UAE introduces 100% foreign ownership and Value Added Tax (VAT)

The new law is aimed at boosting the UAE’s attractiveness as a target for FDI.

2018 opened with the introduction of a 5% Value Added Tax (VAT) on goods and services in the United Arab Emirates (UAE) and Saudi Arabia – the first two states to implement the new tax in the sixmember Gulf Co-operation Council (GCC).

Who will pay the VAT?

Mandatory registration is now required for all companies, businesses or entities with an annual taxable supply of goods and services of over AED 375,000 (US$100,000). A business house pays the government, the tax that it collects from its customers. At the same time, it receives a refund from the government on tax that it has paid to its suppliers.

As per the VAT rules and regulations, some basic services (and goods) like food, public transport, and some healthcare services are exempt from the VAT, while some other services will be taxed at zero percent.

Why VAT in UAE ?

VAT has been implemented in UAE with the aim to reduce the country's dependency on oil resources for revenue. It will create a new and stable source of income for the government, which will be utilized to provide better and more advanced public services. So, the ultimate benefit of VAT is to the general public.

On which businesses does VAT apply?

VAT applies equally on tax-registered businesses managed on the UAE mainland and in the free zones. However, if the UAE Cabinet defines a certain free zone as a ‘designated zone’, it must be treated as outside the UAE for tax purposes. The transfer of goods between designated zones are tax-free.

Implication of VAT on businesses

Businesses will be responsible for carefully documenting their business income, costs and associated VAT charges.

Registered businesses and traders will charge VAT to all of their customers at the prevailing rate and incur VAT on goods/services that they buy from suppliers. The difference between these sums is reclaimed or paid to the government.

VAT return and payment process

One IBC’s team of qualified chartered accountants in the UAE has been focused on clarifying our clients’ VAT position and then implementing and executing procedures to ensure their compliance. One IBC offers the full range of VAT-related services from advisory, registration and implementation through to book-keeping, returns and VAT recovery. We understand that every client’s situation is different and we can provide all these services on the basis of either a comprehensive VAT package or a specific service unit.

In October 2018, a law allowing 100% foreign ownership of companies in certain sectors of the economy finally came into force in the UAE after many years of discussion. Previously, Article 10 of the UAE Commercial Companies Law required that 51% or more of the shares in a company established in the UAE had to be owned by a UAE national shareholder. The new law is aimed at boosting the UAE’s attractiveness as a target for FDI and increase investment flows in priority sectors. At the same time, the Abu Dhabi Executive Council has announced that all new economic licences issued in Abu Dhabi will be exempt from local fees for two years from the date of initial issuance. The long-awaited change applies only to limited sectors of the economy that do not appear on a ‘negative list’ established by the UAE Cabinet and does not apply to free zones where 100% foreign ownership of companies is already permitted. Many investors are concerned by the foreign ownership restrictions and are uncomfortable about relinquishing control of their company to a local partner.

For those sectors that appear on the ‘negative list’, One IBC’s successful ‘Corporate Nominee Shareholder Model’ enables clients to maintain effective 100% ownership control of their business and have the ability to trade with all areas in the UAE and GCC. One IBC operates and controls a portfolio of 100% UAE-owned Limited Liability Companies (LLCs) that can act as the 51% local partner. Through a suite of risk mitigation documents, all management control, financial control and the day-to-day running of the business is passed back to the 49% shareholder in return for a ‘fixed annual sponsorship fee’.

This corporate shareholder model enables the investor to maintain 100% beneficial ownership and control of their business, whilst remaining in full compliance with Bahrain’s companies law. One IBC offers specialist expertise in the ongoing management and administration of its clients’ companies, from providing full back-office solutions to assistance with tax and regulatory compliance. Setting up a company in the UAE or Bahrain will also create the need for a corporate bank account, personal bank account and residency permits. We can assist our clients with all these matters.

The previous Companies Law recognised three main types of company – companies limited by shares, limited liability companies (LLCs) and ‘recognised companies’. Under DIFC Law No. 5 of 2018, limited liability companies (LLCs) have been abolished. Existing LLCs have been automatically converted into private companies, while entities incorporated as companies limited by shares have automatically been converted into either private or public companies. ‘Recognised companies’ (branches of foreign companies) continue to exist. Generally, private companies are subject to fewer regulatory requirements than public companies. All companies should have received a notification of their new status following conversion.

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