Monday, 11 August 2014

Websites or E commerce business case study

Mr. Rusu is a Romanian citizen, student in IT field, who owns several websites. He also launched a free online game that has lately become increasingly popular. The growing number of users and visitors, both on websites and the online game, made the opportunity to profit from the sale of advertising and fees for users.

THE PROBLEM:

Achieving efficient structure in terms of taxation for commercial purpose for the websites Mr. Rusu owns as an individual.

THE SOLUTION:

Oneworld MidEast Ltd (Dubai branch) proposes setting up a company in the residency country of Mr. Rusu and another two offshore companies in Dubai and Cyprus, in order to optimize income taxation. Therefore Mr. Rusu will be the shareholder only for the Romanian company and Dubai one. The Cypriot offshore company will have as shareholder the Dubai offshore company and a Cypriot director and will operate the websites business (sell and collect) and pay royalties to Dubai offshore company.

All the websites will be owned by the Dubai Offshore company, while the Romanian SRL will provide maintenance as subcontractor to Cyprus Offshore Company.

In this situation we have to deal with the EU "E-Business Directive" (Council Directive 2002/38/EC) which came into effect on 1st July 2003. The effect of this directive is to implement the imposition of VAT in on Internet delivered information or services within the EU. This amounts to a tariff of between 13 and 25 percent on items such as software or music downloads any transactions as part of online auctions and subscriptions to internet service providers, sold over the internet anywhere within the European Union.

The directive applies to non-EU companies and providing Internet delivered information or services within the EU. In this case the company is liable to criminal prosecution for tax evasion, money laundering, false accounting or similar offences.

Non-EU vendors must register for VAT in one of the European Union Members States. The VAT authorities of the Member State in which the Non-EU vendor has registered will remit VAT collected to the states in which sales have been made. The rate of VAT and rules relating to VAT vary from state to state. The home address of every customer will need to be obtained, the rate of Vat applied will be dependent on that information and records would to be maintained for the VAT authorities. But establishing all customers' location could be an administrative nightmare.

 
Therefore establish a subsidiary in a Member State where VAT is low or there are other fiscal or operational advantages is the best option for a Non-EU vendor. This will circumvent the need to clarify the location of each customer as local VAT regulations would apply and the subsidiary would be regarded as a normal EU enterprise.

In the first year of activity Cyprus offshore Company made 100,000 euros revenues. Of this amount the offshore company must pay to Romanian SRL 10,000Euro management services for the websites and 80,000Euro for royalties to the Dubai offshore Company. In the Cyprus offshore company there will be a 10,000 euro profit left, on which a 10% tax will be applied. Of the remaining 80,000Euro the Dubai offshore company will pay no tax.

NOTE

If Mr. Rusu would be establishing only the Romanian company, then paid tax structure would have been the following:

90,000Euro x 16% income tax = 14,400 Euro

(90,000Euro-14,400Euro) x 16% tax on dividends = 12,096 Euro
----------------------------------
Total tax paid = 26,496 Euro

Therefore our proposed business structure has streamlined Mr. Rusu business with 25,496 Euro.

Regards

 
Winston

TAX MINIMISATION STRATEGIES FOR OFFSHORE COMPANIES CASE STUDY

 
 
There are many traditions that offshore companies can be used as part of a plan to minimise tax on International Trade and Investing.
 
Here are a few practical examples:
 
1.      Advertising and marketing service based businesses
 
Some of the more popular activities conducted from offshore include service based activities such as advertising and marketing, as well as the sale and distribution of information-based products. Take Facebook for example. Australia is one of Facebook’s most successful markets with 11 million users, or about 68 per cent of the internet population.
 
The media buying consortium Group M estimates this year Facebook will earn $55 million in advertising revenue from Australian users. But the vast majority of that will be billed via Facebook Ireland, where the commercial tax rate is less than half that of the 30 per cent levied in Australia.
 
Google also bills Australian users of its advertising system via its Irish subsidiary. That has allowed it lawfully to pay $74,176 in tax on revenue of $201 million – a figure industry sources say might be as little as a tenth of its real revenue.
 
Once the revenue from selling merchandise and currency for gaming apps such as FarmVille is taken into account, marketing industry sources say the true figure of Facebook’s Australian business could be closer to $100 million.
 
Because Facebook does not file its accounts in Australia no one but the company knows how much, if any, tax it should pay to the Treasury.*
 
The key to the successful use of Offshore Companies for such activities centres on the service being seen to be provided from Offshore (+ the service must be billed at a commercially realistic rate). This requires particular attention to be paid to the wording of sales and other commercial agreements.
 
Additionally, it is vitally important to ensure that the Offshore Company is not seen to be operating from onshore. For example it would not be advisable for the Offshore Company in this instance to have a permanent physical office in any of the countries where its customers are based.
 
Regards
 
Winston Wambua
 
 

Sunday, 10 August 2014

OFFSHORE COMPANY CASE STUDY


SITUATION:

 

Mr. Sergei is a Russian citizen with residency in UAE and is a highly paid technical independent consultant in petroleum industry who works with companies from Russia and Middle East.

 

THE PROBLEM:

 

Mr. Serge is interested to invest his incomes on the UK real estate market and in the same time to find an efficient invoice solution for the clients in the Middle East.

 

THE SOLUTION:

 

Oneworld Mid East ltd incorporates an offshore company in the BVI for Mr. Sergei and organizes banking facilities with a prominent world bank in London. The BVI has an established financial industry. Mr. Sergei is appointed as the sole Director and Shareholder of the Offshore company and arranges finance with our assistance, through the bank for the properties purchase. Thru this offshore company he will purchase the two real estate properties in London, one worth 500,000 £ and other 1 million £.

 

Therefore the BVI Offshore company is the registered owner of the properties and registered itself under the Non Resident Landlord Scheme as the property is to be rented out to cover the finance payments. The BVI company can also claim UK tax relief on the loan interest to set against any possible rental income profit.

 

In the same time Mr. Sergei is able to invoice through his offshore company to Middle East clients, and have the fund remitted directly to his London based bank account without attracting taxation. Related to this, Mr. Sergei is also benefiting from the Limited Liability that a BVI Offshore Company affords him, so any threat of damaging litigation is greatly reduced. A BVI offshore company presumes low startup cost and low maintenance, excellent reputation and credibility, British style on legal system and working with world class financial institution in a political stable market. All of those helped Mr. Sergei solve his issue and produce wealth and reducing cost.

 

Mr. Sergei is able to utilize his accumulated funds anywhere in the world as he is able to access his bank account over the internet and utilize a globally accepted bank cards on the account.

 

NOTE:

 

After 3 years Mr. Sergei decides that he would like to sell one property as the UK real estate market has shown good growth. The second property is sold for £ 1,500,000 and has made a capital gain of £ 500,000. No UK tax is levied on this gain as the property is owned by a BVI Offshore Company and the monies are able to be held with the bank in London for further use or reinvestment. Mr. Sergei has been able to realize the Capital Gain on the property and remove any possible tax burden on the UK rental income. He has also been able to utilize a world renowned bank in London to finance the properties purchase.

 

              
Regards

Winston Wambua
 

 

Tuesday, 5 August 2014

Offshore Company Case Study

CASE STUDY:

Mr. Gillian Luciano is the owner of two companies in the UK, which is his country of residency. He also owns two real estate properties which consist of; Real property in the UK, worth £2.5 Million and Real property in Italy, worth £ 2.0 Million.

Mr. Luciano has several personal loans obtained a few years ago. Lately, due to economic crisis and market upheavals, the operational results of this two business entities were worse than expected and for this reason he has not been able to meet his loan obligations and is currently in default risk. Also, due to the property market downturn, selling one of the properties doesn’t seem a solution for the moment.

Mr. Luciano, owing to these loan defaults and business losses is currently risk entering in enforcement procedure. Consequently it is likely that he loses all his property and this may also have an effect on the activities of his businesses.

THE PROBLEM:

Mr. Luciano needs to protect his assets and his business from the enforcement procedure. When the property market revives he will be able to sell one of the properties at the correct market price to cover all his financing obligations.

THE SOLUTION:

In this situation, the structure illustrated blow could be recommended to Mr. Luciano as an efficient offshore structure (with minimum risk and costs) to protect his wealth against litigation and claims.




Under this structure the properties currently owned in the name of Mr. Luciano is transferred to individual offshore companies.  An offshore company will be set up for the two local companies, in order reduce or eliminate the tax and protect it from any possible litigation. An individual offshore company for each of his properties will be set up in order to protect assets and to optimise tax when selling one of the properties when the market conditions turn around.

On the top of these offshore companies, this recommended structure we will have a Offshore Foundation. Offshore Foundations are key tax exempt asset protection structures. Offshore foundation has its own legal personality and no legal owner over a trust. Foundation can be well mixed with offshore companies to maximize privacy, business confidentiality and to protect assets, accumulate and manage wealth.

When the real estate market recovers and Mr. Luciano could sell one of the properties at a correct market price. Under this proposed structure, he will be selling one of the offshore companies owning the property optimizing all transaction tax costs and cover all his debt.

Also having a foundation as owner of an offshore Company enables the profits of the Company regularly transferred to the foundation but should a bankruptcy of the corporation occur, it would not affect the foundation at all.

This structure will provide Mr. Luciano the following benefits:

This structure will give Mr. Luciano he will not be the direct owner of the offshore companies and thus it provided him with an extra layer of protection and make him less vulnerable to liabilities.

Mr. Luciano will be the Protector of the Foundation but not the founder. The Foundation constitutes a separate legal estate from that of the Founder and its assets are protected from future claims against him.

Also Mr. Luciano will be the sole beneficial owner of the Foundation and thus can legally transfer all assets to his family or another third party, appointing them as secondary beneficiaries.

Regards

Winston Wambua

Email: winstonk@live.com

Skype: winston.wambua





Tuesday, 3 June 2014

Offshore Banking

Offshore banking has become a hot topic in recent years in , once an exclusive preserve of the “rich” , even the moderately wealthy nowadays want a piece of the offshore banking action. Offshore banking services are shrouded in confidentiality.

Opinions vary as to whether or not this state of affairs is preferable, even desirable, when compared to the "good old days." There is no doubt, however, that offshore banking remains a powerful mechanism through which to assert one's financial freedom and privacy.

If you don't already hold a bank account offshore, note that there are at least three good reasons why you too should consider moving at least a portion of your assets to a good offshore banking haven:

- To protect,
- To preserve, and
- To increase.

Assets held domestically are subject to political and social factors that you cannot control. Your home administration may suddenly raise taxes to fund a failing economic experiment. Local courts may be encouraging a culture of legal actions aimed at asset confiscation. The prevalence of divorce, malicious prosecution, and our unstable political world make their own argument each for relocating assets offshore. The unrestricted offshore environment, on the other hand, delivers freedom from excessive taxation and freedom from red tape. Moving your assets to a tax haven bank will allow them to benefit from the offshore fiscal sunlight and grow at a faster rate than back home under the dark shadows of bad financial planning.

Offshore banking, however, isn't only about saving taxes. Offshore banking also equals access to investment products and opportunities that might not be available from your domestic bank, as well as effective asset protection and a level of privacy/secrecy usually unheard of "onshore." In short, doing at least some of one's banking offshore makes financial sense. Isn't it time you tried, too?

One study suggested banks in the United States were only the fortieth safest in the world. Many European countries fared worse. Having an offshore bank account is a key way to reduce your sovereign risk. Imagine your local bank were to go under: who would protect your money? If you answered “deposit insurance”, think again. Not only do many western banks keep mere pennies on hand to pay depositors, but sovereign insurance funds don’t even have 1% of bank deposits on hand.

Why offshore bank account is necessary?

You’ve heard the old saying, “never keep all your eggs in one basket.” In fact, you probably diversify your assets across numerous asset classes, such as growth stocks, Blue Chip stocks, bonds, and real estate.

Yet few people diversify geographically. Having an offshore bank account is a form of risk mitigation that offers the added benefit of potentially high returns and access to new opportunities. Quite simply, having a bank account overseas is the first step to protecting your wealth and your freedom.

Winston Wambua

Tuesday, 22 April 2014

The latest tax minimization strategies are being executed by tax professionals all over the world

There are many traditions that Offshore Companies can be used as part of a plan to minimise tax on International Trade and Investing.











Here are a few practical examples:

1. Advertising and marketing service based businesses

Some of the more popular actions conducted from Offshore include service based activities such as advertising and marketing, as well as the sale and distribution of information-based products.

Take Facebook for example. Australia is one of Facebook’s most successful markets with 11 million users, or about 68 per cent of the internet population.

The media buying consortium Group M estimates this year Facebook will earn $55 million in advertising revenue from Australian users. But the vast majority of that will be billed via Facebook Ireland, where the commercial tax rate is less than half that of the 30 per cent levied in Australia.

Google also bills Australian users of its advertising system via its Irish subsidiary. That has allowed it lawfully to pay $74,176 in tax on revenue of $201 million – a figure industry sources say might be as little as a tenth of its real revenue.

Once the revenue from selling merchandise and currency for gaming apps such as FarmVille is taken into account, marketing industry sources say the true figure of Facebook’s Australian business could be closer to $100 million. Because Facebook does not file its accounts in Australia no one but the company knows how much, if any, tax it should pay to the Treasury.*

The key to the successful use of Offshore Companies for such activities centres on the service being seen to be provided from Offshore (+ the service must be billed at a commercially realistic rate). This requires particular attention to be paid to the wording of sales and other commercial agreements.

Additionally, it is vitally important to ensure that the Offshore Company is not seen to be operating from onshore. For example it would not be advisable for the Offshore Company in this instance to have a permanent physical office in any of the countries where its customers are based. Contact us to learn more.

2. Mail order or website based businesses

This is another example of a Trading Operation that can work tax efficiently from Offshore. Commonly Mail Order (and many website based) businesses never actually physically take supply of that which they sell. Hence there is no need to keep stock warehoused. (Most mail order businesses in fact are middlemen whose speciality is marketing).

How it works is the business receives an order (either via a website hosted, or in response to a print ad that they have placed from, offshore). They pass on the particulars of the order to the manufacturer who then fulfils the order and packages the product (using the Mail Order or Website based business’s branding) for mail or courier direct to the end user buyer.

Provided the order is seen to have been taken from Offshore, the difference between the cost and sale price can potentially be receipted Offshore, tax free.

Again for this to work the mail order or website based business needs to be seen to be managed and controlled (and to be taking orders) from Offshore (which requires considerable skill and experience on behalf of the IBC supplier/manager). Contact us to learn more.

3. Offshore “Captive” Insurance Companies

If you would like your business to be able to claim the maximum tax deduction possible for payment of insurance premiums or if you would like to be able to access insurance premiums at wholesale rates you might wish to consider setting up your own “Captive” Insurance Company Offshore.

If you own a Captive Insurance Company you would, in the ordinary course of business, insure (via the Captive) your various risks at the highest conceivable premium (ie within the bounds of commercial reality). Thereafter the Captive would re-insure those risks elsewhere at a lower rate. The profit made by the captive on the differential would be realized and receipted offshore potentially tax free.

Another advantage of owing an Offshore Captive Insurance Company is that you can use it as a vehicle to invest in a wider range of financial products than you could otherwise access if you were to set up the Captive onshore (wherein you would be limited to the confines and limitations of the onshore investment environment).

Moreover with the Captive being incorporated in a nil tax jurisdiction the returns on its investments would be receipted, (and could also be reinvested) Offshore, potentially tax free. Contact us to learn more.

4. Debt Factoring Businesses

Debt factoring is a process whereby a capital flush company buys a debt from a cash strapped business for less than face value (say 80% of what’s owed) which debt it then collects in full pocketing the difference (in this example 20% of the debt) as its operating profit. Its stock in trade is capital which can be kept, managed and supplied from offshore.

Say you have a business that gives its customers 30, 60 or even 90 days to pay following supply of goods or services. That business could set up a subsidiary ie a debt factoring company offshore (which ideally no one but the partners would know the true owner of) in a nil tax environment. To maximise cash flow the business could resolve to sell each debt, immediately it makes a sale, to the Debt Factoring Company in return for an immediate payment of say 80% of the debt.

The Debt Factoring Company would of course proceed to collect 100% of the debt. The net outcome would be that 20% of each sale is receipted Offshore potentially tax free Contact us  to learn more.

5. Investment in Offshore or Hedge Funds

Many if not most “Onshore” Funds are limited in terms of what they can invest in and what they can offer the retail investor. Plus high regulation makes set up and maintenance costs of such Funds significant which costs are ultimately passed on to the consumer.

Offshore Funds by contrast are quicker and cheaper to set up (and maintain). Plus (because they are not registered in high regulation “nanny” states) they are usually less controlling in terms of what they will allow the Fund Manager to invest in. This is attractive to investors with a higher than average risk appetite eg those in search of higher (say, double digit) returns.

A lot of Offshore Funds however do not allow “Onshore” investors to participate, sophisticated investors excepted (eg persons with a net asset pool of $US2million or an annual taxable income of no less than $US200,000).

By setting up an Offshore company you can gain access to the up till now inaccessible world of alternative investments. However to avoid falling foul of onshore regulations Offshore companies established for such purposes need to be structured and/or managed in a very specific way. Please contact us for further information on what’s involved and on how we can assist you to broaden your investment horizons.

6. Offshore Wills & Estate Planning

An Offshore Estate plan can be conceived in such a way that the individual’s estate is passed at death to an Offshore Beneficiary, typically an International Trust. The Beneficiary is usually created for the sole purpose of benefiting certain nominated persons, without ever giving unfettered control of the deceased’s assets to those persons. Such a plan provides comfort to the client who can continue his life’s work safe in the knowledge that his hard won assets won’t be wasted once he’s no longer around!

Additionally unlike passing those assets to a Trust pre-death the client also benefits from the fact that he can still enjoy (and retain complete control over) his assets for as long as he wishes.  Another benefit of nominating an Offshore beneficiary to receive your estate post death is that you make it extremely difficult for disgruntled family members, in-laws or creditors to fight over your estate once you’re gone as they would most likely have to take action in a foreign court – which is rarely an easy (and almost always an extremely expensive) exercise. Contact us to learn more

7. Insolvency and Divorce Insurance

Persons wishing to protect their assets from a greedy ex-spouse or from Insolvency claims can effectively do so by establishing an Offshore Vehicle designed exclusively for the purpose of taking possession of key assets.

If professionally structured (and at the right time – don’t wait till your spouse sues for divorce or you can’t pay your bills to set up a protective structure!) one may be able to take possession of certain assets from division by the Divorce (or confiscation by the Insolvency) Courts by setting up an Offshore Corporate structure to hold such assets.

You can also transfer ownership of key assets to an Offshore Corporate entity whilst retaining some degree of control over or access to the asset. (The rich learned generations ago that ownership isn’t everything; being able to use the asset at a time convenient to you is what counts most).

Some particularly clever Corporate structures are also available Offshore that, once you perceive that divorce or bankruptcy is looming (or even before that time), enable the Offshore Vehicle to automatically take complete control over the most vulnerable assets, thus shielding those assets from division by the Divorce Court and/or from creditor’s claims.

If structured carefully such Offshore Corporate Vehicles can also provide investment growth potential as well as reductions in future tax liabilities. Contact us to learn more.

8. Group Finance Companies

Thin capitalisation rules onshore often limit the amount of tax deductions that can be claimed for the cost of funds borrowed by one member of a group of companies from another.

Provided the structure meets the present commercial and operational objectives of the relevant company a particular Offshore Corporate structure can be established such as can facilitate arms-length financing for a company or group of companies beyond the application of local laws (the application of which would otherwise limit the amount that can be claimed at home by way of tax deductions for loan fees or interest payments).

How it can work is funds are passed to an Offshore entity that, in turn, via an Offshore Finance Company, on-lends those funds to the onshore resident company. In certain situations it is even possible to claim a tax deduction for the initial payment of funds overseas as well as for interest payments made to the Offshore Finance Company!

As ever for such a venture to work clear commercial objectives need to be apparent from the get-go. Moreover this is a particularly sophisticated system of offshore structuring and formation and deployment of such a plan will require the engagement of specialized professional assistance. Contact us to learn more.

9. Offshore Labour Hire and Recruitment Agencies

Establishing an Offshore Recruitment Agency in a nil or low tax centre is a clever way for contract based workers to save on tax.

How it can work is the contractor agrees to work exclusively for the agency in return for the agency guaranteeing him, by written agreement, a minimum volume and/or rate of work (think about it from a commercial perspective…why would you want to agree to work exclusively for one agent otherwise?).

The next time the contractor finds a job that he’d like to take on he simply tells the prospective employer that he works exclusively for The (Offshore based) XYZ Employment Agency Ltd. Say the contract is for $100,000. The employer signs a contract agreeing to pay The XYZ Employment Agency Ltd $100,000. The XYZ Employment Agency Ltd then subcontracts the job to the contractor for say $50,000 (whatever the lowest rate could conceivably be for work of that type – the contract price cannot be seen to be commercially unrealistic; that’s where these things can really come unstuck). The result? Half the contract price of $100,000 is receipted offshore potentially tax free.

But that’s not all… The capability of the Offshore Recruitment Agency to assume accountability for non-wage obligations means the employer often no longer needs to worry about things like payroll taxes, employee superannuation (retirement plan) payments, worker’s compensation insurance, training costs or fringe benefits tax. This makes it even more attractive for the would be employer to hire the contractor!

In addition the introduction of VAT/GST in most countries has meant that many companies and businesses can benefit financially from exporting (or importing) services that would otherwise be obtained from onshore.

Outsourcing (Or “Offshoreing” as it is sometimes known) is now big business. The rapid growth of the E-Commerce sector and the emergence of websites such as freelancer.com (which enables contractors in developing countries to bid for jobs put up for tender by businesses in wealthy countries) mean that many services can now be obtained from any part of the globe. Hence businesses can effectively outsource many jobs(that would normally be carried out by costly local personnel)without having to worry about non-wage labour costs that would otherwise apply were they to hire onshore resident staff.

Similarly, the ability to sell services offshore may allow businesses to obtain the benefits of tax credits without having to incur a VAT/GST liability. Contact us to learn more.

10. IT Consulting

This is another line of work that lends itself particularly well to Offshore structuring as often the work is done by a person living in country “A” for a client based in another country altogether (i.e. country “B”).

Rather than having his onshore company take up the IT consulting contract the savvy IT Consultant or Developer these days will have an IT consulting company in a nil or low tax centre take up the contract in question and then subcontract the work to him at a cheaper rate. The difference again is receipted and banked offshore potentially tax free. Contact us to learn more.

11. Intellectual Property Holdings

Offshore companies are widely used by Intellectual-Property-rich companies as a means of protecting their unique ideas or branding and to save on taxes. Industrial businesses also frequently exploit their technological innovations by transferring such Intellectual Property (“IP”) to an Offshore Licensing Company. The key is to sell or transfer the IP to the Offshore Company at an early stage. Whatever the Offshore Company pays for the IP it must be seen to be a commercially realistic price. (Ideally the transfer of IP would happen shortly after the business launches in order to minimize transfer costs).

Thereafter royalties, license fees and other sums attributable to the use of the IP may be receipted by the Offshore Licensing Company from related (as well as non-related) Companies, potentially tax-free, Offshore thus reducing the overall tax burden of the group.

Not only can tax benefits flow but by wrapping IP in the protective coating of an Offshore Corporate shell, you also make it much harder for people to sue you

(a) Because they have to sue abroad in an unfamiliar and often sinister legal environment and

(b) Because it’s often impossible to know pre-trial whether the offshore company has any assets from which recovery can be milked. (One wonders if Mark Zuckerberg had transferred ownership of the Facebook name/brand to an offshore company early in the peace whether he would have faced the multitude of law suits that have latterly befallen himiepost mega-success).

Whilst law changes in certain countries have made deployment of such strategies more challenging, effective means of holding and exploiting intellectual property through Offshore corporate structuring still exist, provided that the appropriate structure can be put in place (hence, again, the importance of making sure you choose an experienced, knowledgeable Offshore Company Formation Service Provider). Contact us to learn more.

12. Offshore Employee Welfare Funds

With increased regulation traditional Employee Share/Option Plans and Employee Bonus Plans are becomingly increasingly costly to both establish and administer from “Onshore”. An Offshore Registered and Managed Employee Fidelity Structure or Welfare Fund on the other hand can provide benefits similar to an Employee Share/Option Plan or an Employee Bonus Plan but at a much more economical price.

Traditional Employee Welfare Funds are very restricted in terms of where monies held by the Fund can be invested (eg often they can only be invested in shares of the employer company). Offshore Superannation/Retirement Funds on the other hand are usually able to operate outside of the restrictive regulations of most local superannuation schemes and are thus able to invest in a wide range of investments (including in high yield/risk investments such as Currency Trading, Bonds and Derivatives etc).

As an Offshore fund has a much greater choice of where how and when to invest the fund can also be utilized as a high returning investment vehicle for both employer and employee alike (ie in addition to benefiting the employees by their receiving tax-preferred treatment on retirement or termination). Additionally because the Fund is incorporated in and managed from a nil tax environment and doesn’t have to account for tax every year it is able to grow its capital base much faster via the power of compounding.

Tax deductions may also be available in certain countries for payment of contributions by Employers to non-resident Employee Superannuation/Retirement/Welfare Funds.

13. Offshore Indemnity Funds

In certain countries now the law expects employers to keep funds aside to cover contingencies such as redundancies or employee related legal liability (eg some former hotel owners are now being asked to pay damages, decades later, to former employees who contracted lung cancer after working for years in smoky bars).

There are clear advantages to setting up such a Fund Offshore. For example as an Offshore entity has a much greater choice of investments an Offshore Indemnity Fund can be utilized meantime as a high returning (potentially tax free) investment vehicle for the employer (ie provided the Fund abides by its constitution and keeps aside at all times a prudent amount such as might be required to fund potential liabilities in the future).

Additionally because the Fund is incorporated in and managed from a nil tax environment and doesn’t have to account for tax every year it is able to grow its capital base much faster via the power of compounding.

Tax deductions may also be available in certain countries for payment of contributions by an Employer to a non-resident Indemnity Fund.

Upon winding up of the onshore business the proceeds of the fund might be paid back to the employer (potentially tax free if the employer is then tax resident in a country that doesn’t tax such receipts).

Kindly note the above are generic examples and are not country specific. Local laws may have an important impact on your particular situation. Consequently we recommend that you seek local legal and/or tax advice before incorporating or using an Offshore Company for such purposes.


For more information on this topic (or if you would like to know more about How We Can Help You) please Contact Us

This is a generic example of how an offshore corporate entity can or might be used. Local laws may impact on your situation. Hence we would recommend that you seek local legal and/or tax advice before establishing such an entity


Winston Wambua

Tuesday, 18 February 2014

Questions and Answers guide to establishing a business in the United Arab Emirates


1. What is the legal system in your jurisdiction based on (for example, civil law, common law or a mixture of both)?


The UAE is an Islamic state and Islamic Sharia law is the main source of legislation under Article 7 of the UAE Constitution. The rules and principles of Islamic jurisprudence are relied on in the understanding, construction and interpretation of the provisions of the Civil Code. In addition, under Article 75 of Federal Law No. 10 of 1973, the Supreme Court must apply the provisions of Sharia law, federal laws and other rules of custom and principles of natural law and comparative law insofar as they are not inconsistent with the provisions of Sharia law.

The UAE is a federal state and laws are promulgated at various levels, all of which may cover the same issue or topic with differing impact. Federal laws override the individual laws passed by the seven Emirates within the Union.

There are also carve outs for free zones within the seven Emirates, with laws which are passed by the relevant Emirate but limited to the area within the free zone.

The most prominent free zone is the Dubai International Financial Centre (DIFC), an international offshore financial center, which came about as an effort to bridge the gap between the world's major financial centers. It has its own:

ü  Financial services regulator, the Dubai Financial Services Authority (DFSA).

 

ü  Exchange, the Dubai International Financial Exchange (DIFX).

 
 

ü  Legislation based primarily on common law principles.


DIFC Court.



All financial services activities within DIFC are regulated. Authorised firms are categorised depending on the activities allowed under their licence. There are also unregulated firms, mainly single family offices, company service providers, real estate developers and retail shops, as well as registered entities such as law firms and accountancy practices.

The companies in the rest of the UAE are monitored by different regulators, depending on their activity.

In general, any economic entity (of any nature), whether within or outside of DIFC, must be licensed. In addition, depending on the nature of the activity, it may also need to be regulated. The nature of the licence defines the activities that the company can engage in when conducting its business. This contrasts with the wide range of activities in which a company can engage in most common law jurisdictions.
 
Business vehicles

2. What are the main forms of business vehicle used in your jurisdiction?

What are the advantages and disadvantages of each vehicle?


There are a number of options available for setting up a business in the UAE.

Under the Commercial Companies Law (Federal Law No. 8 of 1984 Concerning Commercial Companies as amended by Federal Law No 1 of 1984 and Federal Law No 13 of 1988, Federal Law No. 15 of 1998) (CCL), foreign investors are only permitted to hold up to 49% equity ownership in UAE companies, meaning 51% of the shares must be held at all times by one or more UAE nationals.

The limited liability company (LLC) is the most popular method of establishing a commercial company in the UAE, unless the business involves banking, insurance and investment activities conducted on behalf of third parties, where a public joint stock company is required.

The LLC requires a minimum of two and a maximum of 50 members, and minimum capitalisation of AED300,000. Management of the LLC is vested in the managers (up to five natural persons) who may or may not be UAE nationals.

Other commercial structures regulated under the CCL are general partnerships, simple limited partnerships, joint participation, public joint stock company, private joint stock company and partnerships limited with shares, most of which, except for the private and public joint stock companies, are not readily used.

Foreign companies may also obtain the approval of the concerned authorities and open a branch of the company in the UAE, provided that the company has a UAE national as an agent.

In addition to registering under the CCL, it is possible to register in one of the many free zones. Within the free zones, foreign nationals can own 100% of the share capital of the free zone entity, without the support of a UAE national that is required under all entities available under the CCL. The free zones are situated throughout the UAE, many within Dubai and numerous others throughout the other Emirates. In total, there are over 25 free zones, some specifically for certain industry sectors, such as Dubai Internet City which is solely for the IT industry. The more popular free zones besides DIFC include Jebel Ali Free Zone, Dubai Multi Commodities Centre and Dubai Media City.
 

Establishing a presence from abroad


3. What are the most common options for foreign companies establishing a business presence in your jurisdiction?


The most common options for foreign companies establishing a business is either a limited liability company (LLC) or a free zone entity.

An LLC can be compared to a joint venture, in that the foreign company, or individual, enters into a relationship with a UAE national, or company owned by one or more UAE nationals (Local Partner), to carry on business. For the majority of businesses the foreign company, or individual, can only legally own 49% of the business with the Local Partner legally holding 51%. The memorandum of association (memorandum) sets out the relationship between the parties. The foreign national can be given certain preferred rights under the memorandum; such as being entitled to 80% of the profits and the ability to appoint the manager of the LLC.

In the majority of cases, the LLC is formed and the local partner is paid an agreed fee each year under a side agreement which states that, in consideration of the fee, the local partner will legally hold the 51% of the company but the foreign company will beneficially hold 100% of the share capital of the LLC. Foreign companies have become comfortable with the use of such side agreements, although their enforceability has not been conclusively tested in the courts.

Establishing a business in one of the UAE's numerous free zones is a common option for foreign companies. To date the free zones have been successful in attracting a large number of foreign companies and foreign direct investment. Advantages in setting up in a free zone include:


100% foreign ownership.


100% repatriation of capital and profits.


100% import and export tax exemptions.


No corporate taxes for 50 years.


No personal income tax.


Each free zone has its own independent free zone authority, responsible for issuing free zone operating licenses and assisting companies with establishing their business in the free zone.

Foreign companies can either register a new company in the form of a Free Zone Establishment (FZE) or simply establish a representative office or branch of their existing or parent company based within the UAE or abroad.

An FZE is a limited liability company governed by the rules and regulations of the free zone in which it is established. Under Federal Law No. 15 of 1998, except for acquiring nationality in the UAE, the provisions of the CCL do not apply to FZEs, provided that the free zones have special provisions regulating such companies.

It is, however, to be noted that there are restrictions on doing business with other free zones and in areas not covered by free zones within the UAE (onshore). These restrictions vary in scope and nature.



4. How can an overseas company trade directly in your jurisdiction?


Any company incorporated outside the UAE can engage in commercial and professional activities through the following legal forms:


-Branch, or a representative office, of a foreign company.


-Limited liability company (see Question 2).


-Private or public shareholding company.


A branch of a foreign company can conduct selected commercial and professional activities, but, for example, cannot import goods into Dubai; this will be managed by a local trader or commercial agency. The branch office must have an independent budget, its own profit/loss statements and must appoint a UAE-accredited auditor. A branch must also have a local service agent, who must be a UAE national or a company owned by one or more UAE nationals.

A representative office is not a business structure in its own right but is rather a business activity that a branch can conduct. It can promote and market the parent company's business, but not conduct business operations. A representative office also requires a local service agent.

A private shareholding company is a partnership of at least three individuals. This type of company can be created for any commercial or industrial type of business, although professional activities are not allowed under this legal form.

A public shareholding company is a company whose capital is divided into transferable shares of equal value. It must have a minimum capital of AED10 million.

The business name cannot include the name of any of the shareholders, with the exception of patents registered in the name of a shareholder or if the business uses a store that has the name of a shareholder. The phrase "Public Shareholding Company" must be included in the business name.



5. What are the formalities for setting up a partnership?


For a general partnership, the general principles include that:


A general partnership is an arrangement between two or more partners whereby each of the partners is jointly and severally liable to the extent of all their assets for the company's liabilities.


Only UAE nationals are allowed to be partners in a general partnership.


All partners are considered to be agents of each other, and the bankruptcy of any partner leads to the bankruptcy of all the partners.


The company shares cannot be represented in negotiable certificates.


Partners are severally and personally responsible for the company's obligations and any agreement to the contrary is not enforceable against third parties.


Company administration is undertaken by all partners, unless the company contract or an independent contract assigns the administration to a partner or to a non-partner party.


For a simple limited partnership:


The partnership is formed by one or more general partners who are liable for the business liabilities to the extent of all their assets, and one or more limited partners liable for the business liabilities to the extent of their respective shares in the capital only.


Only UAE nationals are allowed to be general partners.


The simple limited partnership is a partnership for all partners and is subject to partnership rules, including:

the simple liability contract must include in addition to the other data, the name of each limited partner, his surname, nationality, date of birth, country, capital share and capital contribution;


-the limited partner is only liable towards the company's debtors to the amount of his capital share;


-a limited partner cannot intervene in the company administration-related issues related to others even if authorised to do so. Instead, he can obtain a copy of the loss/profit accounts and the balance sheet and check the validity of the data by reviewing the company's records and documents by himself or by a representative from any of the partners or others, as long as this does not harm the company. If the limited partner violates this ban, he becomes responsible for all the obligations resulting from the business;


-the limited partner may be liable for all the company's obligations if the business administration he carried out leads others to believe that he is one of the ultimate actual partners, in which case the rules and regulations of the actual partners will apply to the limited partner;


-if the limited partners carried out any of the banned administration business based on an explicit or implicit authorisation from the partners, such partners will be held jointly responsible with him for the obligations resulting from such acts;


the limited partnership must issue resolutions with the consensus of all partners and limited partners, unless the memorandum of association specifically provides that resolutions may be passed by a majority of the partners, the majority being either by way of numbers or capital contribution, as stated in the memorandum of association;


-resolutions to amend the company contract cannot be passed unless duly approved by all partners and limited partners.



6. What are the formalities for setting up a joint venture?



A limited liability company formed under the provisions of the CCL has many similarities with a "joint venture" in other jurisdictions.

Onshore companies

Onshore joint ventures are established by a joint venture agreement and must be registered. A foreign national or a foreign company can both enter into joint ventures in onshore UAE, subject to certain qualifications discussed below. The terms of agreement and association are set out in a standard memorandum of association issued by the Department of Economic Development (DED), which is signed before a notary public. The documentary requirements for initial approval are as follows:


Registration and licensing application, as well as proof of reserved trade name.


Photocopy of applicant's passport (together with residence permit/visa details for non-GCC (Gulf Co-operation Council) states' nationals).


Photocopy of applicant's naturalisation identification for UAE nationals only.


No-objection letter from the applicant's current sponsor for non-GCC nationals.


Photocopy of the director's passport, and no-objection letter from the director's current sponsor.


Approval issued by other government authorities according to the type of activity.


The company's board of directors resolution to subscribe to the new company if the partner is an existing corporate entity in UAE or abroad (the resolution must be attested by UAE embassy/consulate or by a GCC state embassy/consulate and UAE Ministry of Foreign Affairs, and duly translated into Arabic).


Once the above documents have been submitted, the second step involves submission of:


An initial approval receipt.


All documents provided under the initial approval stage above.


A photocopy of the office lease including the plot number.


An original photocopy of the memorandum of association duly authenticated by a notary public.


The contract of the limited liability company (LLC).


If the partner is an existing corporate entity in UAE or abroad the memorandum of association and the commercial register certificate must be attested by UAE embassy/consulate or by a GCC state embassy/consulate and UAE Ministry of Foreign Affairs, and duly translated into Arabic.

All applications for establishing an LLC "onshore" are filed with the DED. According to current UAE laws, a UAE national must own and control 51% of the shares in the LLC whereas non-nationals can own no more than 49%. However, this requirement is relaxed for those companies that are wholly owned by GCC nationals who are exempt from the above requirement.

Typically, the partners in a joint venture enter into a formal shareholders' agreement. However, such an agreement must be consistent with UAE law and the registered memorandum of association. If there are inconsistencies between the two, such provisions are unenforceable. This is generally how joint ventures are carried out within the UAE.

Free zones

Each free zone entity has its own rules and regulations, which are generally less onerous, for incorporating companies in the respective free zones. It is not necessary to have a UAE national as a partner to incorporate a company in the free zone; they can be 100% owned by non-UAE nationals.

Unincorporated joint ventures

Unincorporated joint ventures are often used for short term operations. Two or more parties can form a private unlimited company so that the company that is licensed to carry out a certain business may do so on behalf of the other company which does not possess a licence (section 56, CCL).

Due to the UAE licensing requirements, all joint ventures must include a vehicle that has the appropriate licence to carry out the business activities either from the DED or a free zone authority.



7. Are trusts available in your jurisdiction?


Trusts do not exist as such under UAE Law, although there are Islamic trusts, governed by Sharia law. Trusts as vehicles for beneficial owners are not available in the UAE with the exception of the DIFC Free Zone. DIFC does recognise trust principles, which will be familiar to common law lawyers.
 

Forming a private company


8. How is a private limited liability company or equivalent corporate vehicle most commonly used by foreign companies to establish a business in your jurisdiction formed?


Regulatory framework

A limited liability company (LLC) can be formed under the provisions of the CCL.

Onshore. The LLC is the most commonly used vehicle for incorporating an onshore company, in accordance with the CCL. The incorporation process is regulated by the Department of Economic Development (DED). This is a two-step process. The first step is choosing the business activity of the LLC. There are over 2,000 business activities available and the selection may have an effect on the minimum share capital requirements and the ownership structure. LLCs can conduct any industrial or commercial business, but cannot engage in professional businesses other than banking, insurance or investment. LLCs cannot practice law, auditing, accountancy or any other type of consulting service.

Free zone. Each free zone has its own set of requirements, rules and regulations for registering a company. The requirements depend on whether the owners of the new company are individuals or whether it is a corporate entity. Other considerations for registering in a free zone are:


Office space requirements.


The number of visas needed.


The activity of the company.


Once these are ascertained, the appropriate free zone can be approached and the requirements, rules and regulations can be ascertained for setting up an appropriate business vehicle.

The most commonly used vehicle in a free zone is a company limited by shares or a LLC.

For more information on the regulatory authorities, see box: The regulatory authorities.

Tailor-made or shelf company

All companies whether those formed under the CCL or within a free zone are formed on a tailor-made basis. It is not possible to purchase a shelf company.

Formation process

Onshore. To register an LLC under the CCL and obtain a licence from the DED is a two-stage process:


Initial approval. The documents required include:

the registration and licensing application, as well as proof of reserved trade name. This involves an online application with the DED;


copy of applicant's passport;


copy of the director's passport;


approval issued by other government authorities according to the type of activity;


the company's board of directors resolution to subscribe to the new company if the partner is an existing corporate entity in UAE or abroad (the resolution must be attested by UAE embassy/consulate or by a GCC state embassy/consulate and UAE Ministry of Foreign Affairs, and duly translated into Arabic).


Documents required after getting the initial approval include:

initial approval receipt (plus all documents submitted for initial approval);

photocopy of office lease including the plot number;

original photocopy of the memorandum of association duly authenticated by the notary public.


If the partner is an existing corporate entity in UAE or abroad the memorandum of association and the commercial register certificate must be attested by UAE embassy/consulate or by a GCC state embassy/consulate and UAE Ministry of Foreign Affairs, and duly translated into Arabic).

The fees depend on the business activity of the LLC. All fees are paid to the concerned local government office.

Free zone. To register within a free zone, once the free zone is decided on, the specific requirements for registration will depend on the rules of that particular free zone.

Fees vary from free zone to free zone, with the more established free zones, such as Jebel Ali Free Zone and DMCC/JLT Free Zone being more expensive than free zones incorporating virtual offices in other Emirates, such as Fujairah and Ras Al Khaimah.

Free zones have been created on an industry specific basis, for instance a software service provider that wishes to incorporate a company in a free zone would have to establish a company in Dubai Internet City. The trade licence issued to a company will vary as the trade licence defines the business activity that a company may engage in.

Company constitution

The main document for constitution of a limited liability company, formed under the CCL, is the memorandum of association. The memorandum of association is a document that regulates a company's external activities. The memorandum of association records, among other things, the company's name, the company's headquarters, the purpose for which the company was established, the names of its shareholders including their nationality and place of residence, the number of shares held by them, the names of the directors, the company's commencement and expiry dates and other key financial and legal information.

There is no set or standard form of memorandum of association and this must be drafted by a law firm or the DED provide a service for preparing a memorandum of association.

Within each free zone, the company's shareholders sign the company's memorandum of association, which are in a standard form for each free zone and are not generally amended in any way.
 

Financial reporting


9. What financial reports must the company submit each year?


For a limited liability company (LLC) registered under the CCL, there is no requirement to file any accounts with any authority, until it is to be closed or liquidated where an auditor must submit audited accounts.

Generally, there is no requirement to file accounts within the free zones. One exception is Dubai Multi Commodities Centre (DMCC) free zone, where audited accounts must be submitted annually.

If the overseas company has a branch in the UAE, there is no UAE filing requirement and the branch accounts must comply with the overseas company law.
 
Trading disclosure


10. What are the statutory trading disclosure and publication requirements for private companies?


For a limited liability company (LLC) registered under the CCL, the company must keep at its headquarters a record of:


The names, nationalities, professions of the shareholders.


The number and value of shares owned by each of the shareholders.


All actions involving shares and the dates on which they were undertaken.


All LLCs must display their name and sign at their premises and include full details including address, name and licence number on their letterhead and invoices. There is no such requirement for websites.

The LLC's name must include the phrase "Limited Liability Company", in addition to a statement showing the company's capital.



11. How do companies execute contracts or deeds?


Contracts are executed by company seal and/or signature by the manager, director or authorised signatory.

A number of important documents, such as the memorandum of association and a power of attorney must be signed before the notary public.

Any change in the company's constitutional documents arising out of any change in the persons holding shares also requires the documents to be notarised before presenting them to the Department of Economic Development to effect the changes.
 


Membership



12. Are there any restrictions on the minimum and maximum number of members?


A limited liability company (LLC) must have no more than 50 members and no less than two (CCL).

The rules vary between the free zones. Generally, there is no restriction on the number of members.
 


Minimum capital requirements



13. Is there a minimum investment amount or minimum share capital requirement for company formation?


For a limited liability company (LLC) formed under the CCL, the minimum capital requirement depends on the business activity of the company and must be sufficient to achieve the company's corporate purpose (Article 227, CCL).

For a company registered in a free zone, the minimal capital requirement varies between the free zones.



14. Are there restrictions on the transfer of shares in private companies?



For a limited liability company (LLC) registered under the CCL, the shareholders can transfer their shares to one of the other shareholders (Article 230, CCL). A shareholder can also transfer shares to a non-shareholder. However, existing shareholders have a right of pre-emption over the shares to be transferred, at the price specified in the notice given to the directors by the shareholder looking to relinquish his shares (Article 231, CCL). If more than one existing shareholder wishes to purchase the shares the shares are divided between the purchasing shareholders in the proportions in which they hold shares (Article 232, CCL ).

There are no restrictions on transfer of shares within the free zones.
 


Shareholders and voting rights



15. What protections are there for minority shareholders under local law? Can additional protections be given?


Part 10 of the DIFC Companies Law provides protections for minority shareholders in takeovers. For example, a minority shareholder has a right to be bought out by an offeror where, as a result of a takeover offer, the offeror has acquired at least 90% of all shares in the company.

There are no express provisions for the protection of minority shareholders under UAE Law.

There is no concept of unlimited liability in the UAE in the context of companies.



16. Are there any statutory restrictions on quorum or voting requirements at shareholder meetings? Do quorum or voting rights need to be proportionate to shareholdings?


Under DIFC Law, at a general meeting of the company two shareholders personally present or represented by proxy represent a quorum. At any meeting of the holders of any class of shares other than an adjourned meeting, persons holding at least one-third in share value of that class of shares will represent a quorum.

Under UAE Law 50% of the voting rights based on paid up share capital is considered a quorum for shareholders' meetings.



17. Are specific voting majorities required by law for any corporate actions (for example, increasing share capital, changing the company's constitution, appointing and removing directors, and so on)?


Special resolutions (75% of votes) are required under DIFC Law for some corporate actions such as increasing share capital and liquidation.

There is no such requirement under UAE law.



18. Can voting majorities required by law be disapplied to protect a minority shareholder (for example, through class rights or weighted voting)?



Voting majorities cannot be disapplied. However, there are provisions under the DIFC law to protect minority shareholders (see Question 15).
 


Secretary restrictions

19. What are the conditions or restrictions on establishing a business in specific industry sectors? Are there industry sectors in which it is not permitted to establish a business?


In the UAE, the business activity of the company is limited to the nature of the trade licence that has been obtained. The law in the UAE and also in free zones provides for a list of business activities and sectors which are permitted.

There are a number of rules under the CCL relating to establishing a business in the form of a limited liability company (LLC). For example, LLCs can conduct any industrial or commercial business, but not professional activities other than banking, insurance or investment. For example, LLCs cannot practice law, auditing, accountancy or any other type of consulting service. The business activity that the foreign company is anticipating entering the UAE market with should therefore be carefully considered.

Similarly in free zones, the nature of the activity permitted will depend on the regulations of the free zone.
 

Foreign investment restrictions


20. Are there any restrictions on foreign shareholders?


A foreign shareholder can hold no more than 49% of the issued share capital In an LLC formed under the CCL. The standard rule can be varied for certain business activities, for example, in a real estate company a foreign national cannot own any of the share capital.

There is no such restriction in the free zones.



21. Are there any exchange control or currency regulations?


Currently there are no exchange control or currency restrictions except for restrictions in relation to transactions involving Israel or Israeli citizens.



22. Are there restrictions on foreign ownership or occupation of real estate, or on foreign guarantees or security for ownership or occupation?


Only four Emirates allow foreign ownership of real property:


Dubai.


Abu Dhabi.


Ajman.


Ras Al Khaimah.


However, ownership by foreigners in these emirates is restricted to designated areas.

Foreign ownership is restricted to the buildings on the land and does not include the land itself.
 


Directors



23. Are there any general restrictions or requirements on the appointment of directors?


In relation to companies under CCL in the UAE, directors must not have been convicted of a criminal offence involving dishonesty or immorality, and cannot be directors of more than five companies in the UAE. The chairman of the board must be a UAE national.

Under DIFC Law, the following are not entitled to be directors:


-Individuals under 18 years of age.


-Individuals who are disqualified from holding directorships (for example, having been convicted of a criminal offence, guilty of insider trading and so on).


-Undischarged bankrupts.


-Legal entities.


Board composition

24. What are the legal requirements for the composition of a company's board of directors?


Structure

Within the UAE, in both the free zones and limited liability companies (LLCs) registered under the provisions of the CCL, great emphasis is put on the manager of the entity. The manager:


Has his name appear on the trade license.


Have full powers to carry out management affairs of the company.


Has the right to bind the entity in the eyes of all third parties who the entity deals with.


It is possible to have up to five managers. If there is more than one manager, the memorandum of association may provide for the formation of a managers panel.

In addition to the standard board of directors, when the number of shareholders exceeds seven, a supervisory board consisting of at least three of the shareholders must be put in place (Article 240, CCL).

This supervisory board can, among other things:


Examine the company's books.


Take stock of cash or goods.


Require the managers at any time to submit reports about their management.


The supervisory board is not usually accountable for the actions of the directors.

Number of directors or members

The management of the LLC under the CCL can be undertaken by up to five managers. Unless otherwise specified in the manager's contract, his tenure lasts for the duration of the company or until removed by a unanimous board resolution.

There is no restriction in the free zones.

Employees' representation

Employees do not have a right to representation in either a LLC formed under the CCL or in any company formed in a free zone.
 
Reregistering as a public company

25. What are the requirements for a business to reregister as a public company?


Membership

A public company must have at least ten founding members and management must be vested in a board of directors with chairman and majority directors who are UAE nationals. 51% of shares must be held by UAE nationals. Founder members must hold at least 20% of the capital but not more than 45% of the capital. The founders must select from among themselves a committee comprising not less than three and not more than five members to undertake the foundation procedures with the concerned authorities.

The management of a public company is vested in a board of directors comprised in accordance with the memorandum of association, which will state:


The number of the directors (not less than three and not more than 12 directors).


Their term of office (not exceeding three years).


Share capital

A public company has its capital divided into transferable shares of equal value and the respective shareholder is only liable to the extent of his own share capital The company capital must be adequate to achieve the objectives of its incorporation, and must be at least AED10 million.
 
Tax

26. What main taxes are businesses subject to in your jurisdiction?


The UAE does not levy any form of tax.

27. What are the circumstances under which a business becomes liable to pay tax in your jurisdiction?



The UAE does not levy any form of tax.



28. What is the tax position when profits are remitted abroad?


As there is no tax regime, the UAE has no restrictions or regulations on foreign exchange. Capital, profits, interest, and royalty payments may be repatriated freely.

29. What thin-capitalisation rules and transfer pricing rules apply?


In the absence of a tax regime, thin capitalisation and transfer pricing are not issues that are covered by the UAE regulatory regime.
 


Grants and tax incentives



30. Are grants or tax incentives available for companies establishing a business in your jurisdiction?


The UAE does not levy any form of tax.
 


Employment



31. What are the main laws regulating employment relationships?


UAE

Employment matters in the UAE are governed by Federal Law No. 8 of 1980 Regulating Employment Relations as amended by Federal Laws No. 24 of 1981, No.15 of 1985 and No.12 of 1986 (Employment Law). This is a Federal piece of legislation and therefore applicable to all the Emirates of the UAE, which in turn is enforced by the Ministry.

Under the Employment Law, the Arabic language must be used for all employment records, contracts, files, data and so on, and for all instructions and circulars issued by the employer to his employees. A copy of the employment contract in a secondary language is allowed for an employee whose first language is not Arabic. However, if there is a dispute between the two versions of the contract, the contract in the Arabic language will prevail.

The Employment Law applies to all staff and employees working in the UAE, irrespective of whether they are UAE nationals or expatriates. Certain categories of individuals are exempted from the Employment Law, including:


Staff and workers employed by the federal government, government departments of the member emirates.


The employees of municipalities, public bodies, federal and local public institutions, and federal and local governmental projects.


Members of the armed forces, police and security units.


Domestic servants.


Agricultural workers and persons engaged in agriculture (this exemption does not include persons who are employed in corporations which process agricultural products and/or those who are permanently engaged in the operation or repair of machines required for agriculture).


A partner in a business is not considered an employee and is therefore not required to obtain an employment card from the UAE. However, employees working on a commission basis are considered as employees even if they are partners in the entity they are working for.

The Employment Law covers all aspects of the employer-employee relationship including:


Employment contracts.


Restrictions on the employment of juveniles and women.


Maintenance of records and files.


Wages.


Working hours.


Leave.


Safety and protection of employees.


Medical and social care.


Codes of discipline.


Termination of employment contracts.


End of service benefits.


Compensation for occupational diseases.


Labour inspections.


Penalties.


Employment related accidents, injuries and death.


An employee who is subject to the Employment Law is entitled to fixed minimum notice periods and fixed maximum working hours except for managerial level staff. Overtime payment is defined and the employee will be compensated for overtime at an inflated rate. The employee is given the option of payment in lieu at an inflated rate for working on a public holiday. In addition, for both the employee and the employer, the Employment Law is clearer on compensation for termination without due notice, on termination of an employee without notice for misbehaviour and on the possible scope of non-competition obligations imposed on an employee on termination.

The UAE does not allow the formation of trade unions.

In addition, mandatory rules of law apply in relation to termination and compensation regardless of any choice of law in an individual's employment contract. The general rule is to have a written employment contract as it provides certainty as to the terms of the employment according to the prevailing laws. However, oral employment contracts are also valid with adequate proof of its terms, which may be established by all admissible means of evidence.

DIFC free zone

Although the Employment Law stipulates that it applies to all employees (other than the ones listed above), in practice employees in the free zones are subject to the rules and regulations of the particular free zone and maintain their own employment contracts. However, the Employment Law will still apply and the provisions in the employment contract must be in accordance with it. Importantly, free zone employees are sponsored by the relevant free zones and not by their employers.

Such employees are seconded by the free zones to companies established in the free zones in return for, among other things, a bank guarantee which is required to secure the employees' dues and any end of service benefits which may be payable on termination of their employment contracts. Although the free zones are technically the employees' sponsor, the employees maintain a right of action against their employers before the courts.

Employment Law No. 4 of 2005 as amended (DIFC Employment Law) governs the employer/employee relationship in the DIFC. There are certain differences between the Employment Law and the DIFC Employment Law, including that:


The DIFC Employment Law does away with the distinction between limited (fixed-term) contracts and unlimited contracts (broadly, oral contracts for no specified period) and the different rules that otherwise apply to them. For instance, there is no reduction in an employee's severance pay for a limited contract.


Annual leave days consist of working days, they accrue pro rata and are exclusive of public holidays.


The employee is entitled to 90 days sick leave and is paid at his normal rate of pay for the full 90 days.


Ramadan hours are stated to apply only to those who are fasting.


No specific day of the week must be taken off as a rest day, which is good for those companies that would like to co-ordinate with the working week of Western countries or countries with Sunday as their weekly rest day.


32. What prior approvals (for example, work permits, visas, and/or residency permits) do foreign nationals require to work in your jurisdiction?


For immigration purposes, a foreign partner is sponsored by the entity he is a partner in, as an investor rather than as an employee, and will deal with the immigration authorities directly rather than through the Labour Office, if his name is on the business entity's licence, and subject to a minimum investment requirement in the entity. However, if the partner holds an employee position in addition to his partner status, he is considered as an employee for the work he is doing in the company.

When a new business is established, it must be registered with the Ministry before the employment of staff. The free zones authority sponsoring the employees refers directly to the immigration authorities and not to the Ministry. However, the Ministry may still deal with disputes between employees and their employers in the free zones, unless the free zone authority has a special ordinance governing the relationship between employee and employer.

An application must be made to the Ministry to employ any foreign employee in the UAE. The application must be approved by the Ministry before the employee entering the UAE. New businesses must register or open a file with the Ministry before they can employ staff (see Question 19). In addition to obtaining the Ministry's approval to employ non-UAE nationals, certain immigration procedures need to be followed.

There is also a requirement for certain employers to submit to the Ministry a bank guarantee as security for end of services benefits and repatriation costs related to their employees. This procedure is also applicable to employers in most of the free zones.

Where the intended employee is a UAE national, an employment contract may be entered into at any time. Employment contracts for non-nationals must be drawn in the format approved by the Ministry on an application made by the employer. However, employment contracts for national employees do not need to be in writing and the terms and conditions of employment may be proved by any means of proof admissible by law. The Ministry does not issue employment permits for expatriate employees unless a formal written employment contract is filed with the Ministry.
 

Proposals for reform


33. Are there any impending developments or proposals for reform?


It was announced earlier this year that a new Commercial Companies Law has been approved.

Essentially the structure established under the existing CCL remains in place, for example the limitation of foreign investment to 49%, with incremental changes.

Changes include:


Explicit provision for the creation and registration of a pledge over shares in an LLC.


Non-pre-emptive issuance of new shares to strategic investors.


Removal of requirement that the value of bonds issued must not exceed a company's capital.


A statutory objective promoting social responsibility for commercial companies.


A new prohibition on companies providing finance assistance to a shareholder to enable them to hold securities issued by that company.


Provision for sole shareholder companies.


The new law is expected to promote confidence and economic growth.



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