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Free zones in the UAE

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.

For more details reach us at [email protected]

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Dubai Tax-Free Zones To Enhance Cooperation

The Dubai Multi Commodities Centre (DMCC), a free trade zone in the United Arab Emirates, announced on June 29, 2016, the signing of a Memorandum of Understanding with Economic Zones World, the parent company of the Jebel Ali Free Zone Authority (Jafza).

The purpose of the memorandum is to enhance trade and explore new collaboration through sharing best market practices and access to technology.

Jafza companies will benefit from a range of products available through DMCC Tradeflow, an electronic central registry for commodity ownership in the region, and the DMCC’s value-added services.

The DMCC offers a zero percent personal and corporate tax rate, as well as 100 percent capital repatriation with no currency restrictions. Jafza offers a number of benefits to companies established in the zone, including: zero percent corporate tax guaranteed for 50 years, zero percent import and re-export duties, zero percent personal income tax, and no restrictions on the repatriation of capital and profits. 100 percent foreign ownership is permitted.

For more details reach us at [email protected]

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Kingdom of Saudi Arabia vision explained at G-20 meet

BEIJING: Minister of Labor and Social Development Mufrej Al-Haqabani on Tuesday explained here, before the G-20 meeting of ministers of labor and employment, Saudi Vision 2030 as well as the third version of the annual report on the Saudi labor market.

The minister said Vision 2030 would provide meaningful employment opportunities to ensure quality productivity of male and female youths.

He stressed that the vision involves creating job opportunities for all segments of the community, including women and those with special needs.

The minister referred to a number of initiatives and creative programs launched by the ministry to encourage wider participation of male and female youths in the employment process, notably in private sector companies. He said the priority of the vision lies in the employment of new entrants in the labor market through the development a series of initiatives.

Al-Haqabani touched on the ministry’s efforts on the enhancement of the concept of remote work and exploitation of new technologies to facilitate women’s work and the provision of decent job opportunities for them.

Remote work programs will provide some 140,000 out of 1.2 million jobs targeted by the National Transformation Program (NTP) by 2020, which comes within Vision 2030, he said. He said that despite the multiplicity of initiatives, they are being linked and coordinated through a comprehensive strategy to ensure easy implementation.

He said the merger of the Ministry of Labor and the Ministry of Social Affairs into one ministry under the name of “Ministry of Labor and Social Development,” is geared to cope with changes in the work environment.

He emphasized the fact that this comprehensive approach in labor and social development will ensure that citizens will get the services they need to make them productive.

In this context, he announced the creation of an agency for generation of jobs and combating unemployment to ensure the provision of sustainable jobs in all parts of the Kingdom, which will activate coordination between government and the private sector related to the labor market to boost partnership for creation of jobs, combating unemployment and redressing joint issues.

He also referred to the creation of a general authority for small and medium enterprises (SMEs) to promote entrepreneurship among Saudis, innovation in SMEs and development of this sector in line with best international practices.
The minister affirmed the government’s resolve to provide comprehensive education and training programs through many paths including the establishment of “colleges of excellence” by the Technical and Vocational Training Corporation with the intent of providing on-the-job training for new entrants into the labor market, as well as training and professional certificates through electronic and other creative platforms.

For more details reach us at [email protected]

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Extension of the grace period of implementing the revised UAE Commercial Companies Law

This is an update to the attached Tax alert sent on June 9, 2016 with regard to the grace period of implementing the revised UAE Commercial Companies Law (CCL) that was coming to an end in June. The UAE Cabinet recently approved a proposal by Sultan bin Saeed Al Mansouri, Minister of Economy, to extend the period for existing companies in the UAE to comply with the law to one year. The adjustment of positions now starts from July 1, 2016 and ends on 30 June, 2017.

The extension came after Al Mansouri received several requests from the Securities and Commodities Authority, the Departments of Economic Development across all the emirates, and a number of existing companies in the UAE to have more time to adjust to the new law given the substantial time needed to complete the statute amendments and obtain government approvals and the effort required for holding general assemblies for some companies.

During this period companies covered by the new Commercial Companies Law are requested to make the necessary adjustments in accordance with the law’s provisions.

Notice:

In case of Late Adjustment companies will be fined Dh2,000 per day of delay calculated from the day following the expiry date of the applicable period for such purpose as per article 357.

Should existing companies fail to adjust their positions within the extended grace period, the company shall be deemed as dissolved in accordance with the provisions of this Law.

For more details reach us at [email protected]

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Hong Kong and United Arab Emirates, DTA became effective, April 01, 2016

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EU Publishes New VAT Action Plan

The European Commission has released an Action Plan on VAT, setting out plans for the next two years to modernize European Union value-added tax (VAT) rules.

By the end of 2016, the Commission is to propose legislation that would extend the current One Stop Shop concept to all cross-border e-commerce, including distance sales. It will also introduce common EU-wide simplification measures to help small start-up e-commerce businesses, and streamline audits for companies engaged in the sector. In line with the OECD’s recommendations in its Action 1 report on the tax challenges of the digital economy, it will also remove the VAT exemption for the importation of small consignments from suppliers in third countries.

Further, the Commission will seek to improve cooperation between tax administrations including from non-EU countries and with customs and law enforcement bodies, to strengthen tax administrations’ capacity for a more efficient fight against fraud. A report evaluating the Directive on the mutual assistance for the recovery of tax debts will also be released. This work will be taken forward in 2017 also, alongside a proposal to enhance VAT administration cooperation and bolster Eurofisc, the anti-fraud agency.

The Commission will also ensure that member states have greater freedom on setting value-added tax rates, including providing for technology-neutral VAT treatment for digital economy supplies, by allowing the same VAT treatment for the digital equivalents of traditional supplies (for example, for e-books and tangible books).

The VAT Directive sets out general rules limiting member states’ freedom to set VAT rates. Rules on tax rates were designed over two decades ago in the context of a definitive VAT system based on the origin principle. They were intended to guarantee, above all, the neutrality, simplicity, and workability of the VAT system and featured, notably, lower limits on the levels of the VAT rates and a list of the goods and services which could benefit from reduced rates.

The Commission has proposed that member states could be granted greater autonomy on setting VAT rates, subject to appropriate safeguards to prevent excessive complexity and distortion of competition, and to ensure that the operation of the Single Market is not affected.

The Commission has put forward two options for giving member states more freedom. However, the degree of autonomy on rates to be granted to member states is not purely a technical matter, but requires political discussion, the Commission said. The Action Plan aims at initiating such political discussion with the member states in the Council, as well as in the European Parliament, to allow the Commission to submit, in 2017, detailed legislative proposals based on a mandate from the Council.

Vice-President Valdis Dombrovskis, responsible for the Euro and Social Dialogue, said: “Today, we are starting a dialogue with the European Parliament and the Member States for a simpler and more fraud-proof VAT system in the EU. Every year, cross-border VAT fraud costs our Member States and taxpayers about EUR50bn (USD57bn). At the same time, the administrative burden for small businesses is high and technical innovation poses new challenges for VAT collection. This Commission has already proposed clear measures to address corporate tax avoidance, and we will be equally decisive in tackling VAT fraud.”

Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said: “VAT is a major source of tax revenue for EU member states. Yet we face a staggering fiscal gap: the VAT revenues collected are EUR170bn (USD193.6bn) short of what they should be. This is a huge waste of money that could be invested on growth and jobs. It’s time to have this money back. We are also keen to grant member states more autonomy on how to define their VAT reduced rates. Our Action Plan will deliver on each of these points.”

For more details reach us at [email protected]

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Saudi Arabia: Convention on Mutual Administrative Assistance in Tax Matters Enters Into Force

The OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters entered into force in respect of Saudi Arabia on 1 April 2016.

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Georgia, South Korea Sign Tax Treaty

Georgia and South Korea have recently signed a double tax agreement, which allocates taxing rights to the two countries to prevent the double taxation of the same income.

The agreement was signed by Georgian Finance Minister Nodar Khaduri, and South Korea’s Deputy Prime Minister and Minister of Finance, Yoo II-Ho, on March 31, 2016.

At a meeting held after the signing ceremony, the ministers discussed economic cooperation and investment prospects in the two countries. Khaduri briefed II-Ho about his Government’s planned tax reforms and said he sought investment from South Korean firms.

Georgia is seeking to introduce a corporate income tax regime similar to Estonia’s, with support from experts from that country, to encourage new investment in Georgia. A draft law setting out the proposed changes is expected to be laid before Parliament soon.

For more details reach us at [email protected]

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China, Israel Launch FTA Negotiations

During talks in Jerusalem on March 29 between Chinese Vice-Premier Liu Yandong and Israeli Prime Minister Benjamin Netanyahu, China and Israel formally agreed to start negotiations on a bilateral free trade agreement (FTA).

Last year, China and Israel successfully completed a feasibility study on the FTA, after exploratory talks had begun in 2013.

Netanyahu noted that China is now Israel’s third-largest trading partner, with total annual trade of USD11.4bn in 2015, and that there is “the potential for a lot more.” It has been suggested that an FTA could double trade between the two countries.

China’s total investment in Israel has reached USD6bn. Israeli President Reuven Rivlin told Liu during their meeting on March 29 that his country hopes to further strengthen cooperation in fields such as science, technology, innovation, and agriculture.

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Finland Signs TIEA With UAE

The Governments of Finland and the United Arab Emirates have signed an agreement on the exchange of information for tax purposes.

The agreement was signed on March 27 by Younis Haji Al Khoori, Undersecretary of UAE Ministry of Finance (MoF), and Riitta Swan, the Finnish Ambassador to the UAE.

Al Khoori said that the agreement demonstrates the country’s commitment to international standards on tax transparency. “The Ministry of Finance is committed to implementing the highest standards of economic transparency and exchange of information for tax purposes whereby these agreements provide a legal framework for tax authorities to prevent any sovereignty violations of other countries,” he said.

The tax information exchange agreement adds to the double tax avoidance and investment protection agreements signed by Finland and the UAE in 1996.

According to the UAE MoF, bilateral trade between the two countries stood at AED342m (USD93m) in 2015.

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