“Tax Haven”: Gift of the Earth’s Entrails or a Purposeful Policy?

Teimuraz Jusoev, Legal adviser of the Georgian Chamber of Commerce and Industry, Master of International Law
United Arabian Emirates is quite a young state which was formed in 1971 by means of integration of seven emirates. Probably, out of these emirates Dubai, with its unique architecture and shopping centers, is the most familiar to us.

It is hard to believe that this most beautiful pleasure resort, which annually attracts thousands of tourists from almost every country of the world, was just a desert thirty years ago. Such cities as Sharjah, Fujeira, and of course the capital of the country Abu-Dhabi also have a lot of historical and geographical peculiarities.
These cities were built on the shore of the Persian Gulf and represent a value from esthetical point of view. Especially remarkable are seven-star hotels and artificial islands with their infrastructure built in the sea.
It is not surprising that oil represents the main wealth of this region. Production and refining of oil represents the basic sector of the country’s economy. UAE is known as one of the largest oil exporters and its wealth is determined by this fact. There are a lot of legends about the ruling dynasties of each of the emirates concerning treasures and other big values related to oil.
It is also noteworthy that the state opens a 30 000 USD bank deposit from the oil fund for each new-born boy of the emirates, which is untouchable till its owner comes of age. But so called free economic zones (FEZ) in the UAE are of special interest to businessmen. Such zones are located around airports and sea ports, and they are popular all over the world. There are several free economic zones in the territory of the Emirates. For instance, places around the airports of Dubai and Sharja, as well as near the sea ports of Ajman and Fujeira are chosen for this kind of zones. Presently Jebel Ali, which is situated in the territory of Dubai emirate, is considered as the most developed zone. Jebel Ali FEZ was created in 1985 around the largest port of the UAE – Rashid, and now up to five thousand companies from more than 100 countries of the world are registered only here.
Here a question arises: how can this kind of influx of businessmen be explained and what conditions attract them for the beginning of business activities in FEZ?
Let us enumerate for comparison several basic advantages that characterize all free economic zones of the Emirates and attract producers’ attention:
– 100% possibility for foreign citizens to own the companies created in FEZ;
– It is not necessary to have a local partner or agent;
– The goods produced in FEZ or imported to it are not liable to customs duties;
– A company is released from all kinds of taxes and this term can be prolonged for another 15 years;
– Businessmen and workers of a FEZ do not pay income tax for natural persons;
– There is a possibility of transferring capital and income without any obstacles;
– Simplified rule of obtaining resident visas for companies’ proprietors and their workers.
For its part, the government of the UAE created perfect conditions for business in free economic zones, and, of course, the state should somehow compensate for the “presented” privileges.
So, what is the price of the tax haven? Firstly, incomes are obtained by means of granting of licenses. A company registered in FEZ is obliged to annually pay the sum for buying a license. Four types of licenses exist in each FEZ:
a) Industrial;
b) Service;
c) Trade (commerce)
d) General (commercial activity of any kind).
Of course, the price and cost of licenses differ depending on a zone. For instance, industrial license in the zone of Dubai airport costs 5,000 dirhams*, in the zone of Sharji airport – 3,500 dirhams, in Ras Al Haim zone – 2,500 dirhams, and in Ajman – 7,000 dirhams.
Service license in the above-mentioned zones correspondingly costs 5,000; 3,500; 2,000 and 5,000 dirhams.
As to the trade (commercial) license, it differs from the general one by the fact that, according to the first one, it is allowed to trade in 3 kinds of goods only, and the general license allows the companies to carry out any kind of commerce activities.
That is, the prices of general and commerce licenses differ. For instance, in Jebel Ali FEZ commercial license costs 5,500 dirhams, and the general one – 15,000 dirhams. In Sharji airport zone commercial license costs 3,500 dirhams, and the general one – 13,500 dirhams. In Ajman zone this kind of licenses cost 3,000 and 7,000 dirhams correspondingly.
Thus, I would like to point out that for the companies operating in the zones the sum of license’s price is liable to annual paying, and what is most important, a company can carry out only the kind of activities that are determined by the license. At the same time, a firm operating in the zone has the right to buy several licenses for additional payments, of course.
One more source of income for a FEZ is concluding of lease contracts. It means that a company operating in this zone is obliged to rent either an office, or a storehouse or a plot of land. In this case too, the sum of rent is liable to annual payment, and at the same time concluding of this kind of agreement is one of conditions for obtaining a license. It is natural that the rent sums differ as well, taking into account the zone and the leased area. Let me give some examples: in Dubai airport zone renting of an office costs not less than 70,000 dirhams a year, and of renting a storehouse (353 m2) for the same period makes up 180,000 dirhams. In Ras Al Haim zone renting of office costs 15,000 dirham a year, and in Ajman – 25,000 dirhams.
As to Jabel Ali zone, here the price of rent of a standard office (26,88 m2) makes up 35, 000 dirhams. Besides, renting of space in modern glass buildings is also possible, where one square meter costs 1500 dirhams a year. It is an interesting fact that sometimes firms have to wait in a queue since the number of companies is increasing at a high rate, and administration of FEZs does not manage to meet the demand in time, that is why intensive construction of new offices and storehouses is being implemented in the FEZs.
It must be said that there are special places in storehouses allocated for offices. It depends on a businessman what kind of space to rent. A businessman, if he wishes, has the right to simultaneously rent a storehouse, an office, and a plot of land. On the other hand, it is up to a FEZ’s management to allow a company to rent one of them, and pay the annual sum. Besides, a company operating in a FEZ is prohibited to acquire the proprietary rights for the property located within a FEZ.
As to plots of land, proceeding from climate conditions, this space can be used as a storehouse. In my opinion, with the exception of food products, any goods can be placed on this land without any problems, especially since loss of goods because of stealing or any other crimes is practically ruled out.
The rent of plot of land depends on the size of a space. For instance, if we speak about Jabel Ali zone the sum liable to payment is determined according to the following proportion:
– From 2,500 m2 (minimal) to 5,000 m2: the price of one square meter makes up 20 dirhams a year;
– From 5,000 m2 to 7,500 m2 – 15 dirhams;
– From 7,500 m2 to 10,000 m2 – 12 dirhams;
– From 10,000 m2 and more – 10 dirhams.
As to the legal forms of business organization, the companies and enterprises operating in FEZs are separated into two categories: newly established, that is legal entities established in FEZ, and already existing brunches of companies.
Permitted forms of legal entities in a FEZ are: Free Zone Establishment/Entity – FZE, and Free Zone Company-FZC.
According to the local legislation, an individual owner is considered as the owner of an enterprise in the person of its founder, but several founders can be the owners of a company (a partner or shareholder). Registration of both an enterprise and a company is certified by a special license, given out by the management of a FEZ.
In establishing a legal entity there exists a one-time payment, which can be changed depending on a zone. For instance, in Jabel Ali zone registration of an enterprise costs 15,000 dirhams, of a company – 10,000 dirhams, in Sharja and Fujeira the price of registration of both forms of legal entities is the same and makes up 10.000 and 5,000 dirhams correspondingly. But in Ajman zone both a company and an enterprise are registered free of charge.
The legislation of UAE envisages certain demands concerning replenishment of authorized capitals of enterprises and companies. Here the peculiarities of zones can also be seen. For example, in the zones of Jabel Ali and Dubai airports the authorized capital of an enterprise by the moment of registration should make up not less than one million dirhams, and the authorized capital of companies – not less than half a million of dirhams. In the zones of Sharja airport and Fujeira the authorized capital of both kinds of firms must be up to 150,000 dirhams. In Ras Al Haim zone the minimum authorized capital for both kinds of firms is similar and makes up 100,000 dirhams.
We should take into account the fact that enterprises and companies established in FEZs are all functioning firms and by this they fundamentally differ from off-shore companies that exist, as they say “somewhere out there”. The fact that the above-mentioned legal entities have their rights, are completely newly established in FEZ’s territory, and can be owned by foreign investors can be considered as a positive moment. From the viewpoint of tax responsibility, it is of great importance that FEZ’s firms are in no way dependent on some directing agency.
In spite of it, businessmen from the CIS countries prefer to open branches in FEZ territories. Probably this trend is of some sense from the viewpoint of economy. The point is that during registration of a brunch in none of FEZs registration tax is collected, and moreover, there are no obligations on formation and replenishment of the authorized capital.
A brunch retains the name of the central company, and what is most important, the establishing company is responsible for the results of a brunch’s activities abroad, at the same time a brunch retains obligations on concluding a lease agreement and obtaining a license.
Taking into account the above-stated and with the purpose of more confidentiality, of late mainly Russian businessmen “brought into fashion” to register brunches of off-shore companies in FEZ territory. In this case a company registered under off-shore jurisdiction is considered as the owner of the brunch.
For information: free economic zones represent an enclosed territory the right of entrance to which have legal entities put on the list during registration. It must be said that from the legal point of view such notions as the territory of a FEZ and state territory differ from each other. Thus a legal entity or a brunch established in FEZ carry out their activities only within the zone. Each zone has its own administration, which, to a certain extent is independent from the local authorities. Besides, each zone has modern infrastructure facilities. Moreover, in the territory of the UAE there exist up to 40 first-rate banking organizations. Proceeding from this, if a businessman brings goods to the territory of one of the emirates, this is considered as import and is liable to import tax which makes up 5% from the cost of the goods. That is a short description and the legal status of free economic zones in the UAE. Here I would like to point out that in Dubai emirate there also exist FEZs of specific activities. Some of them are already functioning, and some are at the stage of formation. Their purpose can be easily determined by their names. For instance “DUBAI INTERNET CITY”, “DUBAI MEDIA CITY”, “DUBAI KNOWLEDGE VILLAGE”. Besides them, there is also “DUBAI CUSTOMS AUTOMOBILE ZONE “(DUCAMZ), which is well known in our country since second hand cars with right hand drive are sold there. But the best prospects were predicted for “DUBAI METAL & COMMODITIES CENTER” (DMCC) the purpose of which is trade of gold, diamonds, and precious metals, and creation of a large commodity exchange is planned here.
In conclusion I would like to share my opinion concerning free economic zones. True economic boom and the country’s prosperity can be considered as an indisputable effect of their activities. It turns out that local proprietors get oil and real estate, and others – quiet and wealthy life. Thousands of foreign businessmen, of course, need loaders, drivers, security, operating personnel, etc. This means secured work for economic migrants from the neighboring countries (India, Pakistan, Iran, Iraq, etc.). Besides, there is a great demand for workforce in the construction sector as well, since building of hotels, offices, shopping centers is being implemented at high rates.
Those who visited UAE were probably amazed at a wide choice of goods and comparatively low prices. In my opinion, this is also a merit of free economic zones. If we add to this a large number of tourists and shop-tour lovers, it is quite probable that the opinion will be justified that incomes from tourist business in this country will soon exceed the incomes from oil sales. To get a full picture, it is very important to add that the crime rate in the country is equal to zero.
Has the “tax haven” justified itself or not”? Let the readers make their comments …