A Free zone (FZ) entity is the UAE offers many tax and business possibilities.
The establishment of free zones (FZs) in the UAE has been one of the most significant and promising initiate pursued to attract foreign investments. Dubai was the first emirate to establish a FZ in Jebel Ali.
The main advantages of being located in a FZ are set out below:
- 100 percent foreign ownership
- No corporate and personal income tax
- Eligibility for benefits of 80 UAE’s double tax treaties
- Issue of residence permits and tax residence to expatriate owners and managers
- No restrictions on profit repatriation
- No exchange controls
- Availability of offices, factory premises and warehouses
- Excellent port , airport and road transport infrastructure
- Efficient utilities and communication means
- No import or export duties, except for sales made from FZ into the UAE and the GCC
- No recruitment restrictions and assistance on obtaining work permits for expatriate staff
FZ enjoy DTT benefits
FZ companies are owned 100percent by foreigners. They also meet the growing necessity in international tax planning of having necessary substance. The UAE has concluded approximately 80 double tax treaties (DTTs), many of these with OECD countries. Some are not very attractive because of the limitation of benefits clauses, inclusion of tax liability clauses and uncertainty as to whether UAE residents are liable to tax in the context of the treaty. Some treaties restrict the benefits to UAE nationals, some other to government organizations. However, these are several double tax treaties of the UAE that are favorable including the treaties with New Zealand, Austria, Cyprus and Netherlands. None of these has a liable to tax requirement.
The Netherlands is a particularly attractive country for inward investments into the UAE, as most types of income that can be attributed to the UAE are exempt from Dutch corporation tax, even if they are no taxed in the UAE.
In particular, UAE real estate gains and income from a UAE permanent establishment are exempt from tax in the Netherlands. Employment income derived by a resident of the Netherlands from a UAE employer follows the exemption with progression method. Gains and dividends derived from a UAE subsidiary are exempt under domestic legislation in the Netherlands, provided they do not result from passive investments.
Another country that can be beneficially used for inward investment into the UAE is Cyprus. Cyprus also has a tax treaty with the UAE but has an even more favourable participation exemption system than the Netherlands and it exempts profits made by permanent establishment abroad under domestic legislation.
Tax residence
The UAE is particularly well positioned to cope with the increasing pressure from onshore Tax Authorities to provide real economic substance. By making use of the UAE, there are now opportunities available, even for small companies, to locate business functions in the UAE.
A possibility available to a FZ is to issue residence permits and obtain tax residence certificates from the UAE authorities for its foreign owners and executives. A FZ company, must have physical presence in the UAE and, in that respect, it must own or hire premises. If only a small office will be required as the company will be used by its foreign owners mainly for residency purposes the most cost effective options are available by free zones in the northern emirates, notably Hamriyah and Ajman FZs. Physical presence options include “flexi desks” or “flexi offices”.
Furthermore, and if a local bank account is maintained with some movements, the foreign owners and executives can apply to the Ministry of Finance to receive UAE tax residence certificates.
A UAE residence permit and a tax residence certificate can be useful to many foreign owners and executives of FZs who wish to register tax residency in the UAE. It is worth noting, that banking institutions in the UAE and many outside consider the UAE tax residence certificates as adequate proof of tax residency. As in all cases, the advice of a competent tax lawyer must be sought.
Location of FZ
An independent free zone authority governs each FZ. The rules and regulations of each FZ do not differ substantially, all being simple yet comprehensive. The UAE Companies Law is not applicable in the FZs.
Dubai
Dubai has witnessed significant growth in the number of free zones. Each zone has a focus on a particular type of industry. The names and industry focus of the major free zones within Dubai are listed below:
Jebel Ali free zone: manufacturing, heavy industry and distribution. It also encompasses:
- Dubai Cars and Automotive City (DUCAMZ) free zone: re- export of automobile
- Dubai Gold and Diamond Park free zone: dealing in precious metals and stones
- Dubai Airport free zone (DAFZ): light industry, distribution, service industries including insurance
Dubai Technology and Media free zone includes:
- Dubai Internet City: information and communication services
- Dubai Media City: media related business
- Knowledge Village: education and learning establishments
- Dubai Multi Commodities Centre (DMCC): aims to attract the world are leading precious metals, jewels and commodities traders. This zone also includes a manufacturing facility and a diamond trading bourse
- Dubai International Financial Centre (DIFC): focuses on financial institutions and financial services firms and has elevated the UAE to the position of a leading financial centre. The zone is subject to a comprehensive regulatory regime that follows international standards. The regulatory authority in the DIFC is the Dubai Financial Services Authority (DFSA)
- Dubai Healthcare City: aims to attract providers of healthcare, medical education and research
- Dubai Maritime City: aims to attract companies engaged in vessel design, manufacture, repair and maintenance and marine management and related services Other free trade zones in Dubai include Dubai Aid and Humanitarian City, Dubai Techno Park, Dubai Auto Parts City, Dubai Textile Village, Dubai Heavy Equipment and Trucks, Dubai Industrial City (DIC), Dubai Flower Centre, Dubai Logistics City, Dubai Silicon Oasis, Dubai Studio City, Dubai Carpet free zone and Dubai Outsource.
Abu Dhabi
- Abu Dhabi free trade zone (ADAFZ): the objective of this free trade zone is to establish Abu Dhabi as a major bulk commodity trading base to initiate the development of other existing industrial zones in the emirate
- Higher Corporation For Specialized Economic Zones (HCSEZ): the HCSEZ establishes specialized Economic Zones across a range of industries in Abu Dhabi. The benefits of the zones are similar to those in free zones
- Industrial City of Abu Dhabi: the objective is for industrial projects
- Abu Dhabi Global Market (ADGM): Recently set up, it is a broad based international financial centre of local, regional and international institutions. As in the case of the DIFC, an elaborate and comprehensive regulatory regime is in place that follows international standards
Sharjah
- Hamriyah free zone: established in Sharjah, this free trade zone caters to industrial, manufacturing, processing and assembling industries. Sharjah is the only emirate with ports on the Arabian Gulf’s east and west coasts with direct access to the Indian Ocean
- Sharjah Airport International free trade zone: aims to capitalize on Sharjah’s excellent access to both east and west by attracting light manufacturing, storage and distribution business together with services industries
Ras al Khaimah (RAK)
- Ras al Khaimah free trade zone: set up in 2000 on Al Hulayla Island, this free trade zone aims to attract all types of investment with an aggressive marketing plan, intending to turn this zone into the leading free zone of the northern emirates.
- Ras al Khaimah Media free zone: media related business
Fujairah
- Fujairah free trade zone: located near Fujairah Airport, it attracts manufacturing, distribution and general trading industries
Ajman
- Ajman free trade zone: attracts all types of business from heavy manufacturing to professional service companies
Umm al Quwain
- Umm al Quwain free trade zone: it is known as the Ahmed Bin Rashed Port and Free Zone and caters for light industrial development
Type of licenses
To operate in a FZ, all businesses need a license. The type of license depends primarily on the nature of the activity undertaken. Generally, in most FZs a combination of the following types of licenses are available to the foreign investor:
- Trading license
This enables companies to carry out general trading activities as specified in the license
- Industrial license
This license is required for the manufacture of products
- Services license
A services license is necessary where the activities undertaken are of a services nature
Accounting and audit requirements
As FZs have their own laws and regulations, accounting and audit requirements can differ between free zones. As an example, Jebel Ali free zone and Dubai Airport free zone require limited liability entities to file annual financial statements together with an audit report, within 3 months from the end of the entity’s financial year. However, limited liability entities in the Dubai Technology and Media free zone are not subject to the same requirements. Branches are not required to lodge audited financial statements with free zone authorities.
UAE DTT apply in the FZ
Below are some general strategies for setting up in the UAE and taking advantage of its double tax treaties with other countries.
Strategy One: Establishing a free trade zone entity
The free trade zones allow having a UAE entity which is 100 percent foreign owned and yet take advantage of:
- Low formation and annual costs
- Visa sponsorships
- A range of options for physical presence, from flexi Desks (virtual desks) to complete buildings and industrial Developments
- No taxes
- No exchange controls or thin capitalization restrictions
- An individual acts as the “Manager” and is nominated for Each company
Strategy Two: Combine a free trade zone entity with an IBC
Owning a free trade zone entity or creating a free trade zone branch of the IBC provides the following benefits:
- Confidentiality of ownership and operations; physical presence or management as required by some treaties for treaty protection
- Restricted custodian and nominee shareholdings
- Ability to have investments in the UAE and yet not carry on business
- Choice of law – common law, civil law etc
- Access the UAE double tax treaty network
- No local meetings, audits, or local presence requirements
- Migration in and out of the jurisdiction, and
- OECD white list jurisdiction
Strategy Three: Global head office company/IP holding company
In the majority of the UAE double tax treaties which look through limitation provisions, the use of the UAE as the place of the head office of a company to minimize global taxes is an under-estimated and under-utilized strategy.
The relocation of the head office of the known US Company, Halliburton to Dubai is one example of this strategy. However, for the majority of practitioners, the use of the UAE treaty network in this manner has been ignored possibly due to lack of information.
The choice of law for IBCs provides for the head office company to own patents, IP trademarks, confidential know-how and copyright under the laws of any jurisdiction and to license this technology to a free trade zone entity or to other countries worldwide.
The treaty network will reduce withholding taxes, impose no taxes in the UAE and ensure legal enforceability in licensing securities and charges outside the ambit of the local UAE or DIFC laws.
Strategy Four: Residence and domicile for directors and senior staff
Whilst domicile in the UAE may not be possible depending on the laws of the home country, certainly with a renewable residence visa that is issued to persons or associates of a free trade zone entity, individuals may reduce or eliminate home country taxation. In many cases, following the OECD model, the treaties provide for directors’ fees paid to a non- domiciled director of a UAE entity to be exempt from tax in the home country.
The UAE presents a unique window of opportunity. The system of IBCs combined with the benefits of the free zones and the extensive network of double tax treaties make the UAE an attractive proposition.
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