WIXLIB

ThreatsHeavy subsidies on utilitiesand agriculture, as well as anoutdated tax system, havecontributed to persistentfiscal deficits in the past,although rising oil revenueshave addressed theproblem in recent years.The existence of free tradezones with 100% ownership,zero taxes, excellentinfrastructure, a relatively stableoutlook on country risks, andvery a convenient geographicallocation almost midway betweeneast and west are attractiveaspects for foreign investments.Several high-profile constructionprojects have been delayed andthe property market crash couldthreaten future development.Some 80% of Fortune 500companies (including all ofthe top 10) have establisheda presence in UAE accordingto The Economist, and theUAE’s 25 plus free zonesare now host to numerousmultinational and regionalcompanies – including over6,400 companies from over120 different countries locatedin Dubai’s Jebel Ali Free Zone.For the first time in its history,the credit rating of the UnitedStates of America wasdowngraded from AAA to AAplus by S & P which has had asignificant negative impact onthe USA's stock market andcurrency. Despite this, the UAEis committed to maintaining itspeg with the US Dollar and,therefore, the prices of non-USDollar imports are expected towitness volatility in line with themovements in the US Dollarexchange rate.Why it is a good placeto do businessThe UAE is the 30th largesteconomy in the world1 and No.2in the Middle East and NorthAfrica. The UAE ranks 33rd outof 183 countries for the overall‘Ease of Doing Business’2benchmarked as of June 2011.Some of the challengesto invest in the UAE includethe need for a local sponsorowning 51% of the business(if not in a free zone); abilityto enforce contracts; morelimited creditors’ rights andoptions (bankruptcy lawsnot keeping pace with theeconomy development);and some inherent risksto the region becauseof geopolitical concerns.Languages spoken includeArabic (official), Persian,English, Hindi and Urdu. Thelabour workforce is 4.1 millionand expatriates account forabout 85% of the workforcewith over 150 nationalitiesworking and living harmoniouslyin a safe, almost entirelycrime-free environment.(FDI) sources from outside theregion. On the positive side,the absence of income taxcompensates for the restrictiveinvestment environment.The UAE attracts a highlyskilled workforce, whichis absorbed by the growingnumber of internationalcompanies, professionalservice firms and financialinstitutions. Expatriatesenjoy tax-free salaries,schools accredited tointernational standards,a high standard of healthcare and excellent recreationalfacilities – including a numberof championship golf courses.The UAE’s substantialhydrocarbons resourcerevenues means governmenthas no pressing need to raiseincome via direct taxes.Incentives for foreign investorsThe UAE’s investment climateis becoming more clementfor foreign direct investors:the federal government, led byAbu Dhabi, has made significantheadway in the past five yearsin increasing the role of theprivate sector. Yet the overalllegal framework continuesto favour local over foreigninvestors – a fact that partlyreflects the historically benignmacro environment in light ofthe country’s substantial oilrevenue windfall. This hasendowed local and regional Gulfinvestors with substantial liquidity,disincentivising the search fornew foreign direct investmentThere are also several benefitsto corporates and their employeesin relation to taxation. Refer toTaxation section.Barriers, risks or downsidesfor foreign investorsUnfortunately, just as everycountry has some incorporationdisadvantages, so does UAE.However, these disadvantagesare far outweighed by theadvantages of settingup business in the UAE. The UAE is not an Englishcommon law jurisdiction; A foreigner wishing to conductbusiness outside a free zonemust have a local partner owningat least 51% of the business; and The existence and interaction offederal laws, individual emiratelaws and free zone laws can bequite complex and confusing.Key markets and tradeThe major trading partners ofthe UAE include the EuropeanUnion (with 27 memberstates), India, Japan, China,South Korea, United States ofAmerica, Thailand, Singaporeand Oman.Export commodities includecrude oil (45%), natural gas,re-exports, fish and dates toJapan (17.1%), India (13.6%),South Korea (6.1%), andThailand (5.1%). Importcommodities includemachinery and transportequipment, chemicals andfood from India (17.5%),China (14%), United Statesof America (7.7%), Germany(5.6%) and Japan (4.8%)1.Intellectual property rightsThe UAE is a regional leaderin the protection of intellectualproperty rights, with improvingenforcement of copyright,trademark and patent laws.Anecdotal evidence suggeststhat the federal governmentis enforcing these laws, whichwere passed in 2002. The rateof software piracy in the UAEis regarded as one of thelowest in the Middle East.However, enforcement ofanti-piracy measures canvary between emirates,2000-2011 CIA World Factbook.www.doingbusiness.org,a co-publication of the World Bank andthe International Finance Corporation.1210

with Dubai seen as the bestperformer. More could bedone in other emirates, whilethe UAE still remains a majorcentre for the transhipmentof counterfeit goods.Local customs andbusiness etiquetteUAE’s culture is rooted inIslamic traditions. Courtesyand hospitality are amongstthe most highly prized ofvirtues, and this is reflected inthe warmth and friendliness ofthe local people. UAE societyis marked by a high degree oftolerance for different lifestyles.It is a liberal society by anymeasure and is rated as amongthe safest in the world.Foreigners are free to practicetheir own religion, and thedress code is liberal. Women,whether married or single,do not face any form ofdiscrimination and may drive,work, and move aroundunescorted. In spite of itsrapid economic developmentin recent years, UAE remainsclosely linked to its heritage.The customary greeting is‘As-salam alaikum,’ (peace beupon you) to which the replyis ‘Waalaikum as-salam,’(and upon you be peace).When entering a meeting,general introductions will beginwith a handshake. You shouldgreet each of your Emiraticounterparts individually. Inline with Muslim customs,avoid shaking hands with awoman unless they extendtheir hand first. Business cardsare common but not essentialto Emirati business culture. Ifyou do intend to use businesscards whilst in the UAE, ensurethat the information is printedin both English and Arabic.People in the UAE prefer to dobusiness in person. Relationshipsand mutual trust are paramountfor any successful businessinteraction and can only bedeveloped through face-to-facemeetings. It is important tospend time with Emirati businesscounterparts and ensure futuremeetings take place to continuecultivating the relationship.It is also important to haveconnections with people inthe UAE who can facilitateintroductions before attemptingto do business in the country.Emiratis prefer to do businesswith those they know, soappropriate introductions areimportant in order to establish asuccessful business relationship.

Conducting business in the UAEForms of businessForeign investors can carryout any activities in the UAEonly after being registeredand licensed by the relevantauthorities in the UAE.In general, a foreign investorcan establish a suitablebusiness presence in eitherthe UAE mainland (alsocommonly known as ‘onshore’)or a business presence‘offshore’. An ‘offshore’business presence typicallyrefers to a registration in oneof the UAE free trade zones.This type of registration ofbusiness inside the free tradezone is not to be confusedwith the regulatory systemfor offshore companies (alsoreferred to as ‘InternationalBusiness Companies’) whichexist in certain freezones.In terms of the legal forms,UAE Company Law providesthe regulations governing theoperations of foreign business.The Federal Law provides forseven categories of businessorganisation: limited liabilitycompany, branches, partnership,joint venture company, publicshareholding company, privateshareholding company andshare partnership company.14However, owing to certainrestrictions, the choicescommonly adopted by foreigncompanies are generally limitedto a limited liability company(‘LLC’) or a branch. The otheroptions e.g. partnerships andjoint venture etc. are usuallynot favoured by foreign investors.A representative office is broadlysimilar to a branch, except in thata representative office is onlypermitted to promote its parentcompany’s activities and is notpermitted to undertake anyincome earning activities.As per the UAE CommercialCompanies Law, the foreignownership of a LLC maynot exceed 49%, with thebalance of 51% to be heldby a UAE national.Investors also have a choiceto set up operations in oneof the free trade zones in theUAE. A free trade zone is ageographical area within theUAE that has been establishedby the UAE government togenerally encourage directforeign investment into theUAE and, as such, there aregenerally no foreign ownershiprestrictions, unlike ‘onshore’entities. That is, foreign investorscan set up 100% fully-ownedentities in the free trade zones.The principle drawback of afree trade zone is that strictly,entities registered in the freetrade zone are not permitted toconduct commercial activitiesin the UAE, outside of the freetrade zone.The UAE CommercialCompanies Law is currentlybeing re-drafted, and the newlaw is expected to allow 100%foreign ownership (subjectto approval from the relevantauthorities) for specificindustries set up onshore.However, there are no furtherdetails at this time as to howthis new law will apply.A branch is an extension ofthe foreign parent company. Assuch, it is wholly-owned by itsparent company and there is norequirement for UAE nationalsto take an ‘equity’ interest inthe business of the branch.Free trade zonesCurrently, there are over 30established free trade zones inthe UAE, of which the majorityare in the Emirate of Dubai.The free trade zones alsoprovide a choice of establishingeither a company or a branch.

Setting up a businessLimited Liability Company (LLC)A LLC can be formed bya minimum of two and amaximum of fifty personsand the minimum capitalrequirements vary from Emirateto Emirate (e.g. Dubai is AED300,000, whereas Abu Dhabirequires AED150,000). Theforeign minority shareholderis, however, able to exercisecontrol of a LLC through powersvested to the foreign partner inthe Memorandum and Articlesof Association. It is also possibleto attribute profit entitlementsin favour of the foreignpartner in a ratio other thanthe respective shareholdingswould otherwise suggest.It takes approximately eightto twelve weeks to incorporatea LLC, since there area number of steps, andsupporting legaliseddocumentation, to completein the incorporation process.Branch16A branch has no separate legalpersonality and is an extensionof the foreign parent company.According to Law number 13 of2011 free zone companies areallowed to set up branches inthe wider Emirate, provided theyobtain the proper licence fromthe Department of EconomicDevelopment and the approval ofthe Ministry of Economy. Branchregistrations may not be availableto all businesses (in broad termsthey are permitted for serviceproviders and contractors) andthe trade licence limits theactivities of branches to specifiedpermitted activities only.A branch is wholly-owned byits parent company and thereis no requirement for UAEnationals to take an ‘equity’interest in the business ofthe branch.A UAE national service agent,sometimes referred to as a‘sponsor’ must, however, beappointed to represent thebranch in all administrativedealings with Governmentdepartments (such asimmigration formalities). Theremuneration of the sponsoris normally agreed on anannual fixed fee basis, andis a matter of commercialagreement and can varydepending on the prominenceof the sponsor and the precisecontribution he makes to thebusiness of the branch.It takes a similar amount of timeto set up a representative officeas it takes to set up a branch.Free trade zonesThe free trade zones aregoverned by their own regulatoryauthorities and have their ownrules and regulations and areseen to adopt an industry focus.This means that the free tradezones are typically tailored tospecific industries and onlylicence specific types of activities.A representative office is broadlysimilar to a branch except,as mentioned above, it isnot permitted to undertakeany income earning activities.The regulations for establishingand operating a business inthe zones are less rigorous andtime consuming than thoseapplying to entities locatedin the ‘onshore’ UAE. Theregistration requirements aremore or less similar across thefree trade zones and involvea two-staged process. Thefirst stage is to obtain an initialapproval from the free trade zoneauthority and the next stageis to apply for a trade licenceand registration. As mentionedabove, the free trade zones alsoprovide a choice of establishingeither a company or a branch.The capital requirements (onlyfor companies, not branches),licence categories and fees varyamong different free trade zonesaccording to their rules, industryprioritisation as well as the typeof entity that is established.A representative office however,is also required to recruit theservices of a UAE nationalservices agent or sponsor.It normally takes up to four to sixweeks to complete a registration,though this may vary for eachfree trade zone.It takes approximately eightto twelve weeks to establisha branch.Representative officeInternationalBusiness CompaniesBusinesses not intending todo any business in the UAE,whether in a free trade zoneor onshore, can be set up underthe offshore regulatory system.Typically, such businesses actas holding companies forsubsidiaries outside the UAE.Under the offshore regulationsof certain free trade zones, thesecompanies act as a vehicle toown freehold property onshore.Annual filingsUnder the UAE CommercialCompanies Law, most companiesor branches are required tohave their accounts auditedlocally, and these accountswill then need to be filed withthe appropriate Emirate levelauthorities on an annual basisas part of the licence renewalfiling process. There is also anannual licence renewal fees tobe paid which is based on thetype of licence, entity and itsactivities. Similar requirement isfor the free trade zone entities,although the requirementsand fees vary and need to beconsidered based on the legalentity set up and its location.Foreign ExchangerequirementsThere are currently no foreignexchange control restrictions inthe UAE that may impact therepatriation of profits or capital.

Taxation in the UAECorporation income tax(or equivalent)Currently, the UAE federationdoes not impose a federalcorporate income tax in theEmirates. However, most of theEmirates constituting the UAEfederation introduced income taxdecrees in the late 1960’s andtaxation is therefore determinedon an Emirate by Emirate basis.Tax residence under the taxdecrees of the various Emiratesis based upon the Frenchconcept of territoriality.Basically, the Frenchterritoriality concept taxesprofits based on territorialnexus, rather than taxing profitsearned outside the country.Under the Emirate based taxdecrees, corporate incometaxes may be imposed on allcompanies (including branchesand permanent establishments)at rates of up to 55%. However,in practice the corporate incometax is currently imposed onlyon oil and gas companies andbranches of foreign banks havingoperations in the Emirate.In addition, some of the Emirateshave introduced their ownspecific banking tax decreeswhich impose tax on branches offoreign banks at the rates of 20%.18Entities established in a freetrade zone in the UAE aretreated differently than a normal‘onshore’ UAE entity. Aspreviously noted, free tradezones have their own rules andregulations and typically, froma tax perspective, they generallyoffer guaranteed tax holidays tobusinesses (and their employees)set up in the free trade zone fora period between 15 to 50 years(which are mostly renewable).On the basis of the above,most of the entities registeredin the UAE are currently notrequired to file corporate taxreturns in the UAE, regardlessof where its UAE businessis registered.and the remaining 12.5%is payable by the employer.The rates can differ indifferent Emirates.The withholding obligationis on the employer. Thereare no social securitypayments for expatriates.For completeness, expatriatesemployed by a UAE employerare entitled under the UAELabour Law to a gratuitypayment (or an ‘end of service’benefit). End of servicebenefits are not applicableto UAE national employees.On the basis of the above,individuals in the UAE arecurrently not required to filepersonal tax returns in the UAE.Personal income taxThere are currently no Federal orEmirate level personal incometaxes imposed on individualsworking in the UAE.There is a social securityregime in the UAE whichapplies to employees whoare GCC nationals. Generally,for UAE nationals the socialsecurity payment is at a rateof 17.5% of the employee’sgross remuneration as statedin an employee’s employmentcontract and applies regardlessof the free zone tax holidays.5% is payable by the employeeSales tax/VATThere is currently no VAT in theUAE. However, the UAE (alongwith the other member countriesof the Gulf Cooperation Council)has committed, in principle, tointroduce a VAT system and UAEhas made significant progresstowards its introduction, whichis expected in the near future.At this point in time there isno confirmation on its ratesor how this will effect businessoperations in the UAE (onshoreor free trade zones).

Other taxesWithholding taxHotel taxThere are currently nowithholding tax regulationsin the UAE that would applyto payments such as royalties,interest or dividends etc. madefrom the UAE entities to anotherperson (resident or nonresident). That is, paymentsof any kind made by a UAEcompany should not suffer anywithholding taxes in the UAE.Most emirates imposea 5-10% hotel tax on thevalue of hotel servicesand entertainment.Municipal taxMunicipal property taxes arelevied in the various emiratesin various forms, but generallyas a percentage of the annualrental value. In some cases,separate fees are payableby both tenants and propertyowners. (For example, in Dubaithey are currently levied at 5%of the annual rental value fortenants or for property ownersat 5% of the specified rentalindex).These levies are administereddifferently by each emirate.These levies may also becollected at the same timeas (or as part of) licence fees,or the renewal of licences,or by another method.(For example, in Dubaithe payments have recentlystarted to be collected via theDubai Electricity and WaterAuthority’s billing system).Transfer pricing and thincapitalisationThere is currently no transferpricing regime in the UAE.There are currently also no thincapitalisation (or debt-equityratio) requirements in the UAE.

Audit andaccountancyJoint stock and limited liabilitycompanies must appoint oneor more auditors. All legallyincorporated companies haveto file their audited financialstatements with the Ministryof Economy or relevantauthority in order to renewtheir trade licences. Thereare no exceptions availableor restrictions on appointmentof auditors, although

and reducing its ability to tackle inflationary pressure. The country’s location in a volatile region means that its risk profile is, to some extent, affected by events elsewhere. US concerns about regional militant groups and regional political instability could affect investor perceptions. Introduction