TMF Group, in association with ACCA, looks at the big issues that are facing businesses planning to set up or expand in the United Arab Emirates
This article was first published in the November 2018 China edition of Accounting and Business magazine.
The United Arab Emirates (UAE) is a magnet for business thanks to its ultra-low tax environment, reputable regulation and convenient time zone. Over the past 20 years the seven emirates that make up the UAE have become a major international hub for business.
There is no corporate or personal tax in the UAE and no limits on the repatriation of capital or profits. Until very recently it was one of the least complex jurisdictions for doing business, with minimal admin, compliance and forms. Of the 94 jurisdictions analysed by TMF Group’s Financial Complexity Index in 2017, the UAE was ranked least complex for tax and accounting compliance and described as ‘among the least complex nations in the world’.
Any complexity that did exist in the UAE, the index report added, was a result of the free zones. There are more than 40 free zones in the UAE, half of them in Dubai, with each catering to a specific business category. The best known are Dubai International Financial Centre (DIFC), Abu Dhabi Global Market (ADGM), Dubai Multi Commodities Centre (DMCC), Ras Al Khaimah Free Trade Zone (RAK) and Jebel Ali Free Zone (Jafza). All have their own licensing authority, regulations, fee structure and capital requirements.
‘Companies looking to operate in or from the UAE, or that have employees based there, must register a legal entity,’ says Stephanie Williams, legal and governance director for TMF Group in the Middle East. ‘Every company active in the country requires a company licence, which is linked to the registered activity of the entity.’
In general, there are two options when setting up an operational entity in the UAE:
- Free trade zone. There is no UAE-national shareholder or split ownership requirement for companies setting up in a free zone – a foreign entity or individual can have 100% business ownership. Free zone companies are limited in what they can do on the UAE mainland (ie outside the free zones) but can operate freely everywhere else.
- Onshore jurisdiction. Onshore jurisdictions refer to any part of the UAE not within a free zone. They are subject to federal laws and regulations, with regulating and authority bodies under the Ministry of Economy in each emirate.
‘The most common company types in onshore jurisdictions are representative office, branch office and limited liability company [LLC],’ says Williams. ‘An LLC requires a 51% local UAE shareholder; a branch or representative office requires a local service agent as the point of contact with local authorities. Being based onshore allows you to do business anywhere in the UAE.’
Other challenges are more practical. ‘Getting the right staff visas can be complicated, and there is still a heavy reliance on paper – a graduate applying for a job will need to show their degree certificate,’ says Lindsay Degouve De Nuncques, head of ACCA Middle East. ‘But underpinning all this is a real desire within the UAE to be open for international business.’
The VAT hit
The UAE’s reputation for business simplicity, though, has shifted over the past year. In January, the UAE and Saudi Arabia became the first members of the six-nation Gulf Cooperation Council (GCC) to implement the terms of a treaty to introduce VAT at a rate of 5% on many goods and services. The agreement lets members issue their own national VAT legislation and determine specific VAT rules in certain areas.
VAT registration is compulsory for UAE-based businesses with over 375,000 Emirati dirham (about US$102,000) of taxable supplies and imports, but optional for businesses with over 187,500 Emirati dirham of taxable supplies and imports. VAT returns must be filed electronically within 28 days of the end of each tax period (quarterly for businesses with a turnover of less than 150m Emirati dirham, monthly for those with a higher turnover).
VAT income will help the UAE government reduce its revenue dependence on oil and other hydrocarbons. Studies suggest VAT will contribute 1.2%–1.6% of GDP in its first year. But its introduction, following the introduction of excise on carbonated drinks, energy drinks and tobacco in 2017, has also made the UAE a more complex jurisdiction for businesses. The UAE rose from 92nd in TMF Group’s Financial Complexity Index (the higher the ranking, the more complex the business environment) in 2017 to 74th this year.
‘VAT is a big step away from the UAE’s reputation as a tax-free paradise,’ declares the 2018 report. Jonathan Wheeler, TMF Group’s regional director, Middle East and Africa, explains: ‘VAT is a fundamental change to the way businesses operate locally. The transaction tax is embedded in virtually all functions of a company – from sales contracts to accounting and bookkeeping – so it is an important one for businesses to document and report correctly. However, the UAE remains one of the less complex jurisdictions globally for accounting and tax compliance – and a very attractive market for business.’
The GCC’s VAT Framework Treaty will also be implemented in Oman, Qatar and Bahrain (most likely from 2019). Until that happens, special rules for inter-GCC transactions apply, adding huge amounts of complexity to the way businesses operate in the region.
‘The adjustment period for companies operating in the UAE – and Saudi Arabia – is very much ongoing,’ Wheeler adds. ‘Based on the VAT compliance struggles we continue to see with companies six months since implementation, the biggest recommendation we can give is for companies to partner with local experts so that they can focus on their core operations.’
Despite the new complexity, Degouve De Nuncques stresses the UAE’s business-friendly credentials. ‘Once you are established as a business, the ongoing reporting requirements are quite simple, although the introduction of VAT and excise duty has increased that obligation,’ she says. ‘But VAT has also introduced greater expectations around business, and made financial regulation and finance functions more robust. VAT introduction has been a catalyst for much broader financial transformation in the UAE, and that is a very positive move.’
Liz Fisher, journalist
"The UAE remains one of the less complex jurisdictions globally for accounting and tax compliance"