By Tax-News.com Editorial
December 3, 2018
The emirate of Dubai extends along the Persian Gulf coast of the United Arab Emirates for approximately 72 kilometres, constituting just five percent of the total area of the UAE. However, heavy investment in infrastructure and into its many tax-free zones has transformed Dubai from an economic backwater to the region’s premier business, finance, transport and logistics hub.
Petroleum has historically dominated the economy of the UAE. At one time an underdeveloped area, by 1985 the country had the highest per capita income in the world. Petroleum production is centred in Abu Dhabi and Dubai. Revenues from oil sales have enabled the Government to keep taxes very low.
Most commercial activities in Dubai are centred on the Jebel Ali Free Zone and the Dubai International Financial Centre (see below), although there are now more than 20 free zones catering to business in specific sectors, including e-commerce, commodity trading, education and finance.
Dubai city is built along the edge of a narrow 10-kilometre long, winding creek. Once a small fishing town, a series of highly ambitious real estate developments has transformed the skyline and shoreline. Dubai is currently home to the world’s tallest building (Burj Khalifa), while Palm Island and the World Islands are engineering marvels to behold.
Dubai’s port is now one of the largest and busiest in the region. When completed in the mid-2020s, Al-Maktoum International Airport will be the world’s largest, with five runways and capacity to handle up to 220 million passengers per year.
A shortage of trained personnel has resulted in a huge influx of expatriate workers to Dubai; of the 2.7m people currently living in Dubai, 83% were born outside the UAE. While there is a considerable population of non-resident South Asians in Dubai, the emirate has also attracted large numbers of Europeans and North Americans, lured there by high pay, low taxes, and year-round sun and warmth. It is to the emirate’s major tax advantages that we now turn.
Tax (Still Very Low)
Since the discovery of oil deposits in the area 50 years ago, revenues from hydrocarbon exports have allowed the Government to keep taxation law. Accordingly, Dubai is seen as a very low tax emirate. For the most part, there is no income tax, withholding tax or capital tax, although business properties in Dubai pay a municipal tax set at 10% of annual rental value and VAT is now payable (see below).
Except for 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, while 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 83 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 only taxable 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 intention is for value added tax (VAT) to be introduced across all the members states of the Gulf Cooperation Council (GCC), one of which is the UAE. This is to replace revenues lost from the elimination of internal GCC tariffs.
On 1 January 2018, the UAE federal government launched the implementation of VAT at a standard rate of 5%. Saudi Arabia, another GCC member state, also implemented VAT on this date, though the other four countries have yet to do so. Â
In the UAE, VAT must now be administered by businesses whose annual taxable supplies exceed the mandatory registration threshold of AE$375,000 (US$102,000).
Taxpayers are allowed to register voluntarily if the total value of their taxable supplies exceeded AE$187,500 in the past twelve months, or if the business expects its turnover to exceed that threshold within the next 30 days. Businesses must file for VAT every three months, with penalties and interest applying to those who fail to do so promptly. The first VAT filing deadline was on 29 April.
In the first few months of 2018, the UAE ‘s Federal Tax Authority (FTA) has issued a series of clarifications on VAT issues, and has given guidance on matters such as invoicing and reclaiming VAT. The FTA has also softened its position on penalising late registration for the tax.
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, few match the incentives on offer in Dubai’s free zones, of which there are now more than 30.
Companies in Dubai’s free zones are granted a number of fiscal and regulatory benefits. These include freedom from corporate taxation for a period of 50 years (a renewable concession), exemption from all import duties, full repatriation of capital and profits and 100% 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
Jebel Ali Free Zone
The Jebel Ali Free Zone (originally abbreviated to ‘JAFZ ‘, but now more commonly known by the acronym ‘Jafza ‘) was established in 1985 and has an area of over 57 square kilometres. Home to over 7,500 companies from over 100 countries, it is currently thought to be the world’s largest free zone. Of these companies, more than a hundred are listed in the Fortune Global 500.
More than 144,000 people are employed in Jafza, which attracts around 32% of Dubai’s foreign direct investment and accounts for more than half of the emirate’s total exports.
The number of companies registered in the JAFZ increased 8% per year between 2011 and 2015. In 2017, a further 513 new companies registered.
Jafza 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, no corporation tax is payable 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. Full foreign ownership is permitted, there is exemption from all import duties and guaranteed 100% repatriation of capital and profits.
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 AE$1m (US$220,000) 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 Jafza are granted one of the following types of licence, 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 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 Jafza 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)
The Dubai authorities launched the Dubai International Financial Centre (DIFC) in 2003 and it began operations in late 2004. The UAE federal Cabinet approved a decree allowing the DIFC a large degree of sovereignty in July 2003. 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 DIFC has grown rapidly and is now considered the pre-eminent Middle Eastern financial centre.
At the end of June 2018, there were 2,003 active registered companies in the DIFC, a 14% increase on June 2017. Of these companies, 614 were regulated by the Dubai Financial Services Authority (DFSA) – 493 of these were financial services firms. The DIFC workforce totalled more than 22,300 at the end of 2017.
Much like the rest of Dubai, the DIFC is home to a multicultural community. The DIFC’s financial services firms originate from across the globe, with 35% from the Middle East, 17% from mainland Europe, 16% from the United Kingdom, 11% from Asia, 11% from the United States, and 10% from other countries.
The year 2016 was marked by a number of significant events for the DIFC. One of these was the transfer of the HSBC Bank Middle East Limited (HBME) head office from Jersey to the DIFC, meaning HBME is now lead-regulated by the Dubai Financial Services Authority (DFSA).
The DIFC also achieved a regional first in 2016 by becoming home to the first, equity crowdfunding platform. Named Eureeca, the platform has over 12,000 investors from 42 countries enabling entrepreneurs and high growth businesses to raise expansion capital and create new partnerships for growth.
The is also home to the region’s first FinTech accelerator. Launched in early 2017, FinTech Hive at DIFC is supported by Accenture and is intended to catalyse growth and efficiency in a variety of areas including trade finance, alternative finance such as peer to peer payments, and Sharia-based services.
The leadership of the DIFC also have ambitious plans to expand the size and influence of financial centre 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 centres in the world. Assets under the management of fund managers and financial institutions are expected to grow rapidly to an estimated US$250bn 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; contracts and insolvency.
The regulatory authority, the DFSA, 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.
On 14 November 2018, the ruler of Dubai emirate, Sheikh Mohammed bin Rashid Al Maktoum, enacted changes to the legal and regulatory workings of the DIFC. The new laws alter the DIFC ‘s company and trade systems and make various improvements to the general operating environment for DIFC companies. The new Companies Law for the DIFC will allow maximum flexibility for small private companies. Operating regulations will be simplified, making running a business easier.
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.
Dubai Internet City (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.
The free zone authority oversees the establishment of the necessary infrastructure at the zone, licences 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 Licence application form can be done electronically through the Dubai Internet City site.
Dubai Multi Commodities Centre (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 Lake Towers (JLT) Free Zone, the fastest growing free zone development in Dubai.
The number of registered companies operating in the DMCC has grown rapidly to more than 13,000 in 2017. According to the free zone, this growth is attributable in large part to its digital transformation initiative, which made all the free zone’s services available online in 2013, 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 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, and, despite ongoing global economic and political uncertainty, its future looks reasonably assured.