UAE, ABU DHABI - Economy
Managing Partner, Meralis Group
An executive partner of the Meralis Group, Mahmud P.K. Merali is the regional head for the EMEA region. He has over 40 years of experience and serves as a consultant to multi-national and listed companies in the UK, the UAE, and East Africa. A Vice-Chairman of the Board of a listed entity in Turkey, he is also a member of its Corporate Governance Committee and attends Audit & Risk Management Committees.
Abu Dhabi is one of the most rapidly growing economies and entrepreneurial places in the world along with Dubai—it is quite an achievement. Foreign companies can carry out business activities in the UAE only after having been registered by the relevant authorities. A foreign investor can generally establish a business presence either on the UAE mainland or offshore, which basically involves a business presence in a free trade zone. In terms of legal forms, there is a company law providing regulation governing the operations of a foreign business. The federal law provides for seven categories of business organization: limited liability companies (LLCs), branches, partnerships, joint venture companies, public share holding companies, private share holding companies, and share partnership companies. But owing to certain restrictions, the choices commonly adopted by foreign companies are generally limited to an LLC or a branch. Other options like partnerships and joint ventures are usually not favored by foreign investors. As to UAE commercial company law, the foreign owner of an LLC may not exceed 49%, meaning 51% has to be held by a UAE national.
Some of the factors include political and economic stability, the Emirate’s strategically well located position between Europe, Asia, and Africa, excellent Infrastructure, strong healthcare and enhanced education policy, and solid investment incentives. In Abu Dhabi , there is a disciplined process for registering your company and entering the market. Foreign companies like to know that there is a consistent set of regulations. This disciplined procedure is very important for the UAE and Abu Dhabi in terms of attracting foreign businesses. Abu Dhabi also provides very competitively priced utilities. Electricity and gas are provided at very reasonable prices. Abu Dhabi has been attracting more and more visitors, and the hospitality sector is constantly growing and is attracting many residential and office developments. Investors are being attracted here for the good returns on their investments.
The federal government of the UAE has not promulgated any tax laws. Most of the individual Emirates have issued corporation tax decrees, but in practice taxes are only imposed on oil and gas producing companies at rates set forth in government concession agreements, and also on branches of foreign banks at specific tax rates. Unless you are an oil and gas producing company or a bank, you are not subject to taxation. That is very attractive for foreign investors. The income taxes that have been enacted in each Emirate provide for tax to be imposed on the taxable income of all bodies and the branches that carry on trade and businesses at any time during the taxable year through a permanent establishment in the relevant Emirates. But apart from those three industries—oil, gas, and banking—nothing is being collected. In terms of taxation in Abu Dhabi, according to the Abu Dhabi income tax decree, all companies carrying on trade or business in Abu Dhabi are required to pay tax on their earnings. Legally, the tax rates are on a sliding scale, with a maximum rate of 55%. But in practice, oil and gas companies pay taxes at rates specified by the relevant concession agreement. Oil companies also pay royalties on production. Branches of foreign banks, meanwhile, pay an annual flat rate of 20% on profits. The taxable income of the banks is determined by the reference rates audited on financial statements. The Abu Dhabi Income Tax Decree of 1965 specified that an organization that conducts trade or business in Abu Dhabi shall be subject to taxation as follows, bearing in mind this is what is set out in law but not applied in practice: companies are exempt for up to $1 million; $1-2 million is 10%; $2-3 million is 20%; $3-4 million is 30%; $4-5 million is 40%; and above $5 million is 55%.
The UAE is looking at reforming both those laws concerning foreign ownership and insolvency. That would do wonders for the jurisdiction. Another reform that would be of great value to Abu Dhabi is a property law regulator, and I believe the reforms are under consideration. This would give greater confidence to investors. Overall, you need a good regulatory environment with good professionals, consistent and disciplined procedures, and a stable environment for business and the economy to flourish, and Abu Dhabi has all those ingredients.
© The Business Year – March 2015