Competitive costs: Limited taxes make the emirate an attractive destination for investors

A federation of seven emirates (Abu Dhabi, Dubai, Sharjah, Ajman, Ras Al Khaimah, Umm Al Quwain and Fujairah), the UAE was established in 1971. Each individual emirate exercises all its judicial and political powers except those that are assigned to the federation by the federal constitution or by agreements transferred to the federal government, which maintains exclusive jurisdiction in a number of areas, such as foreign affairs, defence, health and education. The individual emirates retain exclusive jurisdiction in other matters, including those relating to municipal work and their natural resources.

CORPORATE TAXATION: There is currently no federal UAE taxation. Each of the individual emirates has issued corporate tax decrees, which theoretically apply to all businesses that have been established in the UAE. In practice, these laws have not been applied and taxes are currently only imposed at the emirate level on oil and gas companies that have production in the emirate as per specific government concession agreements (which are confidential), and on branches of foreign banks under specific tax decrees or regulations or fixed-in agreements with the rulers of the emirates in which the branches operate. Note that this is merely how the practice has evolved in the UAE. There is no general exemption in the law. Investors in the UAE should therefore be aware that the law may be more generally applied in the future and of the remote risk that it may be applied retroactively.

The UAE does not currently impose capital gains tax or any withholding tax. For taxpaying entities, capital gains are taxed as part of business profits. Presently, there is no branch profit tax except on branches of foreign banks.

SALES & OTHER INDIRECT TAXES: At present there is no value-added tax (VAT), indirect tax, sales tax, or goods and services tax levied in the UAE. While there has been some discussion of introducing a VAT system in the future, there has been no set timetable for its introduction and no draft has been released at this stage.

The UAE does not impose the following taxes at present:

• Dividend distribution tax;

• Fringe benefits tax;

• Wealth tax;

• Gift tax;

• Estate tax; or

• Minimum alternative tax. There is currently no stamp duty levied in the UAE. However, there are various fixed transaction charges for the processing of visas, work permits, notarisation, vehicle registrations and other services from government departments.

PAYROLL TAX & SOCIAL SECURITY: There is no payroll tax at present, but if any UAE national or other GCC national is employed in the private sector, the employer must pay monthly contributions to a pension fund at the rate of 12.5% of the salary stated in the employment contract and determinable at the outset (i.e., basic salary and allowances). Additional contributions of 5% of such salary are due from the employee, which the employer deducts from the employee and remits to the pension fund. For UAE nationals working in Abu Dhabi, the employer’s monthly contribution is 15% of the total salary and the employee’s share is 5% of his total salary.

PROPERTY TAX & REGISTRATION FEES: In most of the emirates, property tax is payable by residential and commercial tenants by reference to the annual rent of residential property generally at a rate of 5% and for commercial property at a rate of 5-10%.

In Abu Dhabi a property tax is charged to obtain and renew business licences. In general, taxes are assessed at around 5-10% of the applicant’s annual office rental and 5% of the annual rental of the residence of the manager whose name appears on the licence. In Abu Dhabi and Dubai, there is a sale registration fee of 1% of the value of the sale that is imposed on the seller and a purchase registration fee of 1% of the value of the sale that is payable by the buyer of the property.

In Abu Dhabi, the total registration fee is capped at Dh1m ($272,000) per transaction. However, this rate can differ in other emirates.

MUNICIPAL CHARGES: Municipal taxes are imposed on hotel services. Service charge percentages vary among the emirates. A service charge of 5-10% is charged on food purchased in restaurants, which are licensed by the relevant tourism authorities, including those incorporated in hotels and private clubs. Hotels charge a 10-15% service charge per night on room rates. These charges are usually included in the customer’s bill, which the municipality will collect from hotels and restaurants.

GCC IMPORT TAXES: Under the regulations of the GCC (comprising the member states of the UAE, Saudi Arabia, Qatar, Oman, Kuwait and Bahrain), a unified Customs tariff of 5% of the cost, insurance and freight value applies to the taxable imports of all of the GCC member states from January 1, 2003. All existing taxes and duties on imports within the GCC member states before that date have been abolished. Tobacco and tobacco products are subject to a 100% Customs duty, and for alcohol the rate is 50%. However, in practice these rates may vary between the GCC countries.

Exemptions from Customs duties apply in the UAE and other GCC member states to various items including basic foodstuffs, raw materials for manufacturing industries, spare parts for civilian airlines, diplomatic and consular missions’ imports, imports for military and internal security forces, personal effects and charitable organisations’ imports.

An entity manufacturing goods in the UAE can export its goods to other GCC countries without duty if the manufacturing process involves at least a 40% value addition and the entity manufacturing the goods is at least 51% owned by GCC nationals.

DOUBLE TAXATION TREATIES: The UAE has more than 50 tax treaties in force, including treaties with Algeria, Armenia, Austria, Azerbaijan, Belarus, Belgium, Bosnia Herzegovina, Bulgaria, Canada, China, the Czech Republic, Egypt, Estonia, Finland, France, Georgia, Germany, India, Indonesia, Ireland, Italy, South Korea, Lebanon, Luxembourg, Malaysia, Malta, Mauritius, Morocco, Mozambique, Netherlands, New Zealand, Pakistan, the Philippines, Poland, Portugal, Romania, Seychelles, Singapore, Spain, Sri Lanka, Sudan, Syria, Tajikistan, Thailand, Tunisia, Turkey, Turkmenistan, Ukraine, Venezuela and Yemen.

FOREIGN INVESTMENT INCENTIVES: The UAE has one of the most dynamic economies in the Gulf region, with a booming oil industry, free trade zones (FTZs) permitting 100% foreign ownership, stock exchanges, industrial zones and an open banking system. To do business inside the UAE (and outside the free zones), a foreign business must have a UAE national sponsor, agent or distributor. Once chosen, the UAE sponsors, agents or distributors cannot be replaced without their agreement. To establish a limited liability company in the UAE, it must be owned at least 51% by a UAE national or a company wholly owned by UAE nationals. Foreign ownership is restricted up to 49%. However, Ministerial Decision No. 194 in 2004 allows GCC nationals to set up limited liability companies without UAE-national participation. The UAE government is currently in the process of amending the UAE Federal Companies Law, which would permit higher foreign ownership in certain sectors and industries. Government tendering is conducted according to generally accepted international standards.

INTELLECTUAL PROPERTY LAW: When the federation of the UAE was established in 1971, it was decided that intellectual property (IP) rights had to be protected. This was further supported in 1992 by specific pieces of legislation. Since 1992 the UAE has grown into one of the leading countries in the protection of IP rights. In 2006, the Ministry of Economy issued a federal law to protect patents, industrial drawings and designs.

Not only does the UAE have a department dedicated to combating piracy and counterfeiting, it is also a member of the following treaties:

• World Intellectual Property Organisation (WIPO) Convention

• Paris Convention;

• Berne Convention;

• Patent Cooperation Treaty;

• WIPO Copyright Treaty;

• Rome Convention; and

• WIPO Performances and Phonograms Treaty.

IMPORTS: Import licences are generally not required for the import of goods intended for personal use. Entities importing products intended for resale may only import products that relate to their licensed activity. Imports originating from GCC countries receive favourable treatment and are not subject to any Custom duty. All imported meat products require a health certificate from the country of origin and a halal slaughter certificate issued by an approved Islamic centre in the country of origin.

STATE EXPORT CONTROLS: All goods exported or re-exported from the UAE must have the proper documentation. This documentation and issuing authorities can vary depending on the goods.

Standard trade documentation, including certificates of origin, bills of lading and various government/embassy attestations, must be presented for all imports and exports. Goods that are temporarily imported are granted admission for six months (renewable) with the suspension of the levied Customs duties. Temporary admission is granted in specific cases that are set out in the regulations.

DOING BUSINESS: Private enterprises are valued in the emirates and fresh business ideas are highly encouraged. When an investor – whether an Emirati or an expatriate – decides to pursue a business or industrial activity in the UAE, he or she may do so by either establishing a local entity or by joining with other individuals willing to combine effort, expertise and finance to establish a joint company. The Federal Law No. 8 of 1984, as amended, provides for the following seven different types of entities: general partnership; simple limited partnership; joint participation (venture); public joint stock company; private joint stock company; limited liability company; and partnership limited with shares. In addition, a branch of a local or foreign company may also be established in the UAE.

Any company that is not categorised as belonging to one of the above is viewed as null and void, in which case the signatories are jointly and severally liable for any obligation emanating thereby. In addition, each type of entity incorporated in the UAE must fulfil certain general terms and conditions.

FREE TRADE ZONES: Establishing a business entity in one of the UAE’s many FTZs can be an attractive option for foreign investors. To date, free zones have been successful in attracting a large number of companies and foreign investment, as well as expanding net nonoil exports. The major advantages of a free zone are:

• 100% foreign ownership of the enterprise;

• No restriction on repatriation of capital and profits;

• No Customs duty for imports into the FTZs (but goods transported outside the free zone into other areas of the UAE will be subject to Customs duty);

• Guarantee of no corporate or personal income tax at the emirate level, generally for 50 years in Dubai, renewable for a similar period;

• Assistance with labour recruitment and support services, such as sponsorship and housing; and

• One-stop-shop licensing procedures. Investors can either register a new company in the UAE in the form of a free zone establishment (FZE), or a free zone company (FZCo) or simply establish a branch or, in some instances, a representative office, of the existing parent company based within the UAE or abroad. An FZE is a limited liability entity that is owned by one shareholder, while an FZCo is a limited liability company that is owned by two or more shareholders. Both types of entities are governed by the rules and regulations of the free zone in which they are established.

Some of the FTZs in Abu Dhabi are:

• TwoFour54: TwoFour54 is a free zone committed to providing a regional creative centre facilitating the development of Arabic media and entertainment content based in Abu Dhabi.

• Masdar City: Masdar City is planned to be a carbon-neutral city which will focus on green and renewable energy with an emphasis on research and development in clean energy and green products. Leading multinational companies in the cleantech sector, as well as small and medium-sized enterprises and entrepreneurial start-ups are expected to locate sales and marketing offices, demonstration centres, research and development labs and headquarters in the city.

• Abu Dhabi Airport Free Zone: The Abu Dhabi Airport Free Zone is being established by the Abu Dhabi Airports Company to provide customers a dynamic and thriving business environment with numerous benefits, including fast and efficient cargo clearance services and international freight forwarders and logistics services.

PROMOTING FREE TRADE ARRANGEMENTS: The GCC recently entered into a free trade agreement (FTA) with Singapore and is currently in the process of negotiating FTAs with several countries, unions and trade blocs. These include Japan, the EU, the Association of South-East Asian Nations and Australia.

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The Report: Abu Dhabi 2013

Tax chapter from The Report: Abu Dhabi 2013

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