Conditions for making business in the UAE in 2019

The United Arab Emirates (UAE) are strategically located between Europe, Africa, and Asia. Owing to the investor-friendly legislation and financial and tax environment, as well as a broad network of agreements on avoidance of double taxation and developed infrastructure, the UAE can be a perfect place for business of any kind. The UAE are also perfect for making local business in emirates and regional business from the UAE, as well as for establishment of holdings, financial and supportive platforms for business groups allocated worldwide.

The UAE had implemented a number of initiatives aimed at promotion of business environment and development of the country, e.g. “Vision 2021”.

• The UAE is the member of the “Gulf Cooperation Council” (GCC), which includes six countries – Bahrain, Saudi Arabia, Kuwait, Oman, Qatar, and the UAE.
• The UAE concluded several bilateral agreements and agreements within GCC on free trade.
• The UAE do not have a corporate income tax, but there are taxes in certain emirates for foreign oil companies and branches of foreign banks.
• The UAE applies VAT at rate 5%, also there is excise tax and customs duties.
• The UAE does not apply tax on personal income.
• Social assistance is only provided for citizens of the UAE / GCC. There is a system of pensions paid upon the end of service for expats.
• The UAE follows the “Foreign Account Tax Compliance Act” (FATCA) and the “Common Reporting Standard” (CRS).
• There is no currency control in the UAE.
• UAE currency is linked to US dollar.

Options for starting business in the UAE in 2019

Depending on purposes of business, different options are available by complexity and cost of registration and maintenance of a company.

When making a selection, a planned type of activity, expected duration of activity, preferred location outside free economic zones, or possible location in free zones, requirements to license and expenses, as well as tax consequences, should be considered.

In general, the following options are available:

• Business or trade with the UAE from abroad:
  • immediately with customers/clients in the UAE;
  • via an agent or a distributor in the UAE.
• Projects in the UAE:
  • rotation scheme (at a degree that does not require a local license);
  • via a subcontractor;
  • unincorporated joint company (with a local or foreign partner).
• Legal presence in the UAE:
  • in the UAE outside free zones in any emirate, so that to make business in this emirate or outside the UAE;
  • in any free economic zone in the UAE as a company of a free zone making business only within this free zone, and outside the UAE;
  • in any free zone as an offshore company, so that to make business only outside the UAE.

The main difference between registration of a company in the UAE outside free zones (“local company”) and registration of a company in the UAE in any free zone is that for “local companies” there exist a limitation for non-resident ownership (although currently derogation is being prepared).Outside free zones a foreign investor usually may not own more than 49% of company shares. In free zones, such limitations are absent – an investor here may own 100% of company shares.

Companies in the UAE must have a valid license to make business in any certain emirate or a free zone. Any activity in other emirate or other free zone usually requires an additional registration or licensing from this particular emirate or a free zone. A license is a basic permission for making operations.

Registration of a “local” business in the UAE

A “local” business (i.e. outside free zones) is most frequently registered in the following three organizational-legal forms:

• A branch does not form a separate legal entity. It may only perform the same activity as the head office, and only in the emirate of registration or outside the UAE. A branch requires an assignment of a local agent (citizen of the UAE or a company owned by citizens of the UAE).
• “Limited Liability Company” (LLC). Company LLC forms separated from its owners legal entity that can be registered outside free zones; nevertheless, currently non-residents may own not more than 49% of shares of such company. 51% of company shares must be owned by citizens of the UAE, or a company 100% owned by citizens of the UAE. A company LLC must have at least 2 shareholders. LLC can perform all types of activity stated in its license, in the respective emirate or outside the UAE.
• Representative office. A representative office does not form a separate legal entity. It can perform marketing and advertising activity for the head office, and may not deal with any trade or business operations, while it may only work in the emirate of registration and outside the UAE.

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Registration of companies in the UAE in free zones

Free zones are territories within the UAE that were established to attract direct foreign investments. In free zones, there are no limitations for non-resident ownership, i.e. 100% non-resident ownership is allowed.

There are nearly 45 free zones in the UAE. Each zone is independent and has its own rules and regulations. Nevertheless, they all are subject to certain federal laws of the UAE.

Many free zones in the UAE are established for certain industries. For example, some of zones:

• Financial services: “Dubai International Financial Center” (DIFC), «Abu Dhabi Global Market» (ADGM).
• Ports and logistics: “Jebel Ali” (JAFZA), “Dubai Airport” (DAFZ).
• Telecommunications, IT and multi-industry zones: “Dubai Internet City” (DIC), “Dubai Multi Commodities Center” (DMCC).

In free zones three main types of companies can be registered. They may only operate in certain free zones and outside the UAE:

• “Free Zone Establishment” (FZE):FZE is the simplest form of legal entities of those available for registration in free zones. Such a company can only have one shareholder. Requirements to a minimum authorize capital will vary depending on a certain selected free zone. If necessary that a company had more than one shareholder, then a company FZE can be converted into FZCO or FZLLC.
• “Free Zone Company” (FZCO)or “Free Zone Limited Liability Company” (FZLLC): a company FZCO or FZLLC must have at least two shareholders. Requirements to a minimum authorized capital vary depending on a certain selected free zone.
• Branch of a company can be opened in a free zone by a foreign company or company from the UAE.

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What should you know about the “UAE law on direct foreign investments” when registering a company in the UAE

The new “Law on foreign direct investments” (“FDI law”) implemented in October 2018 lets non-residents own more than 49% of a “local” company. After all, the Ministry of Economy will establish a department on direct investments. There will be held examinations and recommendations will be given regarding the list of industries open for foreign investors.

Requirements to bookkeeping and audit when registering a company in the UAE

The “UAE law on commercial companies” requires that registered in the UAE “local” companies and branches of foreign companies assigned auditors for checking their annual financial reports. In practice, financial reports checked by an auditor should be submitted when updating a new license of a company.

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Taxation when registering a company in the UAE

What one needs to know about BEPS when registering a company in the UAE

On 16 May 2018 the UAE joined the inclusive frame program of OECD on prevention of “Base Erosion and Profit Shifting” (BEPS).

The UAE undertook the obligation on provision of four minimum standards:

• “Action 5”: More effective prevention of malicious tax practices with account of principles of transparence and real content.
• “Action 6”: Prevention of provision of benefits presumed by international agreements, under improper circumstances.
• “Action 13”: Development of rules for documentation on transfer pricing and exchanging reports among countries (“Country-by-Country report”).
• “Action 14”: Development of a more effective mechanism for dispute settlement.

In addition to implementation of these minimum standards, the UAE also undertook the obligation to introduce the remaining “Action 11” BEPS in the mid-term/long-term perspective.

What you need to know about UAE agreements on avoidance of double taxation and about the UAE Tax Domicile Certificate when registering a company in the UAE

The UAE have a broad network of more than 120 agreements on avoidance of double taxation, of which 89 are valid. The UAE signed the on avoidance of double taxation with Saudi Arabia – first of a kind agreement within GCC, as countries of GCC have no mutual agreements on avoidance of double taxation.

The Ministry of Finance UAE can issue Tax Domicile Certificates on an individual basis for companies. Each certificate is issued for one certain agreement on avoidance of double taxation and is valid for 1 year.

Natural persons can also submit an application for Tax Domicile Certificate UAE to use tax benefits, if possible.

The Ministry of Finance issues certificates to natural persons on an individual basis, if a person satisfied requirements to UAE tax residency provided in a corresponding agreement on avoidance of double taxation, and if he can provide necessary documents.

Tax on corporate income when registering a company in the UAE

Currently, corporate tax legislation is absent in the UAE at a federal level. Nevertheless, corporate tax legislation was introduced in some emirates through respective decrees at a level of each separate emirate. Still, corporate taxes were only implemented regarding foreign oil companies and branches of foreign banks.

Most free economic zones provide their companies with guaranteed tax vacations for 50 years. These tax vacations provide absence of taxes, duties, and other for a corresponding period. Some free zones offer renewable tax vacations.

Corporate income tax can be introduced for foreign oil companies based on a concession agreement with a certain emirate. Tax rate is defined according to a concession agreement. This is defined on an individual basis and can reach 80%. Besides, usually tax on royalty in oil production and tax on excess profit are applied.

Branches of foreign banks are liable at rate 20% of their taxable income in emirates of Abu Dhabi, Dubai, Sharjah, and Fujairah.

Tax withheld in the UAE

At present, there are no withholding taxes in the UAE.

Issues of transfer pricing when registering a company in the UAE

Currently in the UAE there are no rules on regulation of transfer pricing. Meanwhile, the UAE undertook obligations to fulfill requirements of the “Action 13” BEPS, therefore measures are being taken in this direction.

Issues of thin capitalization in the UAE

Currently in the UAE there are no rules regarding thin capitalization.

Value added tax (VAT) when registering a company in the UAE

The UAE introduced VAT on 1 January 2018 based on mutual agreements of GCC states on introduction of VAT. The agreement is simulated using the example of VAT regime of the European Union.

The standard VAT rate in the UAE – 5%. For export, zero VAT rate is applied.

All goods and services provided during making business in the UAE are imposed with VAT, if in any certain case these were not exempted from VAT according to “The UAE law on VAT”.

All companies that made taxable deliveries in amount exceeding 375,000 dirham (102,180 dollars) in last 12 months, or expecting the increase of this value in the next 30 days, must register for VAT purposes.

Company that made taxable deliveries or that bears taxable expenses in amount from 187,500 dirham (51,090 dollars) to 375,000 dirham (102,180 dollars), may register for VAT purposes on a voluntary basis.

Registered companies must on a monthly or quarterly basis submit reports provided by the Federal Tax Authority of the UAE.

Customs duties when registering a company in the UAE

The customs union GCC was established on 1 January 2003. The union introduced a duty in amount of 5% for most goods imported in the territory of GCC countries. The duty is withheld at the first point of entry to the territory GCC. After the duty is paid at the initial point of entry to the territory GCC, goods can be freely transferred between member states GCC without payment of any extra fees.

Import into free zones is not subject to customs duties, as their territory is not considered the territory of GCC countries in accounting of customs duties. Duties are only imposed when goods leave a free zone and enter the internal territory of the UAE.

Excise tax when registering a company in the UAE

Since 1 October 2017 excise tax is applied in the UAE. Excise tax is applied to the following goods: carbonated drinks, energetic drinks, tobacco and tobacco products.

Duty for transfer of property in the UAE

Registration fee is collected during transfer of property. For example, in the emirate of Dubai the fee makes 4% of cost of the transferred property.

Duties for living in the UAE

Tenants in Dubai pay a 5% duty of cost of the yearly lease of residential place.

Employment issues when registering a company in the UAE

Labor legislation regulates such terms as working hours, leave, rights at dismissal and medical benefits.

Labor legislation waives any contradictory provisions in a hire agreement is they are less beneficial for an employee.

The tax on personal income is absent in the UAE.

To companies registered in the UAE the following requirements are applied.

Requirements of emiratisation

To overcome structural division on labor market, the government of the UAE launched a campaign on emiratisation. A mandatory inclusion of citizens of the UAE in the common labor force is provided, which also includes a private sector. The purpose of emiratisation is to increase the number of UAE citizens present on the labor market, and enhance their contribution in economy.

The UAE support the process in state and private sectors, on every level, by creating a special department and implementing quotes and stimulations.  

Visa requirements in the UAE

Companies having a license in the UAE must provide that their employees were approved for working in the UAE by executing a working visa UAE valid 1 to 3 years and the “Emirates ID”. Meanwhile, employees may execute visas UAE for their families (sponsor them), so that they could also live in the UAE.

If necessary, a visa can be issued for 3 months for a non-resident personnel or guests.

Also, in the UAE a visa can be obtained with validity period 10 years, but this only works for certain professionals and investors. Actually, this issue is currently on the development stage.

Social payments

If a company hires citizens of GCC countries, then an employer and an employee both should make contributions for social provision and pension to the “General Pension and Social Security Authority”.

These contributions are defined based on salary, and should be paid for citizens of the UAE at following rates (for citizens of other countries GCC other rates may be applied):

• Employer from state sector – 15%.
• Employer from private sector – 12.5%.
• Employee – 5%.

Social contributions are not paid by expats or their employers.

End of service benefits

Non-resident employees who had continually worked for one year or more have right for benefits at the end of service. Such benefit is usually calculated according to these rules:

• Payment for 21 day is paid for every year of the first years of work. If a period of continuous work of an employee exceeds three years but is less than five years, then an employee has right for two thirds of a benefit. If a period of continuous work of an employee is more than one year but is less than three years, he has right for one third of a benefit.
• Payment for 30 days is paid for every additional year, provided that the total amount of benefit does not exceed the payment for two years.

Wages Protection System

Companies must register salaries of their employees through the “Wages Protection System” (WPS). The Ministry of Labor created the database that accounts payments of salary in the private sector, to guarantee timely and full payment of wages.

All companies in the UAE, except companies from free zones, must work through the WPS.

Main insurance obligations for employers and employees in the UAE

Medical insurance

The law on medical insurance is applied in every emirate, so that to provide all employees with the minimum level of medical service. Employers in the UAE must provide that their employees had a valid medical insurance at any time. Companies must present a valid medical insurance policy for employees during the initial execution of visa UAE and its prolongation.

Insurance of compensations for employees

Insurance of compensations for employees is a mandatory condition for all companies. Such insurance covers the legal responsibility before an employee for professional traumas during work within a definite territorial scope.

Insurance of employment

Recently, insurance of employment was introduced as an alternative to the existing system of cash deposits of employers in amount of 3,000 dirham (818 dollars) for an employee. Instead of a deposit, insurance can be used at a price of only 60 dirham (16.4 dollars) yearly for an employee.