A Freezone (FZ) entity in the UAE offers many tax and business opportunities. A Freezone company enjoys full exemption from income and corporate taxation, 100 percent foreign ownership, no exchange restrictions, free profit repatriation, benefits accruing from the UAE's nearly 80 double tax treaties and many more. A further possibility available to a Freezone is to issue residence permits and obtain tax residence certificates from the UAE authorities for its foreign owners and employees.
Furthermore, if a local bank account is maintained with movements, the foreign owners
and managers can apply to the Ministry of Finance to receive the UAE tax residence certificates. The Umm AI Quain Freezone also offers options to lease executive offices, warehouses and land.
A UAE residence permit and a tax residence certificate can be useful to foreign owners
and employees of FZ who wish to register tax residency in the UAE. It is worth noting that banking institutions, in the UAE and outside, consider UAE tax residence certificates as proof of tax residency in the UAE. As in all cases, the advice of a competent tax lawyer must be sought.
Under the UAE federal law, foreign businesses have three main entities to choose from in order to conduct business in the UAE: a local limited liability company (LLC), a FZ entity, and an international business company (IBC).
Freezone companies can be owned 100 percent by foreigners. They also meet the growing necessity in international tax planning of having necessary substance. This is not possible to obtain in traditional offshore set ups since they typically only offer an IBC regime.
The main advantages of setting up in a Freezone in the UAE include:
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100 percent foreign ownership
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residence permits for the owners of the entity
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guarantee for 15-50 years against the future imposition of corporation tax
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import of goods is duty free, provided the goods are not supplied to the local market
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streamlined procedures:all formalities are typically dealt with through the FZ authorities instead of the various government departments
Obtaining a residence permit is the primary condition for being considered as resident in the UAE. As a general rule, a foreign individual needs to have a sponsor in order to apply for a residence permit in the jurisdiction. For many expatriates, the company that employs them will act as their sponsor and secure them residence visa. For those who do not come on an employment contract, there are two other ways for obtaining the UAE residency:
The UAE government in June 2011 introduced a new system extending the validity of the visa granted to real estate investors for up to 3 years. Under the property residence visa, holders reside freely in the UAE but are not allowed to work. The preferred way to obtain residency is through a corporate structure. For foreigners, setting up a FZ company is a practical way of obtaining sponsorship. As far as the FZ company is concerned, it must have physical presence in the UAE.
In that regard, the most interesting and cost effective options are proposed by FZ situated in the northern emirates with possibility to have flexi desks and flexi offices. Requirements for a personal tax residence certificate from the Ministry of Finance of the UAE:
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letter from the individual
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passport copy and valid visa copy
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bank statement for the last 6 months
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certificate from the UAE company stating the individual activity and sources of income
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AED 2,000 (US$750,equivalent)
An independent FZ 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 FZ.
The UAE has witnessed significant growth in the number of FZ. Each zone has a focus on a particular type of industry. Notably within Dubai:Jebel Ali FZ, Dubai Airport FZ (DAFZ), Dubai Technology and Media FZ, Dubai Multi Commodities Centre (DMCC), Dubai International Financial Centre (DIFC), Dubai Healthcare City, Dubai Maritime City, Dubai Aid 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 FZ and Dubai Outsource. Apart from the Dubai FZ mentioned above, other emirates also have FZ albeit fewer in number. Special reference needs to be made for Umm AI Quain Freezone in Sharjah and Ajman FZ in Ajman. They are both relatively easy to set up, charge competitive fees and can be especially useful for tax residency situations.
As world markets become increasingly intertwined, taxpayers need to be ever more aware of cross-border considerations. This is especially important in the current environment, where focus on the disclosure, reporting, and taxation of foreign assets has sharpened. Rules are introduced continuously and the focus on anti-avoidance directions is building up.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 owners, managers or associates of a FZ, individuals may reduce or eliminate home country taxation. If they also obtain a tax residence certificate in the UAE they can claim tax residency which they can enhance by having inter-alia, private accommodation and maintaining a local bank account.
Economic substance is at the top of the agenda of many countries and offshore jurisdictions.
The UAE has capitalised on its infrastructure and location to develop as a real economic and financial centre to attract Corporates and Individuals. The importance of substance has given the UAE an advantage as the country offers an ideal relocation proposition which is also feasible for companies to relocate head offices and staff. Small to Medium size enterprizes have also been attracted by the facilities and business benefits of relocating in the UAE.
Dubai is a zero tax country.
The UAE has concluded nearly 80 double tax treaties, many with OECD countries. Accordingly, double tax treaties aim at making Dubai a more attractive territory in which to
operate by reducing taxation levied in the foreign jurisdictions on profits remitted abroad by foreign corporations operating in Dubai.
The "place of incorporation" criterion is part of many of the UAE treaties and simply if a company is incorporated in the UAE, it will then be resident for the purposes of that particular treaty.
This covers, inter alia, treaties with Armenia, Finland, Mauritius, Mongolia, Luxembourg, Sri Lanka, Austria, Switzerland, Mozambique, New Zealand and many more.
Many treaties are attractive.
For example, the treaties with New Zealand, Austria and the Netherlands. None of these has a liability to pay tax. The treaty with the Netherlands was ratified in June 2010. Its most important effect for outbound investment (from the perspective of the UAE) is that it limits the dividend with holding tax rate to 5 percent. The Netherlands is a particularly attractive country for inward investment into the UAE, because for most types of income the Netherlands will exempt Dutch companies from corporation tax on UAE income, even though it has not been subject to tax in the UAE.
Cyprus also concluded a tax treaty with the UAE. It has a similar participation exemption system regime as the Netherlands and exempts profits made by a permanent establishment abroad from tax, under domestic legislation. So even before the tax treaty was concluded, setting up a branch of a Cyprus company in the UAE was still an attractive option.
Some of the tax treaties of the UAE may not be so attractive because of the limitation of Benefits (LOB) clauses and inclusion of liable to tax clauses. Currently, not many UAE bilateral treaties include LOB clauses, although the more recent treaties tend to include them. Treaties covering LOB clauses include:
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India (new 2007 Protocol) requiring a bona fide business activity
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Luxembourg which includes consultation if treaty shopping is taking place
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Belgium requires attention to be given if improper use of the agreement is found
These treaties impose the additional test of "place of effective management", which is determined by:
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key office location
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place where meetings are held or initiated
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domicile of controlling individuals
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banking relationships
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property and IP held
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head office mailing address
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location of auditor and accounts
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residence of the management
Domestic tax regimes of high tax jurisdictions often contain provisions for the avoidance of domestic and international double taxation. Generally there are two main methods to avoid double taxation: the credit and exemption methods.
Countries that apply the credit method, in principle, include items of income in their tax base, both from domestic sources and foreign sources, but allow a credit for foreign taxes against the domestic tax liability. This usually leads to taxation of income from foreign sources at the applicable tax rate of the state of residence of the company carrying out the foreign activities.
For countries that apply the exemption method, it may be somewhat more complex to determine the tax consequences of a foreign investment, but the outcome is usually more beneficial. Common exemptions in many tax regimes are exemptions for profits derived from a so called permanent establishment (foreign branch exemption) and exemptions for profits derived from a qualifying subsidiary (participation exemption).
For an investment in a tax free country like the UAE, the application of an exemption in the country of residence would clearly be beneficial over the credit system, as the company will effectively benefit from the fact that there is no domestic taxation of its business profits derived from the UAE.
A FZ can 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 is required the most cost effective options Include flexi desks and flexi offices.
A UAE residence permit and a tax residence certificate can be useful to foreign owners and executives who wish to register their tax residency in the UAE.
It is worth noting, that banking institutions in the UAE and outside consider UAE tax residence certificates as proof of tax residency in the UAE.
The UAE is well positioned to cope with the increasing pressure from onshore tax authorities to ensure economic substance.
By making use of UAE FZ, there are opportunities available to locate business functions there and realize tax savings and economic substance.
UAE treaties apply in the FZ
Double tax treaties apply for companies established in a FZ and local LLC.
An important aspect for foreign investors and global companies is the use of a
UAE FZ in establishing UAE presence. The FZ are used by foreign investors to retain 100 percent beneficial ownership and to avoid the 5 percent import duty on goods.
The combination of a FZ entity with an international business company, IBC, known as RAK ICC (UAE offshore company) and a trust or foundation can also be effective in ensuring confidentiality when required in tax planning.Indeed the UAE is the only OECD "white list" jurisdiction that has no taxes for international companies, FZ, local companies or individuals.
Strategy 1: Establish a FZ entity
FZ allows to have a UAE entity that is 100 percent foreign owned and yet take advantage of:
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residency and visa
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a range of options for physical presence from flexi desks to buildings and industrial developments
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no taxes
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no exchange controls or thin capitalization restrictions
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access to the UAE double tax treaty network
Strategy 2: Combine a FZ entity with an IBC
Owning a FZ entity or creating a FZ branch of the IBC provides the following benefits:
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confidentiality of ownership and operations
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physical presence or management as required by treaties for treaty protection
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ability to have investments in the UAE and yet not carry on business
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choice of any law-common law, civil law etc.
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no local meetings, audits, or local presence requirements, for migration in and out of the jurisdiction
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OECD white list jurisdiction and European Union white list Jurisdiction- removed from grey/black list in October 2019.
Strategy 3: Global head office company/IP holding company
In the majority of UAE double tax treaties which have looked through limitation provisions, the use of the UAE as the head office of a company to minimize global taxes is important. The relocation of the head office of the known US company, Halliburton, to Dubai is one example of this strategy. The choice of law for IBC provides for the head office company to own patents, intellectual property (IP) trademarks, confidential know how and copyright under the laws of any jurisdiction and to license this technology to a FZ entity or to other countries worldwide. The treaty network will reduce withholding taxes, impose no taxes in the UAE and allow for peace of mind.
Strategy 4: 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 FZ entity, individuals may reduce or eliminate home country taxation.
Dubai has witnessed significant growth in the number of FZ. Each zone has a focus on a particular type of industry.
The names and industry focus of the major FZ within Dubai are listed below:
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Jebel Ali (JAFZA): manufacturing, heavy industry and distribution. It also encompasses:
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Dubai Cars and Auto motive City (DUCAMZ) FZ: reexport of automobiles
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Dubai Gold and Diamond Park FZ: dealing in precious metals and stones
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Dubai Airport FZ (DAFZ): light industry, distribution, service in dustries including insurance
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Dubai Technology and Media FZ includes:
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Dubai Internet City: information and communication services
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Dubai Media City: media related business
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Knowledge Village: education and learning establishments
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Dubai Multi Commodities Centre (DMCC): aims to attract the world's leading precious metals, jewels and commodities traders. This free zone also includes a manufacturing facility and a diamond trading bourse
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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)
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Dubai Healthcare City: aims to attract providers of healthcare, medical education and research
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Dubai Maritime City: aims to attract companies engaged in vessel design, manufacture, repair. 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 FZ and Dubai Outsource.
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Abu Dhabi free 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.
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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 FZ
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Industrial City of Abu Dhabi: the objective is for industrial projects
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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 elaborative and comprehensive regulatory regime is in place that follows international standards
Features of FZ
A FZ entity in the UAE offers many tax and business possibilities.
The establishment of FZ inthe UAE has been one of the most significant and promising initiatives pursued to attract foreign investment. Dubai was the first emirate to establish a FZ inJebel Ali (JAFZA).
List of advantages of being located In a FZ:
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100 percent foreign ownership
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no corporate and personal income taxes
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eligibility for benefits of nearly 80 UAE's double tax treaties
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issue of residence permits and tax residence to foreign owners and management
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no restrictions on profit repatriation
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no exchange controls
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availability of offices, factory premises and warehouses
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excellent port, airport and road transport Infrastructure
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efficient utilities and communication means
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no import or export duties, except for sales made from FZ into the UAE and the GCC
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no recruitment restrictions and assistance Inobtaining work permits for expatriate staff
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 nearly 80 double tax treaties (DTT}, 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 inthe context of the treaty. Some treaties restrict the benefits to UAE nationals, and some other to government organizations.
However, there are several double tax treaties of the UAE that are favourable including the treaties with New Zealand, Austria, Cyprus and the Netherlands. None of these has a liable to tax requirement.
Economic Substance
The UAE is particularly well positioned to cope with the increasing pressure from onshore tax authorities to provide economic substance. By making use of the UAE, It Is now possible even for small companies to locate business functions there, realize the promised tax savings, and satisfy requirements of onshore tax authorities.
It is hard to think of a place where it is so uncomplicated and quick to set up business inone of its FZ and to access the world's labour pool, as the UAE. ItIs even more difficult to think of any other traditional zero tax jurisdiction offering this.
FZ In the UAE An Independent FZ authority governs each FZ. The rules and regulations of each FZ do not differ substantially, all being straightforward and comprehensive. The UAE Companies Law is not applicable inthe FZ.
Umm al Quwain
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Umm al Quwain free trade zone: it is known for the Ahmed Bin Rasheed Port. The free zone caters for light industrial companies as well as small to medium size enterprizes (SMEs) and individuals who would like to set up a company in the UAE. The diverse list of activities available to license as well as low cost of incorporation and office lease, makes UAQ one of the most attractive freezones to start business in the UAE. The excellent support provided by the Freezone's staff ensures that companies can be incorporated within two days and resident/work permits can be issued within weeks.
Sharjah
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Hamriyah FZ: established in Sharjah, this free 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
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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)
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Rasa I Khaimah (RAK ICC) free trade zone: set up in 2000 on AI 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 FZ of the northern emirates
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Rasal Khaimar Media FZ: media related business Fujairah
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Fujairah free trade zone: located near Fujairah Airport, it attracts manufacturing, distribution and general trading industries
Ajman