Frequently
Asked Questions (FAQ)
There are many options available
for foreign companies seeking to establish a business relationship with Dubai.
While some companies prefer traditional trading relationships, others prefer to
have a local business set up in order to research market prospects, make contacts,
liase 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
are listed below. Click on the respective question to receive the corresponding
answer.
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 Formation of a Professional Firm
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
ANSWERS
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
(total foreign equity of not more than 49% permitted) |
| • |
formation
of a company in a free trade zone of the UAE
(total foreign equity of 100% permitted) |
| • |
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?
|
As a rule, a number of people or bodies are referred to as "sponsor"
in Dubai, the other emirates of the UAE and the GCC countries. This could be the
employer, the business partner, the local partner or the sleeping partner in a
joint venture, for example. However, the term "sponsor" is predominantly
used in connection with the fact that as per the UAE Companies Law, foreigners
and foreign companies may only hold minority shareholdings in commercial entities.
A minimum of 51% of the company capital must be held by a national of the UAE
or a corporate body, which is wholly owned by a national of the UAE, the so-called
"sponsor".
Representative offices,
branch offices or professional companies, which may remain in full foreign ownership
require a service agent, also known as "sponsor".
Direct trade is the
only commercial activity that can be carried out by a foreign company without
the need for a sponsor.
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 licence)
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 conduct 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.
An 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 licence can import goods of
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 officially be 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 an appeal to 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, specialisations 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 seven 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. However, the UAE Companies Law limits the activities of such commercial
entities to the area of "trade". A legal definition of "trade"
is provided in the UAE Civil Code. The term "trade" does not include
services or consultancy work, e.g. in the area of medicine, education or the performance
of academic services and skilled professions. These types of commercial activity
can therefore not generally be carried out by a LLC or any other type of commercial
entity provided in the UAE Companies Law. Firms whose objectives or activities
are to render professional services must be set up as professional firms being
a sole proprietorship or a civil company in accordance with the UAE Civil Code.
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.
However, both types of affiliates require a service agent, who has to be a national
of the UAE, but has no decision-making rights or any other rights whatsoever.
The role of the service agent is to assist in obtaining licences, visas, labour
cards, etc.
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.
| Is
the legally required service agent of a representative or branch office
entitled to compensation in the case of a termination or expiration of the
service agency agreement? |
The service agent must be strictly distinguished from the commercial agent/distributor.
The UAE Companies Law provides that the service agent is responsible neither for
the legal nor the financial obligations of the company; neither is he entitled
to get involved in any way with the business operations of the company. In reality,
the service agent is a formality. The role of the service agent is to assist in
obtaining licences, visas, labour cards, etc.
The service agent is paid
an expense allowance, which is agreed in the service agency agreement to be
concluded between the parent company and the agent. As opposed to the commercial
agent/distributor, the service agent is not entitled to a statutory compensation
payment in the event of termination of the service agency agreement.
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. The minimum capital required in Dubai is Dhs 300,000 to be
contributed in cash or in kind.
| 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 partne racts 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, Dubai's free trade zones are the Jebel Ali Free Zone, Dubai Airport
Free Zone and Dubai Technology, Electronic Commerce & Media Free Zone, which
incorporates the Dubai Internet City, Dubai Media City and the Dubai Idea Oasis.
| 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)
| 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 a 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 Dhs 1,000,000 and
Dhs 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 Dhs 500,000.
|
May
companies located in a free trade zone legally operate outside the free
trade zone?
|
Companies holding a free trade zone licence 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 licence
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,
specialised engineering 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.
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? |
There are double taxation agreements with Jordan, Sudan, Syria, Kuwait Yemen,
Egypt, Finland, France, India, Pakistan, Poland, China, Germany, India, Indonesia,
Italy, Malaysia, Poland, Romania, Singapore, Algeria and Turkey.
|
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
| Are
profits earned in the UAE by a company residing in Germany subject to corporate
income tax in Germany under the Double Taxation Agreement UAE - Germany? |
Profits earned overseas by a company residing in Germany are fundamentally subject
to corporate income tax due to the principle of global revenue of the German tax
law. However, the since 1996 existing agreement between the UAE and Germany for
the prevention of double taxation (DTA) limits the German tax law in some partial
areas, which applies retrospectively from 1st January 1992.
|
What
are the benefits of the DTA for German companies?
|
The DTA specifies that profits of a company residing in Germany are only subject
to taxation by the UAE as long as the German company's activities in the UAE is
carried out by a local permanent business establishment. If the German company
does not have a permanent business establishment in the UAE, the profits earned
by the German company in the UAE continue to be subject to German taxation. The
existence of a permanent business establishment of a German company in the UAE
is thus the decisive factor for the question whether the profits of the German
company earned by operating in the UAE will be subject to German or UAE taxation.
| What
is the meaning of "permanent establishment" of a German company
in the UAE? |
The term permanent business establishment is defined in legal terms in the DTA.
This business establishment has to be permanent and perform the activities of
the company either partially or completely. A permanent place of business can
also be a mine or oil or gas facility or any other mineral exploitation facility.
Construction work or assembly site is considered a permanent business establishment
if its duration does not exceed nine calendar months. The remaining particulars
of the definition of the term permanent business establishment should not be explained
here. Insofar as a German company carries out its business activities in the UAE
through a permanent business establishment residing locally, the profits earned
there are subject to UAE taxation laws. The current taxation according to the
tax laws of the UAE results in a tax rate of 0%, as long as the permanent business
establishment is not a bank or company directly dealing with the production of
oil, gas, and petrochemical products.
| May
profits earned by a "permanent establishment" of a German company
in the UAE be transferred tax-free to Germany? |
As far as the German tax law releases the profits earned in the UAE from German
taxation and the UAE does not enforce its taxation laws, the profits earned in
the UAE remain tax-free and are considered so-called "white earnings."
However, this applies only under the condition that the permanent business establishment
located in the UAE is active according to the definitions of the DTA and the German
International Taxation Law (AstG). If these conditions have not been met, the
so-called credit or offset method applies. When crediting the taxes levied by
UAE, the total tax burden of the revenues earned in the UAE depend on the German
tax burden. Crediting or offsetting does thus not offer any real tax advantages
since the tax burden to be credited amounts to 0%. The
conclusion is that if the conditions mentioned above are met, profits of a permanent
business establishment of a German company located in the UAE are basically released
from German taxation and thus remain tax-free. Based on this tax situation, German
companies ought to be interested in shifting profits to the tax-free permanent
business establishment abroad on a regular basis. However, the principles of earning
limits between connected companies (so-called "administration principles")
have to be observed, which contain very complex prerequisites for the recognition
of service relationships between parent company and subsidiaries established abroad.
| May
profits earned by a German company holding shares in a corporate enterprise
located in the UAE be transferred tax-free to Germany? |
The DTA also yields interesting
options for dividend earnings, which are the result of a German company holding
a legal share of a company in the UAE. If the parent company is a German corporation
with a direct share in a corporation located in the UAE of at least 10%, dividend
payouts of the company located in the UAE to the German parent company are never
subject to German taxation. However, this applies only under the condition that
the corporation located in the UAE is active according to the definitions of the
DTA and the German International Taxation Law.
For example, an active activity
in the area of trade does not exist if the German company supplies goods to
company located in the UAE in which it has a share itself. This basically applies
to distribution companies of German corporations if these hold a share in such
a distribution company located in the UAE. However, the prerequisites of an
active activity according to Article 8 Paragraph 1 No. 4 AStG have been met
if, in case of such a constellation, the German company can proof that the distribution
company in the UAE consists ofa business operation established according to
business principles, which participates in the general business traffic, and
that the activities that are part of the preparation, conclusion, or execution
of the business are performed without participation of the German company. Similar
strict prerequisites apply to service activities.
German companies can attain
considerable competitive advantages and benefits compared with other markets
in addition to the other investment incentives offered by the UAE to foreign
investors. This requires that the options of the double taxation agreement are
utilized and that a tax-oriented structure of the business relations is implemented.
In addition to the formal requirements, especially local peculiarities have
to be considered as well as the actual taxation process in the UAE and Germany.
Due to the complex requirements
of the DTA for an exemption of the profits earned in the UAE, any planning of
a business activity in the UAE should be preceded by examining and determining
the actual exemption facts. This also applies to the taxation treatment of other
types of incomes, which the DTA covers in addition to the ones introduced here,
e.g., interest earnings, licenses, self-employed/employee revenues, public service,
etc.
top
Jörg
Seifert, Al Sharif Advocates & Legal Consultants, Marriott Hotel Complex
/ Hamarain Centre, P. O. Box 8867, Dubai - UAE
tel: +971-4-2628 222 fax: +971-4-2628 111 mobile: +971-50-6367 443
Jörg Seifert is a German advocate (Rechtsanwalt) and member of the Bar
Association (Rechtsanwaltskammer) Oldenburg/Lower Saxony.
He is practising his profession in accordance with the provisions of the Rules
and Regulations for the German Bar.