About the UAE and Market Entry
As the geographic and economic lynchpin of the Middle East, the United Arab Emirates (UAE) is a key operational hub for international investors. It is well established as a tax efficient regional base from which to serve the high growth markets in the Middle East, Africa and South Asia. It is also the perfect location for new business set-ups across diverse sectors.
Dubai is the second largest emirate and ranks as the most important port and commercial centre in the United Arab Emirates. It has worked to transform itself into a broadly diversified economy. Critical sectors include manufacturing, logistics, financial services, information technology, retail, travel, tourism, healthcare and education, in addition to a strong focus on green technologies.
To attract international business, Dubai has invested heavily in its transport, telecommunications, energy and industrial infrastructure.
The UAE is to implement a new federal corporate tax (CT) system, at a standard rate of 9%, which will be effective for financial years commencing on or after 1 June 2023. It is applicable to all businesses and commercial activities operating within the seven Emirates, with certain sector-specific exceptions.
The introduction of Corporate Tax is intended to help the UAE achieve its strategic objectives and accelerate its development and transformation. The certainty of a competitive Corporate Tax regime that adheres to international standards, together with the UAE’s extensive network of double tax treaties, will cement the UAE’s position as a leading jurisdiction for business and investment.
The OECD Transfer Pricing Rules are also now applicable in the UAE. All companies have to comply with the Transfer Pricing rules and documentation requirements, which may also be applicable to domestic transactions.
There are no capital gains taxes and no withholding taxes in the UAE. Companies in Dubai can obtain further significant advantages from the absence of foreign exchange controls, trade barriers or quotas, making it an ideal location for business setup and company formation.
Company formation in Dubai
A foreign investor wishing to start a business in Dubai can choose to set up operations as a Branch, Representative Office or a registered Company, or it can appoint a commercial agent to sell its products in the UAE market or for export.
New companies can also choose to conduct their activities from a Free Zone, which is a designated, self-regulated area set up to encourage economic activity within an Emirate. There are around 40 Free Zones in the UAE, with more coming to market.
The UAE Commercial Companies Law (CCL) provides for the establishment of the following business entities for foreign investors: joint stock companies (JSC), Limited Liability Companies (LLC), unincorporated joint ventures and branch offices of foreign companies. The CCL does not apply to companies that are established in the Free Zones.
An amendment to the CCL, effective 1 June 2021, permitted 100% foreign ownership of UAE mainland companies for the first time. It removed the requirement for a local partner or sponsor to own 51% in UAE mainland companies. As a result, mainland UAE companies (existing and new) are allowed to be 100% foreign-owned, subject to the proposed activity of the company and obtaining specific approval from the relevant authorities in each Emirate.
It is important to have a full understanding of your options before deciding how to establish your company’s presence in the UAE. The potential growth of your business in the UAE can be damaged by making the wrong choice, so please consider the following points when deciding the best structure for your needs:
Choosing the right business setup in Dubai
A common way for foreign companies to retain foreign ownership under the Commercial Company Law in the UAE is to incorporate a Branch or Representative Office, which permits 100% ownership by the parent company. These forms do not have a separate legal identity and are therefore treated as an extension of the foreign company, which remains liable for their activities.
A Branch is permitted to engage in commercial activity in the UAE and to earn profits. It is licensed for the purposes set out in its commercial licence and may only engage in activities similar to those carried on by the foreign company in its home jurisdiction.
An Representative Office is not permitted to earn profits within the UAE and its activities are limited to marketing or promoting the products and services of its foreign parent company in the UAE.
Both Branches and Representative Offices must operate under the authority of a commercial registration and licence in the name of the foreign company, and both are required to appoint a Local Service Agent, which must be a UAE national individual or a 100% UAE national-owned corporate entity. Sovereign is authorised to act as a Local Service Agent in Dubai.
There are around 40 Free Zones currently operating in the UAE, with more coming to market. Each Free Zone is designed around one or more commercial categories and only offers licences to companies within those categories.
The main attractions of establishing an entity in one of the UAE’s Free Zones is that there are no foreign ownership restrictions and companies are governed by an independent Free Zone Authority (FZA), which is responsible for issuing operating licences and regulating the activities of companies within the Free Zone.
Fujairah is the fifth largest of the seven Emirates in the UAE and is the only one with a coastline solely on the Gulf of Oman. There are two major Free Zones in Fujairah – Fujairah Creative City and the Fujairah Free Zone.
Both offer a wide variety of licence types and are highly cost effective in comparison to the Dubai-based Free Zones. This makes them an attractive option, particularly for start-ups and freelancers who do not necessarily require physical office space.
Fujairah Creative City focuses on a broad spectrum of business fields including media, events, consulting, education, communication and marketing, music and entertainment, design and technology.
Fujairah Free Zone is adjacent to the Port of Fujairah and close to the Fujairah International Airport. It focuses on trading entities, service providers, logistics companies and manufacturers.
All UAE mainland (onshore) companies are required to be licensed by the respective Emirate’s Department of Economic Development (DED) and are governed by the UAE Commercial Companies Law (CCL) and its accompanying regulations.
The main advantage for foreign investors in establishing a business in mainland UAE is that, unlike the Free Zones, there is no territorial restriction on business activities or the location of offices/premises. A mainland company has the freedom to trade anywhere in the UAE or wider Gulf Cooperation Council (GCC) states, including all the Free Zones, and has access to a far wider range of real estate options.
Foreign investors must obtain the approval of the General Directorate of Residency and Foreigners’ Affairs before getting the initial approval. Some activities require additional approvals from government entities related to that particular business before applying for the initial approval. These include activities related to legal affairs, security affairs and financial securities and commodities.
Businesses owned completely by non-GCC residents will require a Local Service Agent in the UAE to assist in liaising between the company and government entities in applying for licences and visas. Local Service Agents have no direct involvement in the running of the business. Sovereign is authorised to act as the Local Service Agent.
A UAE Sole Establishment (also known as a Sole Proprietorship) is an entity that is owned by one individual with the trade licence that is issued in his or her own name. The owner assumes all the responsibilities of the entity, including any financial liabilities.
A foreign investor applying for a Sole Establishment can only acquire a professional service licence, for the provision of services such as consulting, IT, legal, engineering and marketing. They would not be eligible to do business in import-export, trading or real estate development.
Foreign nationals that set up a Sole Establishment to practice a professional service are permitted 100% ownership of the entity.
Establishments that practice professional services and do not extend to any commercial business are exempt from the UAE Commercial Companies Law (CCL) but are required to be licensed by the Department of Economic Development (DED).
Sole Establishments that are owned by a foreign investor are required to appoint a Local Service Agent to assist in liaising between the company and government entities in applying for licences and visas. Local Service Agents have no direct involvement in the running of the business. Sovereign is authorised to act as the Local Service Agent.
An Offshore Company in UAE should not be confused with a Free Zone Company. Offshore Companies are business entities that are set up with the intention of operating outside their registered jurisdiction and / or the location of their ultimate beneficial ownership.
There may be many reasons for registering an Offshore Company, but the general advantages can include providing:
- A holding company structure for an onshore Company or other UAE asset.
- A gateway for international market expansion
- Access to a business-friendly legal system
- Access to a more flexible regulatory regime
- Tax neutrality on international earnings in respect of (depending on jurisdiction) personal or company income, capital gains and inheritance taxes
- Better access to global funding
- A vehicle to separate or protect assets, such as Intellectual Property, from operating entities.