainty in contracts governed by the laws of the DIFC by providing terms and conditions not normally included in contracts and assures the necessary framework for their enforcement;
  • Law of Damages and Remedies No. 7 of 2005. This law creates the structures necessary to assure the recovery of damages and other forms of relief to claimants within the DIFC; and
  • Law of Security No. 9 of 2005. This law defines various forms of security interests as collateral for repayment of debts and prescribes the process for their perfection and enforcement.

Then in November 2005, the DIFC Trust Law 2005, which provides a comprehensive framework for the creation of trusts in the DIFC, was enacted. Consisting of ten major sections, the legal framework encompassed matters such as choice of governing law, place of administration, creation, validity and modification of a DIFC trust, office of trustee, and duties and powers of trustees.

The Trust Law, DIFC Law No. 11 of 2005 followed closely the enactment in September of the Personal Property Law No. 9 of 2005, which defines the rights and obligations of parties in relation to property other than real estate (land and buildings) located in the DIFC, and the Law Relating to the Application of DIFC Laws (Amended and Restated) No. 10 of 2005.

In 2006, both the Companies Law and the Limited Partnerships Law were amended.

Dubai Tax Treatment of Offshore Operations

Amongst the incentives offered to companies operating within the Jebel Ali Free Zone, the DIC and the DIFC are:

  • Corporate Income Tax: No corporate income tax on profits. The exemption is for a period of 15 years with a guarantee of an extension for a further 15 years in the event that corporate income tax is introduced in Dubai. Currently only banks and oil companies are assessed to corporate income tax in Dubai. The key difference with companies operating in JAFZ is the guarantee of exemption in the event that corporate income tax is imposed by the Government.
  • Withholding Taxes: No withholding taxes.
  • Import Duty: Exemption from all import duties on goods imported into the free trade zones. For all other imports, duties have been largely standardised at 5%.

Dubai Taxation of Foreign Employees of Offshore Operations

No personal income tax is deducted from wages and salaries paid to employees or on other income earned. See Domestic Personal Taxes for the general principles of individual taxation (or lack of it) in Dubai, which also apply to the resident employees of offshore entities.

Dubai Exchange Controls

There are no exchange controls in Dubai

Dubai Employment & Residence

Citizens of GCC countries (Gulf Cooperation Council: Saudi Arabia, Kuwait, Bahrain, Qatar and the Sultanate of Oman) and British nationals with the right of abode in the UK do not need visas to enter the UAE. GCC nationals can stay more or less as long as they like. Britons can stay for a month and can then apply for a visa for a further two months.

The Dubai Naturalization & Residency Department (DNRD) issues different types of visas which are listed below.

1) 96 hour visa:

  • Issued upon arrival at the airport
  • Airline sponsored only
  • Applicants should have onward booking
  • Should have a minimum of 8 hour transit break

2) Visit visa:
2.1 In case of Personal sponsorship:

  • Fees: Dhs 100
  • Entry permit application form with completed typed data
  • Original Marriage certificate and copy of it, in case of wife sponsorship
  • Salary Certificate; The monthly salary should not be less than Dhs. 4000 in case of wife
  • sponsorship, and Dhs. 6000 in case of first relatives sponsorship.
  • Copy of the Sponsor passport
  • Copy of the Sponsored passport.

2.2 In case of Establishments sponsorship:

  • Fees: Dhs 100
  • Entry permit application form with completed typed data
  • Establishment card and copy thereof
  • Copy of the Sponsored passport.

2.3 Renewal:

  • Fees: Dhs 100
  • Original Entry Permit.

2.4 Extension:

  • Fees: Dhs. 500
  • Original Entry permit
  • Extension application form
  • Original sponsored passport.

3 – Transit visa

  • Fees: Dhs. 120
  • Establishment card
  • Entry Permit Application form
  • Copy of Sponsored passport.

4 – Tourist visa

  • Fees: Dhs. 100
  • Establishment card
  • Statement of tourists data

A Multiple Visit Visa can be granted after a normal visa has been issued and used, and are an option for business visitors who are frequent visitors to the UAE and who have a relationship with a reputable company in the UAE. Valid for six months from date of issue, each visit must not exceed 30 days in total. This visa costs Dh1000. The visitor must enter the UAE on a visit visa and obtain the multiple entry visa while in the country.

A Residence Visa stamped on a passport proves the legal residence of an expatriate in the country. This visa is given to workers who have obtained work permits or for relatives living with them permanently, and additional documentation is required.

In June, 2004, the Dubai government unveiled plans to enshrine in law rules governing foreign freehold ownership of property. Deputy director general of the Dubai Chamber of Commerce and Industry (DCCI), Ahmed Abdul Rahman Al Banna explained that:

“At present there is no federal law to govern foreign freehold ownership of property in Dubai,” although he added that as an internim measure “major property developers have got together to offer guarantees to investors on freehold ownership, which has been endorsed by the Dubai government.”

The DCCI deputy director general went on to announce that: “As part of our commitment to regulate the real estate sector, the Dubai government will issue a new property law which will address some of the key issues including legalising foreign freehold ownership of properties.”

In August 2006, the Dubai International Financial Centre Authority (DIFCA) published draft legislation that will allow foreign freehold ownership of property in the DIFC.

The laws published included the DIFC Real Property Law 2006 and the Strata Title Law 2006. The Real Property Law guarantees ownership of freehold land and interest in land within the DIFC. It will allow for foreign companies and individuals to hold freehold ownership of real estate within the Dubai International Financial Centre.

The Strata Title Law establishes a system of guaranteed freehold title to units in buildings in the DIFC. It is based on the system originally developed in Australia, which is now in use in many countries around the world, including Singapore.

Consultation on the proposed laws ended in September 2006.

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