Company Setup in the UAE: Free Zones and LLC structures
- Free Zones Companies have its seat in one of over 45 Free Zone. They allow 100 % foreign ownership, and in most cases, they can be used as a basis for a permanent Visa and an Emirates ID. The Free Zones have their own rules and regulations, and some of them apply international law in specific areas.
- Legal forms are Free Zone Establishment Limited Liability Company (FZE LLC, with one shareholder) and Free Zone Company Limited Liability Company (FZCO LLC a limited liability company with several shareholders). Free Zone Companies are usually used by foreign investors. The companies can have 100% foreign ownership and there are some tax advantages.
- Mainland companies in activities with strategic impact still need 51% UAE national ownership, but since 2020 in other industries, 100% foreign ownership is possible. Mainland companies are often used for local service business on the mainland, but also for manufacturing and industrial operations.
- Offshore companies have a low level of substance and offer no visa. There is no requirement to submit financial statements. If the shareholders have no Emirates ID, it is difficult to get a bank account and if a bank is found, the results are reported to the residence country of the beneficiary.
Free Zone companies usually have a commercial license, they can only operate within their designated free zone and the amount of visas is limited. However, with Professional Licenses, they can still work in the local market if they want to. Pure LLC companies can trade everywhere, but usually need a minimum of 200 sf2 (18,5 m2) office space.
The number of visas for LLC companies must be applied for at the Ministry of Labour. For office work, one visa is usually granted per 80 ft2 (approx. 7.5 m2) of office space, for other tasks the authority decides according to the application.
The “Economic Substance Regulations” define additional requirements for some industries, for example a rental contract and employment, but it is possible that the director is employed in the company.
It is possible to migrate and relocate companies. Within the UAE, there is a certain procedure with a certificate of continuity in place. For migration from outside the UAE, the procedure depends on the legislation in the exit country.
Taxation in the UAE, Taxation in Dubai, Taxation in Ras al Khaimah and all other Emirates
UAE introduced a corporate tax of 9% for all companies who start their business year with 1.6.2023 or later. However, there is a threshold of 375.000 AED (tax free) and there are plenty of exemptions available, mainly the Small Business Relief and the Qualifying income of Qualifying Free Zone Persons.
The information here is based on the following sources and subject to change: Federal Decree Law 47 of 2022 on the Taxation of Corporations and Businesses, Ministerial Decision No. 73 of 2023 on Small Business Relief, Cabinet Decision No. 100 of 2023 Determining Qualified Income for the Qualifying Free Zone Person, Ministerial Decision No. 265 of 2023 Regarding Qualifying Activities and Excluded Activities, Ministerial Decision No. 126 of 2023 on the General Interest Deduction Limitation Rule.
A business is generally considered to be effectively managed where key commercial decisions concerned with broader strategic and policy matters are made. This is distinct from day to day operational management.
Small Business Relief in UAE:
Companies with a revenue of up to 3.000.000 AED remain tax free and have only to submit a Simplified Tax Return. They must register with the Federal Tax Authority (FTA) for Corporate Tax, receive a Tax Registration Number (TRN) and opt for the Small Business Relief in their tax declaration. The Small Business Relief ends on 31.12.2026.
- Revenue can be calculated on a cash basis. If the company issues an invoice that is paid later, then this does not count for the 3.000.000 AED.
- There is no need to calculate taxable income or to maintain a transfer pricing documentation. However, the tax authorities have the right to ask for bank statements and documents.
- There are a few more requirements: revenue in all previous tax periods (starting from the first period after the introduction of the tax law) must be below or equal to 3.000.000 AED. In addition, the company shall not be member of a Multinational enterprise with a consolidated group revenue of more than 3.15 billion AED.
- There are anti abuse rules, especially restrictions against artificial separation of activities. If someone has different entities that stay below the 3.000.000 AED threshold, it is necessary to present a valid commercial purpose (e.g. limit the legal liability) and to make sure that the entities do not conduct substantially the same business activity. Also, it is not forbidden that different companies have different business years. It is not accepted if a group has several companies and moves the same activities to another entity as soon as the threshold is met. Also geographical separation within the same Emirate is considered as misuse (e.g. 2 restaurants) and functional separation of activities where there is substantially the same business (e.g. a restaurant sells food in one company and drinks in another one). Generally, there shall be different employees, different activities, different marketing and if possible different premises.
There are some interesting points to mention:
As there is no need to calculate taxable income, a company can have expenses that may not be deductible in accounting systems of other countries.
If a company has not used up the 3.000.000 revenue allowance for a certain year and wants to issue additional invoices, they need to make sure their customers have liquidity for payment or they can issue cheques (because cheques qualify in cash accounting as cash). Revenue, however, includes sale of assets.
Losses of a period cannot be carried forward if the company applies for this period for the Small Business Relief. So if there are losses, it is better to calculate the taxable income (loss) and submit the tax declaration with audited financial statements. Then the loss can be carried forward. If the turnover in the year with the loss was lower than 3.000.000 AED, the company can opt in the next year again for Small Business Relief and use the loss in a later year.
There is a General Interest Deduction Limitation Rule of 30% of EBITDA with a threshold of 12.000.000 AED. Remaining interest expenditure can be carried forward to the following years.
If a foreign company has a permanent establishment in UAE according to UAE rules, it may be eligible for the Small Business Relief, if there is a double tax treaty that has conditions for the non- discrimination of a permanent establishment (and the conditions for Small Business Relief are met).
Regular Tax in UAE and Exemptions for Free Zones:
For natural persons that are considered resident persons for corporate tax purposes, there is a threshold of 1.000.000 AED turnover derived from Business Activities within a Gregoran calendar year. Income from wages, personal investment income and real estate investment income is not considered as being derived from Businesses or Business Activities.
For Companies, tax declaration is due 9 months after the end of the business year.
Accounting is mandatory in UAE. Companies have to prepare yearly financial statements according to IFRS or, if the turnover is less than 50.000.000 AED, according to IFRS for SME. Records shall be kept for 7 years after the end of the business year. Companies that qualify for the Small Business Relief can submit a Simplified Tax Return.
Audits shall be done by auditors that are approved in UAE and enrolled in the approved auditors’ list of the Free Zone.
Qualifying Free Zone Persons with Qualifying Activities and Qualifying Income that have elected to be subject to Corporate Tax and submits audited financial statements, benefit from a 0% corporate tax rate on their qualifying income and can carry forward losses. Some activities are excluded activities and therefore not part of the tax base. Here is a summarized overview, details can be found in the legal sources:
The following qualifying activities are listed:
- Manufacturing of goods or materials.
- Processing of goods or materials.
- Trading of Qualifying Commodities.
- Holding of shares and other securities for investment purposes.
- Ownership, management and operation of Ships.
- Reinsurance services.
- Fund management services.
- Wealth and investment management services.
- Headquarter services to Related Parties.
- Treasury and financing services to Related Parties.
- Financing and leasing of Aircrafts.
- Distribution of goods or materials in or from a Designated Zone.
- Logistics services.
- Any activities that are ancillary to the Qualifying Activities specified in paragraphs (a) to (m) of this Clause.
Qualifying Income is defined as:
- Income derived from transactions with a Free Zone Person, except for income derived from Excluded Activities.
- Income derived from transactions with a Non-Free Zone Person, but only in respect of Qualifying Activities that are not Excluded Activities.
- Income derived from the ownership or exploitation of Qualifying Intellectual Property.
- Any other income provided that the Qualifying Free Zone Person satisfies the de minimis require
Excluded activities are defined as transactions with natural persons, banking, insurance, finance and leasing activities, ownership and exploitation of immovable property and ancillary activities.
There is an exemption for dividends and other profit distributions received from juridical persons resident in the UAE. Dividends and other profit distributions received from a participating interest in a foreign juridical person and income of a foreign permanent establishment (if some conditions are met) is exempt as well. A participating interest is a long-term ownership interest (intention: at least 12 months) in a legal person that allows to exercise some level of control or influence and that is in a jurisdiction with a tax rate not less than in UAE. The ownership interest shall have the right to receive at least 5% of the profits. There are some more criteria to be met.
In some cases, depending on the business, the UAE company can outsource activities to a foreign subsidiary in a zero-tax country in which the UAE company has a percentage shareholding. The result are deductible costs in the UAE company, and the subsidiary will pay a regular dividend to the UAE company that is there a tax-free income.
A special regulation allows to form a qualifying group and for certain restructuring transactions where assets and liabilities can be transferred at net book value.
VAT in UAE:
VAT of 5% is due for activities within the UAE. The VAT return must be filed until the 28th day of the month following the VAT period.
Tourists visiting the UAE can receive a visa on arrival or have to apply online for an e-visa, depending on their nationality.
Investor visa are issued to shareholders of a company in combination with their license. They are valid several years. Usually, investors with companies in UAE need to re-enter into the UAE within six months, however they can stay within the UAE wherever they want (for example in Dubai). Investors with a company in Ras al Khaimah only need to re-enter once a year. Those who prefer to stay in UAE between October and March and avoid the hot time, benefit from this special exemption.
Employees can apply for a visa for up to 3 years. When they leave the UAE, they have to re- enter into the UAE within six months. For employees of a company in a Free Zone, there is no need for approval from the Ministry of Labour. Such visa are sometimes used by persons who do not want to be shareholder of a company but need to have access to the bank account to handle transactions.
For specialized professionals, also Freelance Visa are available, up to two years. Freelancers operate in their own name and are not eligible for a business bank account.
Qualified investors who purchase a property for at least 2 Mio AED, can receive a golden visa that is valid for 10 years and can be renewed. When they leave the UAE, they have to re- enter into the UAE within six months.
In the Emirates, there is no obligation to register residence. The mobile phone plays an essential role in this. The authorities communicate via mobile phone and e-mail.
Telephoning over the Internet is often blocked for some international providers. Messages and voice messages are possible. However, a VPN can be installed.
Ras al Khaimah – a recommended location
Ras al Khaimah is the Northern Emirate with sandy beaches and its international business area located around 45 minutes’ drive from Dubai International Airport. Because of the traffic within Dubai, travel time from the airport is similar to a trip to Dubai Marina.
Ras al Khaimah is modern, but less glamorous than Dubai, there is less traffic, people do not feel to be permanently observed and there is more tourism infrastructure. For businesses, the Ruler guarantees a business friendly environment and the costs are fair in relation to the benefit.
For foreign investors, several organizations offer company formation:
RAKEZ, the Ras al Khaimah Economic Zone (RAKEZ) allows businesses from most industries in all sizes in several physical areas.
The RAKEZ management operates professionally, and the free zone companies are internationally recognized. There is support to open a bank account and with an investor visa, one re-entry into the UAE within a year is sufficient.
RAK ICC (International Corporate Centre) allows to register an IBC (International Business Company). These entities can trade globally but not within the UAE. In addition, these entities are sometimes used as a holding, to administrate assets or to own real estate. RAK ICC also runs offices in Dubai and Abu Dhabi and it is possible to form and run foundations. Unfortunately, an IBC does not allow for a residency visa and therefore it is currently not easy to get a bank account.
RAK Digital Assets Oasis is a Free Zone dedicated to digital and virtual assets companies. It has just started in 2023 and has its own regulations.
Benefits for company formation packages Visa in Ras al Khaimah:
- There is no corporate income tax if the company qualifies for the Small Business Relief, and there is no income tax for employment income and no withholding tax
- The government supports businesses to open a bank account in a bank in the Emirate
- Residency in the UAE is included in the package. The Investor visa for private person requires only one mandatory entry into UAE per year
- No public register shareholders and no disclosure of the UBO to other authorities if there is no serious crime involved
- Most services are possible online, making the location the perfect fit for travellers and business nomads
- Companies can have their domicile in the modern business centre with all facilities
- Costs in Ras al Khaimah are much lower than in other emirates
- Over 110 double tax treaties in place (however not with Germany)
- Low requirements for share capital
- No foreign exchange controls and little restrictions on cash payments
- There is a business friendly legal framework with robust company laws that allow investment security
Company formation with licenses and visa packages – full procedure
- Decide on the package: amount of visa, amount of years prepayment (discounts) and business objects
- Submit basic information for due diligence
- Passport copies
- Mobile Number
- Email address
- 3 Company Names in the order of preference
- Receive a Client Confirmation Letter and a payment quotation. Sign the letter and pay the fees (at the transfer, mention UAE Central Bank purpose code TTS)
- Receive the documents online, sign and upload them.
- Letter of engagement of company formation specialist
- Lease agreement for the coworking facility
- Memorandum of Association
- Short after you receive the company documents:
- Certificate of Incorporation
- License Letter
- Partners List form
- Bank letter for opening a corporate bank account
Visit the UAE for visa and bank account
Update the steps in the Portal360 online system of RAKEZ
- Enter with the visa
- Organize the Medical Typing in an approved Typing Centre and go for the medical test
- Organize a UAE mobile phone (number is needed for the Emirates ID)
- Go to a typing centre for the Biometrics Typing and make the visit for Biometrics Visit
- Issuance of Residency (with entry permit) and if required employment visa
- when Emirates ID arrives, update the biometrics at the UAE phone
- with the Emirates ID and the UAE phone get the bank account open, make a small payment and apply for the credit card
- when the credit card comes, finish the setup of the app on the phone for E-Banking
Company formation with licenses and visa packages – costs
Example packages of co-working centre + company + license + Visa (values from 11/2023):
The visa is accompanied by a residence permit, mandatory entry with an investor visa in Ras al Khaimah is once within 12 months from departure.
1 year: 1 license, 1 visa: AED 16500, around 4150 EUR
1 year: 1 license, 2 visa: AED 20.000, around 5000 EUR; additional costs per visa only 850 EUR
For packages of more years, there is a discount, and in addition the customer avoids additional administrative steps during the duration.
Discount is 15% for 2 years, 20% for 3 years, 25% for 4 years and 30% for 6 years
Example: 3 years: 20 % discount for the complete package including the visa:
3 years: 1 license, 1 visa: AED 39600, around 9900 EUR, this is only 3300 EUR per year
3 years: 1 license, 2 visa: AED 48000, around 12000 EUR, this is only 4000 EUR per year, additional costs for the second visa are only 700 Euro per year.
Ongoing costs are then for travel, accounting, and annual audit (auditors charge usually 5000 AED, but the audit costs depend on the amount and the kind of activity)
UAE- History and relevant information about the United Arab Emirates
This is the short summary of the recent history of the UAE: before 1971, there were seven sheikdoms under British protectorate. Then, oil was found in Abu Dhabi 1958 and in Dubai 1967. 1968, the British had to stop their protectorate, and in 1971, the United Arab Emirates were formed to protect their new resources.
In 2023, the United Arab Emirates have a population of a little over 10 million, consisting of twice as many men than women. Dubai has 3.65 million population, Sharjah 1.83 million and Abu Dhabi, the richest emirate has around 1.6 million.
Around 11% of the UAE population are native Emirati, 5% are Westeners, the rest is from Asia and Africa. 75% of the population are Muslims.
Legalization of Documents:
UAE is not member of the Hague Apostille convention, therefore the international legalization procedure is complex and there are extremely high fees.
Procedure for documents from UAE needed abroad:
- Original document must be first attested by the governing government entity, However, this is not needed if digital documents have been issued by a government entity and in some cases documents are attested electronically
- After an application for attestation through MoFA (Ministery of Foreign Affairs) online channels, an envelope with the original document is picked up by a delivery service employee.
- Authentication of electronically certified documents: Please attach the QR code or any link issued by the authorized entity for verification and authentication of the document.
For documents issued outside the UAE:
- Original document must be attested by the Ministry of Foreign Affairs of the issuing country.
- The document can then be attested by one of UAE’s Embassy or Consulate in the issuing country by applying through MoFA online channels.
- Authentication of the document can be done through the digital channels of the Embassy or Consulate of the United Arab Emirates abroad. In case there is no UAE mission in the country you are located in, please contact the Ministry through the call center or the Mofa website
Do well GmbH, a regulated Swiss entity of Zugimpex Group, is authorized partner of RAKEZ
(updated November 2023)