Free zone entities (FZ)
If there is little or no scope to sell goods directly to the UAE market, but office space and local staff are required, then setting up in a FZ is often more attractive than using a local company. FZ companies also meet the growing necessity in international tax planning of ensuring requisite substance. This is often impossible to deliver from the traditional offshore jurisdictions since they typically only offer an IBC regime.
The main advantages of setting up in a FZ in the UAE are:
• 100 percent foreign ownership is allowed
• guarantee for 15-50 years against the future imposition of corporation tax.
• import of goods are duty free, provided the goods are not supplied to the local market for which there is a 5 percent levy
• streamlined procedures: all formalities are typically dealt with through the FZ authorities instead of the various government departments
• no restrictions on hiring expatriates
A free zone (FZ) entity in the UAE offers many tax and business opportunities. For a start, a FZ 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 FZ is to issue residence permits and obtain tax residence certificates from the UAE authorities for its foreign owners and employees.
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 as the company will be used by its foreign owners mainly for residency purposes, the most cost effective options are available by FZ in the northern emirates, notably - Ajman, Hamriya and Umm Al Quwain (UAQ). Physical presence options include flexi desks and flexi offices.
Tax Residence Certificates
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. 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.
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.