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Dubai - Land of the Free Zone


By Tax-News.com Editorial
February 19, 2019


The emirate of Dubai extends along the Arabian Gulf coast of the United Arab Emirates for approximately 72 kilometers and constitutes just five percent of the total area of the United Arab Emirates. However, heavy investment in infrastructure and into its many tax-free zones has transformed Dubai from a relative economic backwater to the region's premier business, finance, transport and logistics hub.

A Low-Tax Oasis

Since the discovery of oil deposits in the area 50 years ago, revenues from hydrocarbon exports have allowed the Government to keep taxation law. Accordingly, Dubai is seen as a "no tax" emirate characterized by an almost complete absence of taxation. For the most part, there is no income tax, and there are no withholding or capital taxes, although business properties in Dubai pay a municipal tax set at 10 percent of annual rental value. Value-added tax (VAT) was also recently introduced across the UAE.

With the exception of banks and oil companies, no corporate income tax is payable by businesses in the UAE. Oil companies pay up to 55 percent tax on UAE-sourced taxable income whereas banks pay 20 percent tax on taxable income. The taxable income of banks is based on audited financial statements whereas that of oil companies is according to their concession agreements. Oil companies also pay royalties on production.

Double taxation treaties (negotiated and signed by the federal government) are in place aimed at making the emirates a more attractive territory in which to operate by reducing taxation levied in foreign jurisdictions on profits remitted abroad by foreign corporations operating locally. The extensive and growing list of signed treaties currently numbers 115 countries, although at the time of writing 28 of these await full ratification.

Under these treaties, profits derived from shares, dividends, interest, royalties and fees are taxable only in the contracting state where the income is earned. Although corporate income tax is not levied in the UAE the provisions of the treaties do not state that such income must be taxed to qualify for benefits. Thus, dividend income paid by a UAE company to a company which has a double taxation treaty with UAE may not be taxable in the hands of the foreign parent corporation. However, it is wise to study the text of the treaties themselves before assuming anything about the tax treatment of untaxed income flows originating in Dubai.

Having introduced VAT at a rate of five percent in January 2018, the United Arab Emirates and Saudi Arabia became the first two states of the six-member Gulf Cooperation Council grouping to follow through on the bloc's commitment to introduce a harmonized VAT.

In the UAE, VAT must be administered by businesses whose taxable supplies exceeded the mandatory registration threshold of AED375,000 (USD102,000) in the past twelve months. Businesses that were not yet required to register but whose supplies will exceed this threshold within a period of 30 days must register.

Taxpayers are allowed to register voluntarily if the total value of their taxable supplies exceeded AED187,500 in the past twelve months, or if the business expects its turnover to exceed that threshold within the next 30 days.

In line with international norms, VAT concessions are available for certain transport, financial services, real estate, education, and healthcare goods and services.

The Free Zones

While commercial and economic free zones, whereby investors are granted exemption from certain taxes and legal and regulatory, are growing in numbers around the world, few match the incentives on offer in Dubai's free zones, of which there are now more than 30.

Companies in Dubai's free zones are granted a number of fiscal and regulatory benefits, including freedom from corporate taxation for a period of 50 years, a concession which is renewable; exemption from all import duties; 100 percent repatriation of capital and profits; and 100 percent foreign ownership.

The oldest and most significant free zone is the Jebel Ali Free Zone (JAFZ). Established in 1985 the JAFZis spread over an area of about 50 square kilometers, is home to well over 7,000 companies from over 100 countries, attracts over 20 percent of Dubai's foreign direct investment, accounts for more than half of the emirate's total exports, and is claimed to be the world's largest free zone.

The JAFZ was set up with the specific purpose of facilitating investment. Accordingly, the procedures for setting up in the zone are relatively simple. Its legal status is quite distinct: companies operating there are treated as being "offshore", or outside the UAE for legal purposes.

The option of setting up in Jebel Ali is therefore most suitable for companies intending to use Dubai as a regional manufacturing or distribution base and where most or all of their turnover is going to be outside the UAE.

As mentioned above, there is freedom from corporate taxation for a period of 50 years, a concession which is renewable. In addition, there are no import or re-export duties, no personal income taxes, no currency restrictions, and no restriction on hiring foreign employees. 100 percent foreign ownership is permitted and there is exemption from all import duties, plus 100 percent repatriation of capital and profits is guaranteed.

A Free Zone Establishment, or FZE, is an entity formed and registered in Jebel Ali and regulated solely by the Free Zone Authority. Such establishments must have a capital of at least AED1m (USD220,000) and liability will be limited to the amount of paid-up capital. A FZE need only have a single shareholder and is an independent legal entity.

Companies approved for operation in the Jebel Ali Free Zone are granted one of the following types of licenses, renewable annually for as long as the company holds a valid lease from the Free Zone Authority (Jafza):

  • A General Trading License allows the holder to import, distribute and store all items as per Jafza rules and regulations.
  • A Trading License allows the holder to import, export, distribute and store items specified on the license.
  • An Industrial License allows the holder to import raw materials, carry out the manufacture of specified products and export the finished product to any country.
  • A Service License allows the holder to carry out the services specified in the license within the Free Zone. The type of service must conform to the parent company's license, issued by the Economic Department or Municipality of the relevant Emirate in the UAE.
  • A National Industrial License is designed for manufacturing companies with an ownership or shareholding of at least 51 percent in GCC hands.

Dubai's network of free zones now covers a comprehensive range of economic sectors, and includes the following:

  • Dubai Academic City
  • Dubai Airport Free Zone
  • Dubai Biotechnology & Research Park
  • Dubai Car and Automotive City Free Zone
  • Dubai Gold and Diamond Park
  • Dubai Healthcare City
  • Dubai Industrial City
  • Dubai International Academic City
  • Dubai International Financial Centre
  • Dubai Internet City
  • Dubai Knowledge Village
  • Dubai Logistics City
  • Dubai Media City
  • Dubai Multi Commodities Centre
  • Dubai Outsource Zone
  • Dubai Silicon Oasis
  • Dubai Studio City
  • Dubai Techno Park
  • Dubai Technology and Media Free Zone
  • Economic Zones World
  • Jumeirah Lakes Towers Free Zone

 

Tags: Dubai | tax | business | services | trade | regulation | law | commerce | investment | Europe | Middle East | Tax | fees | interest | royalties | currency | e-commerce | financial services | manufacturing | insurance | licensing

 

 

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