In this first article in a series about the world’s premier offshore financial centers we look at the city and emirate of Dubai in the United Arab Emirates.

Dubai is the largest and most populous city in the United Arab Emirates (UAE). On the southeast coast of the Persian Gulf, it is the capital of the Emirate of Dubai, one of the seven emirates that make up the country. Geographically, it is convenient to Europe, Asia, the Middle East and Africa.

Dubai is a global city and business hub of the Middle East. It is also a major transport hub for passengers and cargo. Oil revenue helped accelerate the early development of the city, but its reserves are limited and production levels are low: today, less than 5 percent of the emirate’s revenue comes from oil. Dubai’s economy now relies on revenues from tourism, aviation, real estate, and financial services.

Since the discovery of oil in the UAE nearly 60 years ago, the country has undergone a profound transformation from an impoverished region of small desert principalities to a modern state with a high standard of living. The country’s free trade zones – offering 100 percent foreign ownership and zero taxes – are helping to attract foreign investors. Dubai has developed into a premier offshore financial center, offering the incorporation of offshore companies and offshore banking services among others.

The official language is Arabic, but as the Emirati represent only 15 percent of the population, most people speak English. Arabic and English are the official business languages. The local currency is pegged to the US dollar ($1 = 3.67 dirham).

Government

The United Arab Emirates is a federation of hereditary absolute monarchies. It is governed by a Federal Supreme Council made up of the seven emirs of Abu Dhabi, Ajman, Fujairah, Sharjah, Dubai, Ras al-Khaimah and Umm al-Qaiwain. All responsibilities not granted to the national government are reserved to the emirates.

Taxes in Dubai

Most people associate tax havens with tiny islands with almost as many corporate residents as human residents (or sometimes even more). Dubai does not have the stigma of a tax haven because of its very diverse and flourishing economy and does not currently appear on any tax haven black lists, but in fact it is the ultimate offshore financial center. Here is an overview:

Personal Income Tax

Neither the UAE Federal Government nor Dubai imposes an income tax on individuals. Even during the period of economic downturn after 2008 the ruling family of Dubai has indicated that Dubai will never resort to taxation as a means of financing government or dealing with debt. Although there is no personal income tax, the Ministry of Finance does issue tax residence certificates to individuals so they can make use of the extensive tax treaty network of the UAE.

There are three ways you can obtain a residence certificate: through an employment contract, by purchasing immovable property, or by registering a free zone company.

Payroll taxes and social security

There are no payroll taxes, but social security contributions are due for nationals of the Gulf Cooperation Council (GCC) states (Kuwait, Saudi-Arabia, Oman, Qatar, Bahrain and the UAE). Non GCC nationals are exempt, even though they may be entitled to an end of service benefit.

Corporate income tax

Dubai has a corporate income tax for companies, but this tax is imposed only on gas or oil producing companies and branches of foreign banks operating within Dubai. Even though there is no effective corporate income tax for any other businesses, the Ministry of Finance of the UAE does issue tax residence certificates to corporations incorporated under UAE law and managed from the UAE.

For a company to be tax resident in UAE, the company must have a valid trade license and be incorporated for at least one year and its director has to be a resident of the UAE (and thus can be a foreign citizen with a UAE residence visa).

Capital gains tax

Dubai has no capital gains tax.

Wealth tax

Dubai has no wealth tax.

Inheritance and gift taxes

Dubai has no inheritance or gift taxes.

Withholding taxes

Dubai has no withholding tax on dividends, interest or royalties.

Value Added Tax

As of Jan. 1, 2018, the UAE has introduced a 5 percent VAT on goods and services. Businesses that sell their goods or services outside of the UAE are not affected.

Property tax

Dubai companies are subject to municipal property taxes. Depending on the company’s status, the tax rates vary between 5 percent and 10 percent.

Import duties

Unlike most zero-tax jurisdictions, Dubai doesn’t levy high import duties. The tariffs average between 1-5 percent. No import taxes are levied in free zones.

Excise tax

An excise tax of 50 percent is imposed on products deemed unhealthy, like soft and sugary drinks and tobacco products.

Tax treaty network

The UAE have conducted double taxation avoidance agreements with 92 countries across the world, which is unique for a zero-tax jurisdiction. These tax treaties serve to protect taxpayers from double taxation by restricting the right to tax of the contracting states.

Dubai cityscape at night

Conducting business in Dubai

The absence of the aforementioned taxes, along with a low burden of rules and regulations, makes Dubai naturally attractive for entrepreneurs who want to minimize their tax and regulatory burden. By establishing a company in Dubai, entrepreneurs can protect their assets against confiscatory taxes and other dangers.

The UAE has no exchange controls in place. This makes it easy for individuals and corporations to transfer funds in and out of the country. Import and export of capital, profits and wages are entirely free.

There are no minimum wage laws, no unions, few labor laws or restrictions on hiring foreigners. Due to these liberal immigration laws, the population consists for more than 85 percent of expatriates.

The combination of an attractive tax climate with a favorable business and investment climate has attracted a tidal wave of economic activities. For many years, the UAE’s economic growth has been in the double digits.

Economic statistics

Since independence in 1971, the UAE’s economy has grown by nearly 231 times to 1.45 trillion AED in 2013. The non-oil trade has grown to 1.2 trillion AED, a growth by around 28 times from 1981 to 2012.

Dubai’s economy from 1975 through 2008 grew by a factor of 11, making it the fastest-growing economy in the world over the period, according to a study by the Dubai Economic Council. The study breaks down the growth between 1975 through 1990 showing an annual rise in GDP of around 6 per cent, then 1990 through 2005 showing an annual rise of about 9 percent.

If one focuses on the years 2000 through 2008, one sees an extraordinary growth rate, on average, of over 10 percent per year. The research underlines that few other countries can match the emirate’s growth, citing the GDP’s of other city states, such as Hong Kong and Singapore, in comparison and the U.S. as a benchmark. The U.S. GDP tripled from 1975 through 2008, Hong Kong grew by a factor of 7, Singapore by a factor of 10 and Dubai by a factor of 11.

Living in Dubai

Dubai has topped the list of best places in the world to relocate to because of its schools, sunshine and sports. When it comes to living the best lifestyle, the Middle Eastern city trumps the likes of Majorca, Cayman Islands and Madrid, according to findings by international property agents Knight Frank. Its global lifestyle review takes into account four key factors it says the majority of clients are interested in – international schools, weather, leisure pursuits and the availability of quality restaurants.

The UAE has been ranked the second safest country in the world by the World Economic Forum (WEF) in 2017. The UAE has recorded a surge in visitors in the past two years, welcoming 14.4 million international visitors in 2015. Dubai alone reached a staggering 14.9 million tourists in 2016, making Dubai the fourth most visited city in the world.

Many world records broken

Dubai has been ranked as the world’s fastest growing city, with the population increasing by 1,000 percent in 40 years, and it is expected to double by 2027. Due to the heavy construction which is taking place in Dubai, 30,000 construction cranes, which are 25 percent of cranes worldwide, are operating in Dubai.

Due to the burst of construction, Dubai has acquired various building-related records, which include: the world’s tallest tower (Burj Khalifa), the world’s busiest airport by international passenger traffic (Dubai International Airport), the world’s largest man-made port (Port of Jebel Ali), the world’s largest shopping mall (Dubai Mall), the world’s tallest hotel (Gevora Hotel) and the world’s largest fountain (The Dubai Fountain).

UAE company law

United Arab Emirates company law, which is also applicable in Dubai, allows for seven categories of business organization, Public Shareholding Companies, Private Shareholding Companies, Limited Liability Companies, General Partnerships, Limited Partnerships, Partnerships Limited by Shares and Shareholding Companies. Some of these categories may not be open to foreign investors or be subject to limitations. Therefore, foreign investors usually choose a Limited Liability Company, or opt to open a branch of an existing company.
The business presence can be either in the Dubai mainland (“onshore”) or “offshore.” A Dubai onshore company can operate in Dubai, in its free trade zones and in the other emirates.

Basically, it can offer its goods and services in the whole of the UAE. An onshore company must comply with the local legislation in Dubai, including the accounting regulations. In order to open an onshore company, a foreigner will need a local partner or sponsor, although announcements have been made that this may change in the future. A branch of an existing company does not require a local partner.

A Dubai offshore company has no restrictions or any special requirements in terms of foreign ownership but can only offer its services or sell its goods outside the country. An offshore company will benefit from corporate tax and other tax and duty exemptions in the UAE and is allowed to open a bank account with banks in Dubai or other emirates.

Free zones

Investors also have the choice to set up operations in one of the free zones in Dubai. A free zone is a geographical area within Dubai that has been established by the Dubai government to generally encourage direct foreign investment.

There are more than 30 free zones operating in Dubai. Free zones in Dubai are governed pursuant to a special framework of rules and regulations. A Free Zone Authority offers business licenses to foreign-owned businesses. Each free zone is designed around one or more industry categories and only offers licenses (e.g., for a Free Zone Enterprise), to companies within those categories. Generally, there are no foreign ownership restrictions in free zones. That is, foreign investors can set up 100 percent fully-owned entities in free zones.

The main drawback of a free zone is that entities registered in the free trade zone are not permitted to conduct commercial activities in the UAE, outside of the free trade zone.

Free Zone Authorities generally offer certified tax holidays to businesses (and their employees) set up in the free zone for a period between 15 and 50 years (which are mostly renewable). Therefore, even if new taxes were to be introduced in the UAE, the government would still need to honor the exemptions guaranteed by these certificates.

Foreign investment

Foreign investors can carry out activities in Dubai after being registered and licensed by the relevant authorities in the Dubai.

Registration has to take place with the Department of Economic Development, the Trade Register and with the Tax Authorities. There are three types of licenses:

  1.  A commercial license, which allows the company to engage into various trading activities;
  2.  An industrial license, which is issued for various activities related to the production of goods; and
  3.  A professional license, a special category of license available for those operating in specific industries, such as the medical, the legal and IT ones.

 

 

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Toine Manders
Toine Manders is an independent lawyer with 20 years of experience in providing corporate and trust services, international tax planning, estate planning and wealth protection for entrepreneurs and private clients.
Ronald Bijl
Ronald Bijl is an independent tax advisor with 15 years of experience in tax advice for corporates, entrepreneurs and high net worth individuals.