|
|
|
Frequently Asked Questions (FAQ)
The United Arab Emirates (UAE) consist of seven Emirates, i.e. Abu Dhabi, Dubai, Sharjah, Ajman, Ras Al Khaimah, Fujairah and Umm Al Quwain. There are many options available for foreign companies seeking to establish a business relationship with the UAE. While some companies prefer traditional trading relationships, others prefer to have a local business set up in order to research market prospects, make contacts, liaise with customers and extend their market position. However, choosing the most suitable commercial vehicle for any business activity always depends upon the nature of the business targets of each investor.
Experience has shown that very often the same questions are asked with regard to the particular legal features of an envisaged financial commitment. The most frequently asked questions and answers are listed below.
|
| 1. |
Types of Commercial Activity |
| 2. |
Trading |
| |
| 2.1 |
Direct Trade |
| 2.2 |
Marketing of Products via a Commercial Agent/Distributor |
| 3. |
Public Sector Procurement |
| 4. |
Setting up a Place of Business |
| |
| 4.1 |
General Aspects |
| 4.2 |
Formation of a Representative Office/Branch Office |
| 4.3 |
Formation of a Company within the UAE |
| 4.4 |
Formation of a Company in one of the Free Trade Zones of the UAE |
| 4.5 |
Foundation of a Professional Firm |
| 4.6 |
Formation of an Offshore Company |
| 5. |
Tax-Related Considerations |
| |
| 5.1 |
Tax Duties in the UAE |
| 5.2 |
Double Taxation Agreements with different Countries |
| 5.3 |
Double Taxation Agreement UAE – Germany |
| 1. |
Types of Commercial Activity |
| |
| Which types of commercial activities are generally available to foreign investors in Dubai? |
| |
As a rule, foreign investors can participate in the following commercial activities in Dubai: [Most of the following information apply as well in the other emirates in the United Arab Emirates, i.e. Abu Dhabi, Ajman, Fujeirah, Ras Al Kaimah, Sharjah, Um Al Quwain.]
|
| Trading: |
| ⇒ |
direct trade |
| ⇒ |
appointment of a commercial agent |
| ⇒ |
appointment of a distributor |
| |
| Public Sector Procurement: |
| ⇒ |
local tenders |
| ⇒ |
international tenders |
| |
| Setting up a Place of Business: |
| ⇒ |
formation of a representative office
(no direct commercial activities permitted) |
| ⇒ |
formation of a branch office
(import/export not permitted, only rendering of services) |
| ⇒ |
formation of company within the UAE
(since 2021 a total foreign equity of 100% is permitted) |
| ⇒ |
formation of a company in a free trade zone of the UAE
(total foreign equity of 100% permitted) |
| ⇒ |
formation of an offshore company
(business activities only permitted outside the UAE) |
| ⇒ |
formation of a professional firm
(may be 100% owned by one or more foreign investors; such firms may only render professional services, e.g. in the areas of medicine, education, and academic and skilled professions) |
| |
| Do foreign companies require a "sponsor" for all types of commercial activities? |
| |
On November 23, 2020 the UAE announced a total of 51 amendments to the UAE Law on Commercial Companies. Most of these amendments apply to public companies and LLCs which, amongst other things, provide that a UAE national or a 100% UAE legal entity are no longer required to hold a majority stake in an LLC or any other company form. This regulation allows foreign investors to hold 100% of the shares of a company in the UAE outside a free trade zone. The so-called "sponsor" is therefore no longer required.
However, these changes do not apply to strategically important sectors such as oil and gas exploration, electricity and water supply and state-owned companies.
Furthermore, foreign companies having a representative office or a branch in the UAE, do no longer require a local service agent (sponsor), who was mandatory until 2020.
The elimination of these legal requirements is another investment incentive for foreign companies.
UAE Companies Law reforms are far-reaching, but removing the requirement for a local sponsor and service agent for foreign companies and branches operating outside of free zones is seen as the greatest incentive for new investments.
Companies that have shied away from the UAE market because of the local sponsor requirement will now rethink their approach. |
| 2. |
Trading |
| |
| 2.1 |
Direct Trade |
| |
| Is direct trading subject to particular legal constraints? |
| |
| Conducting business by concluding transactions directly with importers and traders in Dubai or the other Emirates in the United Arab Emirates is not subject to particular legal constraints or restrictions. Any company (holding a respective import license) may import goods without being the registered agent/distributor of the exporting company. However, direct trading is deemed to be only suitable for low volume trade. Notwithstanding, the parties to such transaction should enter into respective written contracts specifying their rights and obligations. The most important issue is to secure payment. This should exclusively be achieved by obtaining confirmed and irrevocable letters of credit. In case the local business partner does not agree with such payment arrangements, there will always be a risk of payment failure. Since it is time-consuming and expensive to enforce a claim for payments due by way of court action, it should always be the highest priority to secure payment by way of a letter of credit. |
| 2.2 |
Marketing of Products via a Commercial Agent/Distributor |
| |
| Can foreign companies do business in Dubai without establishing a physical presence? |
| |
| A foreign company wishing to supply goods and services from abroad, but without establishing a physical presence in Dubai, may appoint a commercial agent/distributor for that purpose. |
| |
| What is the difference between a commercial agent and a distributor? |
| |
A commercial agent negotiates business transactions in a specific contractually agreed territory, on behalf of and for the account of his principal, and for remuneration in the form of a commission. The actual business deal is made between the principal and the customer.
A distributor however, purchases goods from the principal and distributes these in the contractually agreed territory on his own behalf and profit.
The UAE Commercial Agency law defines a commercial agency as the representation of a principal by an agent for the purpose of distributing, selling, offering or providing merchandise or services in the United Arab Emirates for a commission or profit. |
| |
| Are there other laws applicable to the contractual relationship between the principal and/or the commercial agent/distributor in addition to the UAE Commercial Agency Law? |
| |
The UAE Civil Law and the UAE Commercial Transaction Law also contain provisions regulating the relationships between the principal and/or the commercial agent/distributor. These laws either apply in cases where the UAE Commercial Agency law does not apply at all (see further down) or in cases where an outstanding issue is addressed or if there are gaps in the respective legislation.
Due to a lack of special provisions, the UAE Commercial Agency Law likewise applies to franchise agreements. |
| |
| Who qualifies as a commercial agent/distributor? |
| |
| According to UAE Commercial Agency Law only UAE nationals can be registered as commercial agents/distributors. If the commercial agent/distributor is a corporate body, all partners must be UAE nationals. A commercial agency contract must be registered with the Ministry of Economy & Commerce. Only if the respective contractual relationship between the principal and the commercial agent/distributor is registered, the provisions of the UAE Commercial Agency Law apply. |
| |
| Are unregistered distributors, or those not eligible for registration, able to import goods? |
| |
Any trader in the UAE, not being registered as an agent/distributor with the Ministry of Economy & Commerce, holding a valid import license can import goods without any restriction, unless no exclusive, registered commercial agency/distribution contract exists for the respective goods.
Hence, a distribution company with foreign equity participation can – according to the provisions of the law – not beofficially registered as a commercial agent/distributor. In practice, however, there are numerous companies with foreign equity participation, acting as commercial agents/distributors, without being registered. As a rule, unregistered commercial agency contracts do not entitle either party to claim any rights as per the UAE Commercial Agency Law, since such unregistered contractual relationships are not subject to the UAE Commercial Agency Law.
For such cases, the legal provisions on commercial agents in the UAE Civil and Commercial Law generally apply. As opposed to the provisions of the UAE Commercial Agency Law, they do not provide for the commercial agent to be a UAE national. Also, the cancellation of an unregistered contract is substantially less complicated than the cancellation of a registered contract. Experience has shown, that due to the protective rights a commercial agent/distributor is entitled to on the basis of a registered contract, the local commercial agent/distributor usually insists on the registration of the contract. |
| |
| What advantages does the UAE Commercial Agency Law provide to registered commercial agents/distributors? |
| |
The UAE Commercial Agency Law grants the commercial agent/distributor far-reaching protection against termination of the contract by the principal. Although the term of the agreement may be limited to a specified period, it is not permissible for a principal to terminate an agency agreement without the agent's approval, unless the principal can provide an according reason for such a cancellation or non-renewal of the contract. It should be noted, though, that a failure to achieve a contractual minimum purchase quantity, for example, is not necessarily a sufficient reason for termination.
A commercial agent/distributor is entitled to territorial exclusivity and, as such, will receive infringement commissions on transactions concluded by the principal himself or through others within the contractual territory. The contractual territory may be the entire UAE, or a particular emirate or to several emirates. |
| |
| What advantages does the UAE Commercial Agency Law provide to principals of registered commercial agents/distributors? |
| |
| Under the provisions of a registered contract, the principal also enjoys certain protective rights, since the commercial agent/distributor, and/or the principal himself can have parallel imports of the products of the principals ruled out. Upon a complaint of the commercial agent/distributor, and/or the principal, the UAE customs authorities will not clear the importation of products through parties other than the registered agent. Hence principals of registered commercial agents/distributors enjoy protection against parallel imports of their goods by third parties. |
| |
| Does the cancellation/expiration of a registered commercial agency/distribution contract automatically cause the de-registration of the same from the commercial agency register with the Ministry of Economy & Commerce? |
| |
| A registered commercial agency/distribution contract is not deemed legally terminated upon cancellation or expiration, but only upon actual deletion from the commercial agency register kept by the Ministry of Economy & Commerce. Such a deletion requires the approval of the commercial agent/distributor. Hence the principal can neither register a new commercial agent/distributor nor deliver his goods via another importer into the UAE when litigation procedures against the previous commercial agent/distributor are in progress. The previous commercial agent/distributor continues to enjoy the protective rights provided for by UAE Commercial Agency Law, and can legally prevent the importation of products through parties other than him as the registered agent. Hence, utmost care should be taken in choosing a commercial agent/distributor. |
| |
| What type of institutions have jurisdiction in case of a dispute between the registered commercial agent/distributor and the principal? |
| |
| In the event of disputes between the principal and the commercial agent/distributor, the UAE Commercial Agency Law provides for filing a case with the Commercial Agency Dispute Committee, which will act as an arbitration authority between the parties. However, should an amicable settlement not be reached, the Commercial Agency Dispute Committee will ultimately make a final decision. The parties are entitled to challenge the decisions of the Commercial Agency Dispute Committee in the ordinary courts. |
| |
| Can the parties agree on a foreign applicable law in order to prevent the application of the UAE Commercial Agency Law? |
| |
It is generally possible to agree on legislation other than that of the UAE. In practice however, the local courts exclusively apply the laws of the UAE, even when the parties have agreed on the application of foreign law.
It is not possible to agree on a foreign jurisdiction, since the UAE Commercial Agency Law, provides for the exclusive jurisdiction of the courts of the UAE. A judgment passed abroad cannot be enforced against a commercial agent/distributor in the UAE, since such a judgment violates the ordre public. This principal also applies is case of unregistered agency/distribution agreements, since the UAE courts have exclusive jurisdiction in case of a claim against any natural person or legal entity located in the UAE. |
| |
| Can the parties agree on a probationary period enabling the principal to cancel the contract without notice during such probationary period? |
| |
| The UAE Commercial Agency Law does not provide for a probationary period like, e.g. the UAE Labour Law. Once the respective contract is registered, the provisions of UAE Commercial Agency Law are fully applicable. However, an indirect probationary period may be obtained by keeping the contract ineligible for registration. This can be achieved delaying the required certification and authentications of the signatures of the principal for the time of the agreed probationary period. It is also possible to sign an uncertified declaration of intent, to which the unsigned contract is attached as an annex. This declaration provides for the contract to be signed and registered following the end of the probationary period – provided the latter was satisfactorily completed. |
| 3. |
Public Sector Procurement |
| |
| How can foreign companies participate in public tenders? |
| |
In Dubai, and the other emirates of the UAE, government projects and orders are generally put out to tender. The required qualifications, specializations and other terms and conditions for participation vary according to the project and the authority concerned.
Certain tenders are offered internationally, but in case of local tenders only those companies licensed and registered with the department concerned are eligible to bid. As a rule, companies which are not licensed in the UAE, cannot take part directly in such public tenders, but only via a registered representative, the so-called tender agent? |
| |
| Who qualifies as tender agent for foreign companies? |
| |
| Submissions can be made by a commercial agent/distributor registered for the bidding company, a local registered joint venture, where at least 51% of the equity must be owned by UAE nationals, a branch office of the bidding company, a consortium (project-specific internal company), or an agent specifically appointed for this purpose (tender agent). The tender agent can be an individual or a corporate body. |
| |
| Can the appointment of a tender agent be restricted in time or to a certain project? |
| |
| The appointment of a tender agent can be limited to a particular tender or a particular period, without indemnities or other compensation payments becoming due in the event of termination of the representative relationship, as is the case with a registered commercial agent/distributor. |
| 4. |
Setting up a Place of Business |
| |
| 4.1 |
General Aspects |
| |
| Can foreign companies choose any legal form of a corporate enterprise, e.g. a Limited Liability Company (LLC) for their commercial activities? |
| |
| The LLC is one of five types of commercial entities provided for by the UAE Companies Law. The LLC happens to be the type of company most frequently chosen by foreign investors. |
| 4.2 |
Formation of a Representative Office/Branch Office |
| |
| What is the difference between a representative office and a branch office? |
| |
Firstly, both types are affiliates of a parent company, carry its name and remain wholly owned by the parent company without them having their own legal entity. Since June 2021 a so-called service agent, who had to be a national of the UAE, but had no decision-making rights or any other rights whatsoever, is not required anymore.
The main difference between both types of affiliates is that a representative office – as opposed to a branch office – is not allowed to perform any commercial activities. |
| |
| What kind of activities can be performed by a representative office? |
| |
By setting up a representative office, the parent company creates its own legal and physical presence in the market. The task of a representative office is mainly providing support to the parent company. It may perform the following duties:
|
| ⇒ |
observing the market |
| ⇒ |
preparation of project studies |
| ⇒ |
marketing and promotion for the products and services of the parent company |
| ⇒ |
negotiation of contracts between local customers and the parent company |
| ⇒ |
customer advice |
| ⇒ |
services |
| ⇒ |
supervision of commercial agents |
| ⇒ |
training activities |
| ⇒ |
observation of public sector invitations to tender |
Representative offices must not perform any commercial activities, import or export goods, or sign contracts on their own behalf or set up their own accounts. |
| |
| What kind of activities can be performed by a branch office? |
| |
| The activities a branch office can perform depend upon the licence issued by the respective authority, the Dubai Department for Economic Development. As a rule, only such activities are approved, which are at least similar to those of the parent company. However, a branch office must not perform import, export and manufacturing activities. In practice, the activities of a branch are limited to services and consultancy work.A branch office may perform import activities subject to the condition that the branch only imports goods which are manufactured by the mother company abroad. |
| 4.3 |
Formation of a Company within the UAE |
| |
| What is the meaning of "joint venture" in the UAE? |
| |
| In the UAE so-called joint ventures are present in all areas of economy, trade, manufacture and industrial production. Internationally, the term joint venture is not always used consistently. A joint venture is generally understood as "the legal relationship of legal entities and/or individuals running a business or company jointly with the intention of generating an income". In the UAE, a joint venture with foreign participation is generally understood as the corporate association of a foreign investor and a national of the UAE, with the objective of commercial activity in the UAE. Joint ventures in the UAE, or, in the other member states of the Gulf Cooperation Council are therefore not just consortia or working partnerships, but usually legal entities in the form of corporate enterprises. |
| |
| Which kind of corporate enterprises are defined by the UAE Companies Law? |
| |
| The UAE Companies Law permits a total of seven different types of corporate enterprises. Out of these seven different types of corporate enterprises the LLC is the company form usually chosen by foreign investors. It is the suitable structure for organizations interested in developing a long-term relationship in the local market. The partners are only liable for the company's liabilities to the extent of their shares in the capital, the foreign joint venture partner is allowed to completely take over the management of the joint venture and there is flexibility in the profit and loss distribution. There is no minimum capital requirement anymore for LLCs in the UAE. |
| |
| What is the meaning of "sponsorship agreement" in the UAE? |
| |
As mentioned above, any foreign partner can only hold up to 49% of the company's shares. The remaining 51% must be held by a UAE national, or a company wholly owned by nationals of the UAE.
However, the foreign partner is often interested – despite the provisions of the law – to obtain the majority of shares and sole power to take decisions on behalf of the company. Therefore many joint venture partners enter into side agreements to the memorandum and articles of association.
A common set up is that the foreign partner pays the capital of the company in full and the local partner acts as trustee for the shares of the foreign partner, who in fact is the sole shareholder of the company. The foreign joint venture partner indemnifies the local partner from all financial responsibilities of the company and is liable towards third parties for any liabilities of the company. The local partner is usually paid a lumpsum amount for his services only and is excluded from any profit and loss distribution.
These agreements are known as so called sponsorship agreements or side agreements. Any side agreements between the partners of a LLC providing that the foreign joint venture partner only shall be considered as the real owner of the entire share capital and excluding the local joint venture partner from any profit and loss distribution are a circumvention of the law. Any such side agreements between the partners do not have any legal effect as against others. |
| |
| Does a "sponsorship agreement" have any legal effect on the relationship of the partners to one another? |
| |
Although such side agreements contradict and violate the law and have no effect as against others they might bind the parties entered into it. In case of a dispute between the partners of a LLC, e.g. the local partner is claiming his "rights" according to the provisions of the memorandum and articles of association, the UAE courts usually refer to the side agreements to reveal the real intention of the partners of the LLC. In combination with the principal of "duty of loyalty" that nobody shall act contrary to what was really agreed between the parties, such side agreements create rights and obligations between the contractual parties.
If a side agreement has been entered into, a claim by the local against the foreign partner based on the provisions of the memorandum and articles of association will most probably be rejected by the UAE courts. However, this always depends on the individual case. |
| |
| Are there legal possibilities other than a "sponsorship agreement", to compensate for the controlling stake position of the local partner? |
| |
The memorandum and articles of association act as the constitution of the LLC, governing the internal organization pertaining to its partners. Furthermore it regulates the rights and obligations of the partners generally, thus creating rights and obligations between them and the LLC respectively. The rights and obligations provided in the memorandum and articles of association are directly enforceable by one partner against the other. Therefore the position of the minority foreign joint venture partner may be strengthened by a carefully drafted memorandum and articles of association as follows:
A distribution of profits and losses that does not correspond with the capital shares of the partner can be agreed in the company contract. Deviations of a ratio of up to 80:20 for the benefit of the foreign partner are permissible. It is not possible to exclude a partner entirely from the appropriation of the financial results, neither with regard to the loss nor the profits. However, a part of the profit can be diverted by the foreign partner before capital gains distribution by way of appropriate management remuneration.
The management of the business can be carried out by the foreign partner.
Each partner may be represented in the company's general meeting by another partner, who is not a managing director him/herself. The local partner can therefore authorise the foreign partner – unless he is a managing director – to represent him in the general meeting of partners. This enables the foreign partner to exercise the voting rights of the local partner for his own benefit. |
| |
| May a LLC conduct any kind of trading activities? |
| |
| In principle, the area of activity of an LLC is not subject to restrictions, with the exception of the ban on activities in the areas of banking, investment and insurance. Industrial businesses require a special licensing procedure, however, they can be operated as a LLC and enjoy exemptions and subsidies in particular, as opposed to pure trading enterprises. |
| 4.4 |
Formation of a Company in one of the Free Trade Zones of the UAE |
| |
| How many free trade zones are located in Dubai? |
| |
At present the following free trade zones are available in the UAE:
|
| ⇒ |
Jebel Ali Free Zone (Dubai) |
| ⇒ |
Dubai Airport Free Zone (Dubai) |
| ⇒ |
Dubai Technology, E-Commerce & Media Free Zone – TECOM (Dubai)
• Dubai Internet City
• Dubai Media City
• Knowledge Village |
| ⇒ |
Gold & Diamond Park (Dubai) |
| ⇒ |
Dubai Cars & Automotive Zone (Dubai) |
| ⇒ |
Dubai International Financial Center |
| ⇒ |
Dubai Health Care City |
| ⇒ |
Dubai Metals & Commodities Center |
| ⇒ |
Dubai Flower Center |
| ⇒ |
International Media Production Free Zone |
| ⇒ |
Dubai Silicon Oasis |
| ⇒ |
Dubai Maritime City |
| ⇒ |
Dubai Auto Parts City |
| ⇒ |
Heavy Equipment & Trucks Zone |
| ⇒ |
Dubai Aid City |
| ⇒ |
Dubai Carpet City |
| ⇒ |
Dubai Textile Village Free Zone |
| ⇒ |
Mohammed Bin Rashid Technology Park |
| ⇒ |
Sharjah Airport International Free Zone (Sharjah) |
| ⇒ |
Hamriyah Free Zone (Sharjah) |
| ⇒ |
Ajman Free Zone (Ajman) |
| ⇒ |
Fujairah Free Zone (Fujairah) |
| ⇒ |
Ras Al Kaimah Free Zone (Ras Al Kaimah) |
| ⇒ |
Ahmed Bin Rashid Free Zone (Umm Al Quwain) |
| |
| What are the differences between a company established in a free trade zone or in Dubai or in the other emirates of the UAE? |
| |
The free trade zones in Dubai are designated areas, which are not bound by the laws and regulations of Dubai and/or the UAE. They are aiming to provide incentives for investors which the local and federal laws do not necessarily provide.
The main incentive for a foreign investor in setting up a company in a free trade zone is that 100% foreign ownership is guaranteed. No local equity participation, a service agent or sponsor is required.
The free trade zones are issuing trading, industrial and service licenses. |
| |
| What kind of companies can be set up in a free trade zone by foreign investors? |
| |
In principle, there are three different ways of setting up a company in one of the free trade zones in the UAE:
|
| ⇒ |
Foundation of a branch office |
| ⇒ |
Foundation of a free zone establishment (FZE) |
| ⇒ |
Foundation of a free zone company (FZCO) |
| ⇒ |
Foundation of an Offshore Company |
| |
| What are the differences between the different kind of companies? |
| |
The branch office is an affiliate of a already existing parent company in the UAE or abroad. The FZE and the FZCO are – as opposed to a branch office – corporate enterprises with their own legal identity. FZEs and FZCOs are corporate enterprises where the owner's liability is limited to the paid-in capital, similar to the LLC, which can be founded within the UAE. A FZE can only be founded by a single shareholder, while a FZCO can be founded by two to five foreign partners. The partners may be individual or legal entities. The minimum capital stock varies in the respective free trade zones. In the Jebel Ali Free Zone and the Dubai Airport Free Zone, for example, capital stock for an FZE amounts to AED 1,000,000 and AED 500,000 for an FZCO.
The Dubai Technology, Electronic Commerce & Media Free Zone also offers the establishment of a branch office, but does not distinguish between a FZE and a FZCO. The available corporate enterprise is termed a Limited Liability Company and can be founded by one or any number of partners. The minimum capital stock is AED 50,000.
At present Offshore Companies can be established in free trade zones in Dubai and Ras Al Khaimah. The two Emirates allow any non-resident individual or juridical entity to open a company registered within the RAK Free Zone.These companies are extremely flexible international instruments that can serve many objectives: Trading operations, asset protection, tax planning,real estate holding, trusts, funds etc.They require only a symbolic (nominal) capital and only one director and one shareholder as a minimum. However, they may only conduct business outside the UAE. |
| |
| May companies located in a free trade zone legally operate outside the free trade zone? |
| |
Companies holding a free trade zone license are permitted to operate in the respective free trade zone and outside the UAE. Operation within the UAE can be undertaken either by a commercial agent, representative, distributor, or the mother company licensed by the relevant UAE authority. Any company holding a Free Zone license can itself purchase goods or services within the UAE.
Hence, the decision in setting up a company within the UAE or in one of the free trade zones, largely depends on the target market. If the latter is not limited to the UAE, a set up in a free trade zone represents an alternative to a location inside the UAE well worth considering. |
| 4.5 |
Foundation of a Professional Firm |
| |
| What are the main difference between a professional firm and a corporate enterprise e.g. an LLC? |
| |
The foundation of a corporate enterprise, is – in principle – reserved for trading and industrial activities, and requires a 51% equity participation in the company by a national of the UAE. Depending on the type of corporate enterprise, it is possible to obtain a limitation of liability for the partners.
Professional firms include all firms whose objectives or activities are to render professional services. Professional companies can be set up for services or consultancy work, e.g. in the area of medicine, education and the provision of academic and skilled professions. A professional firm may remain wholly owned by a foreign party and requires a service agent. The operator or operators of a professional firm do not enjoy any limitation of liability. They are fully responsible for the liabilities of the professional firm. A professional firm can only be managed as a sole proprietorship or as a civil company in accordance with the UAE Civil Code. Every profession is regulated by its special law and the number of staff members that may be employed is limited. |
| |
| What laws apply for foreign engineering consultancies? |
| |
In Dubai, engineering consultancy is perceived as a professional activity that is regulated by "Local Order Nr. 89/1994 on Regulating the Practice of Engineering Consultancy Profession in the Emirate of Dubai" and its amendments.
Engineering firms operating in Dubai shall adopt one of the following forms:
• Local Engineering Firm
• Associate Engineering Firm
• Expert Engineering Firm
• Branch Office of a Foreign Engineering Firm
Local Engineering Firm
A local engineering firm may be owned either solely by a local Engineer or jointly by a number of local and foreign Engineers. The foreigner partner's total shareholding in the capital of the firm shall not exceed 49%. The firm may be licensed to practice in more than one field of engineering on condition that there is a registered local engineer for each field.
Associate Engineering Firm
A local engineering firm may associate with a foreign engineering firm by establishing not more than one associate engineering firm, to carry out some sophisticated, specialisedengineering works. The foreign firm shall have previously practiced the profession for a minimum period of ten years within the United Arab Emirates or abroad, in the field required to be licensed.
Expert Engineering Firm
One or more natural persons may establish an expert engineering firm for the purpose of performing sophisticated, specialised engineering works. The firm's work shall be limited to the provision of expert opinion to local engineering firms, associate engineering firms and other official bodies. The appointment of a service agent is no longer required.
Foreign Engineering Branch Office
A foreign specialised engineering firm may establish a foreign engineering branch office. The license shall be limited to fields of sophisticated specialised engineering works not commonly practiced by local engineering firms. The appointment of a service agent is not required. |
| 4.6 |
Formation of an Offshore Company |
| |
| For which target markets offshore companies are suitable? |
| |
At present offshore companies can be established in the Emirate of Dubai and Ras Al Khaimah.
If the target market of an investor is mainly the UAE an offshore company is not a suitable vehicle since offshore companies are restricted from doing business within the UAE. They may open bank accounts in the UAE and have business ties with lawyers, accountants, management companies etc. However any kind of trading or consulting activities with companies based in the UAE are not allowed. For that purpose an onshore company is required.
An offshore company is not required to maintain an office in the UAE, but is required to have a correspondence address via a so called Registered Agent. As Registered Agents duly registered law firms or accounting firms can be appointed. |
| 5. |
Tax-Related Considerations |
| |
| 5.1 |
Tax Duties in the UAE |
| |
| Are any corporate taxes levied in Dubai or in the UAE on foreign companies? |
| |
| Tax legislation is the prerogative of the individual emirates in the UAE. The tax laws provide for the levying of taxes, however, in practice, most provisions are not applied. Only banks and companies immediately involved in the extraction and processing of oil, gas and petrochemical products, are liable to taxation. Thus, companies that do not fall into one of the above categories and generate an income from business operations in the UAE, are currently neither subject to corporation tax, nor other taxes in the UAE. |
| |
| Are any income taxes levied in Dubai or in the UAE on foreign employees? |
| |
| No income tax levied on the income of individuals. According to expert statements, no changes to this taxation policy are expected in the long term. |
| 5.2 |
Double Taxation Agreements with different Countries |
| |
| What are the economic reasons for entering into double taxation agreements? |
| |
| Since the UAE are to be considered a "no tax" country, double taxation agreements are aimed at making the UAE a more attractive territory in which to operate by reducing taxation levied in the foreign jurisdiction on profits remitted abroad by foreign corporations operating in the UAE. |
| |
| With which countries have the UAE entered into double taxation agreements? |
| |
| The UAE has an extensive and growing list of double tax treaties, which currently numbers 56 countries. This network includes treaties with China, France, Germany, India, Indonesia, Italy, Luxembourg, Malta, Malaysia, the Netherlands, Singapore, South Korea. |
| |
| What are the benefits for foreign investors as per such double taxation agreements? |
| |
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 agreement with the UAE may not be taxable in the hands of the foreign parent company even though it has not been taxed in the UAE.
However, many countries have anti-avoidance provisions which either set minimum levels of tax for income to benefit from tax treaties, or set out lists of low-tax countries which do not qualify under tax treaties. Therefore it is necessary to study the tax legislation of each treaty partner as well as the text of the treaties themselves before assuming anything about the tax treatment of untaxed income flows originating in the UAE.
Most of the double taxation agreements the UAE have entered into with other countries follow the OECD Model Tax Convention, e.g. like the double taxation agreement with Germany. Hence the following requirements of the double taxation agreement between the UAE and Germany in order to enjoy the benefits of the said agreement apply to most of the double taxation treaties the UAE have entered into with other countries. |
| 5.3 |
Double Taxation Agreement UAE – Germany |
| |
| May a company based in Germany transfer profits generated in the UAE to Germany tax-free? |
| |
Due to the global income principle applicable in German tax law, the profits a German-based company generates in a foreign country are liable to German corporate income tax. This includes income from foreign subsidiaries.
On July 1, 2010 the new double taxation agreement between Germany and the UAE was signed by the foreign ministers of both countries. On May 6, it officially went into force by approval of the German Bundestag and Bundesrat.
The effective date of application for the new DTA is set for January 1, 2009. This ensures that, after expiration of the old agreement at the end of 2008, no taxable person is left uncovered due to the absence of an agreement. |
| |
| Are there any differences compared to the previous DTA? |
| |
The essential difference, and the one with the most far-reaching consequences, is the transition from the exemption method to the credit method, which for subsidiaries of German companies as well as for German employees working in the UAE can lead to taxation in Germany.
Like most former German agreements, the former UAE agreement was based on the exemption method. This means that if pursuant to art. 14 the right of taxation had been assigned to the UAE, the German taxable person was exempted from taxation in Germany although no tax had been collected in the UAE.
According to the new UAE agreement, the credit method is applied as a basic principle. If pursuant to art. 14 the right of taxation of activities as an employee is assigned to the UAE, a natural person domiciled or permanently resident in Germany is therefore still liable to German taxation of income from activities as an employee. The tax collected in the UAE (if any) may, however, be deducted from the German tax (art. 22). |
| |
| What advantages does the DTA have for German companies? |
| |
Basically none, since regarding the major issue of tax liability in Germany the credit method is applied and the exemption method is no longer applicable.
With the credit method, the taxable person has to pay taxes in his country of residence on the income that has already been taxed in the foreign country. He may deduct the amount already paid in the foreign country from the tax payable. However, this involves no advantages whatsoever, since the tax rate in the UAE is 0%.
For the taxation of individuals in Germany, it depends on whether they are “based” in Germany, i.e. whether they are either domiciled or permanently resident there. |
| |
| Is there a DTA with Austria? |
| |
UAE and Austria have a DTA.
For income from the UAE, this DTA provides for an exemption method with a progression clause. The consequence of the exemption method is that income generated in Dubai is generally not liable to taxation in Austria.
The tax-free income generated does not increase the income of the taxable person but is subject to the progression clause, which means that this income is included in the assessment of the tax rate applicable to the taxable income. The assessment is performed as follows: national and foreign income is added up and forms the basis for the Austrian tax rate. However, this higher rate is applied only to the Austrian income. If the investor is already paying the highest tax rate, this progression clause becomes irrelevant. |
| |
| May a company based in Germany and generating profits with a permanent business establishment situated in the UAE transfer those profits to Germany tax-free? |
| |
| Pursuant to the DTA, the UAE holds the right to tax profits generated by a permanent business establishment with active operations situated in the UAE. Accordingly, the profits of an establishment with active operations situated in the UAE are fully taxed in Germany, since the UAE do not raise taxes on profits generated by a permanent business establishment which would, however, be taxed in Germany. |
| |
| May profits generated by a German company as shareholder of a company situated in the UAE be transferred to Germany tax-free? |
| |
Essentially no change is brought about by dividend income of the German corporation from distributions of its UAE subsidiary. Distributions are not taxed in the UAE, and in Germany the German parent company is required to pay income tax on only 5% of the dividend distributions – 95% of the dividends are therefore tax-free.
The subsidiary which is headquartered and managed in the UAE is a legal and tax subject in its own right. It is taxable only in the UAE; its profits are therefore practically tax-free. The precondition for this is that the subsidiary in which the German company has a majority share may not be classified as an intermediate company as defined in § 7 section 1 of the Foreign Tax Act (AStG). It is harmful if the subsidiary generates passive income, i.e. income other than the active income referred to in § 8 section 1 of the Foreign Tax Act (AStG). The subsidiary’s passive income must be added to the income of the German parent company. |
|
|
|
|
|
|
