Dubai's economy is fairly clearly divided between the 'onshore' sector, dominated by local business interests, with restrictions on foreign ownership, and the 'offshore' sector which consists of the Jebel ali Free Zone, the Dubai Investment Park, Dubai Internet City, where construction commenced in 2000, and the Dubai International Finance Centre (DIFC), due to open in 2003. 

There are no taxes to speak of in Dubai, on- or off-shore, but 100% foreign ownership and customs privileges make the Free Zone and its successors some of the most favourable locations in the Middle East for international operations.

All business in Dubai is low tax, but in Offshore Business Review we examine the Free Zone, the newer DIC and DIFC, shipping and the banking and finance sector, which are the business sectors most interesting to international investors.

The regulatory authority since 1980 has been the UAE Central Bank. Some 47 commercial banks operate, with a total of around 350 branches, of which about 28 are foreign banks with a combined total of more than 200 branches. Federal law restricts foreign banks to no more than eight branches each. There are a number of Islamic banks in Dubai.

Despite regional uncertainties, UAE banks saw increases in bank deposits during 2002. Central Bank figures revealed that deposits with the UAE's 47 commercial banks increased by Dh15.5 billion ($4.2 billion) to Dh198.3 billion ($54 billion) between January to September last year. 'There is a steady increase in domestic liquidity and this points to a return of funds abroad despite regional tension and low interest rates on deposits,' Ziad Dabbas, share dealing director at the National Bank of Abu Dhabi explained. .

Most banks provide trade, project and consumer financing. Their re-export financing accounts for a large portion of trade finance, and this is viewed as having substantial prospects for growth. Short-term loans (3-6 months) by commercial banks are offered at current interest rates. Project loans are given for five years. Consumer financing is also growing rapidly. Furthermore, the local banking system has well established correspondent relationships with international banks.

Federal law requires that every commercial bank must have a paid-up capital of at least Dh 40 million. There are few investment or merchant banks at present.

In the UAE, the marketing of financial products and services is regulated by the UAE Central Bank under Federal Law No. 10 of 1980 (the Central Bank Law and related banking resolutions). Enforcement of Central Bank policy, however, is often undertaken by the local licensing authorities in the various Emirates.

The Central Bank Law establishes five principal categories of institutions in the UAE - commercial banks, investment banks, financial establishments, financial intermediaries, and monetary intermediaries - all of which must be licensed by both the Central Bank and the local licensing authorities. In addition to these five categories, current practice in the individual Emirates permits the licensing of financial or investment consultants. These consultants are not required to obtain a Central Bank license.

The Central Bank Law defines a commercial bank as any establishment which customarily receives funds from the public, grants credit and banking facilities, and conducts other banking operations prescribed for commercial banks either by law or by customary banking practice. In the UAE, customary banking practice includes the marketing and sale of investment products and services, including the sale of securities and various funds.

Central bank regulations announced on April 5, 1993, set the minimum capital to risk-weighted asset ratio at 10 percent, which is 2 percent higher than the minimum level recommended by the Basel Concordat committee on banking supervision.

Central Bank Resolution No. 21 of 1988 regulates the activities of investment banks. Investment banks are defined as merchant or development banks or banks which provide medium or long term financing. The Central Bank Resolution authorizes investment banks in the UAE to offer financial products and services, including the issuance of financial instruments and the management of investment portfolios.

On June 1, 1997, the Emirates Bank Group, which is controlled by the Dubai government, launched UAE's first mutual investment fund with an initial capital of about US$ 8.2 million. The fund offered non-UAE nationals their first opportunity to invest in the UAE's tightly restricted equity market up to a limit of DH 500,000. The huge response by foreign investors prompted the UAE Central bank to raise its original ceiling of 20 percent of foreign investment to 49 percent. When the fund closed for public subscription on June 15, 1997 the investment totaled to US$ 74.5 million.

The UAE Central Bank has not published regulations on investment consultancy. Under the existing policies of the individual Emirates, a company licensed as an investment consultant may advise and assist clients in pursuing various investment strategies but may not directly sell investment products. 

Sales of investment products introduced by consultants are, therefore, typically booked outside the UAE. Consultants are also not expected to receive investment funds from clients, although they may assist in the transfer of those funds. Consultants may not provide credit facilities or open accounts for clients but may assist them in opening accounts with brokers and banks. If properly authorized by the client, the consultant could also manage such accounts.

The UAE Central Bank has recently moved towards a tighter policy regarding investment companies and financial consultants. In the future, such companies will have to obtain a license from the Central Bank and to report under the rules it has established. Investment Companies for the purpose of these regulations have been defined as undertakings which are involved in investment in securities or in the management of trust funds or investment portfolios on behalf of others. 

The minimum paid up capital for investment companies (including branches of foreign companies ) is DH 25 million, increasing to a larger amount depending on the activities of the company. Financial consultants, on the other hand, are deemed to be individual professionals or groups of professionals providing advice to individuals or companies about the value of securities and other financial instruments or giving recommendation about investing. 

For these, licenses can be issued with a minimum paid in capital of DH 1 million.

Dubai could be said to be over-banked, and there is intense competition to offer technologically-advanced services - services on offer include mobile phone banking and Internet banking. With proposed plans to develop the UAE as a regional e-commerce centre and plans for an Internet city, many banks are working on providing high-tech banking products and services.

Partnership
Partnership companies are limited to UAE nationals only. The Dubai government does not presently encourage the establishment of partnerships-en-commandite or share partnership companies.

In March 2001, the UAE government announced plans for a new commercial law, in its final stages of completion at the time, which will allow foreign companies up to a 70 per cent stake in local firms. Details were unclear at the time but it is likely that the majority shareholding for foreign companies will be limited to particular industries and that the future of free zones in the country will be affected by the new law.

A joint venture is a contractual agreement between a foreign party and a local party licensed to engage in the desired activity. The local equity participation in the joint venture must be at least 51%, but the profit and loss distribution can be prescribed. There is no need to license the joint venture or publish the agreement. The foreign partner deals with third parties under the name of the local partner who - unless the agreement is publicised - bears all liability.

In practice, joint ventures are seen as offering a suitable structure for companies working together on specific projects.

The law stipulates that companies engaging in banking, insurance, or financial activities should be run as public shareholding companies. Foreign banks, insurance and financial companies, however, can establish a presence in Dubai by opening a branch or representative office.

Shareholding companies are suitable primarily for large projects or operations, since the minimum capital required is Dh. 10 million (US$ 2.725 million) for a public company, and Dh. 2 million (US$ 0.545 million) for a private shareholding company. The chairman and a majority of directors must be UAE nationals and there is less flexibility of profit distribution than is permissible in the case of limited liability companies.

A limited liability company can be formed by a minimum of two and a maximum of 50 persons whose liability is limited to their shares in the company's capital. Such companies are recognised as offering a suitable structure for organisations interested in developing a long term relationship in the local market.

In Dubai, the minimum capital is currently Dh. 300,000 (US$ 82,000), contributed in cash or in kind. While foreign equity in the company may not exceed 49%, profit and loss distribution can be prescribed. Responsibility for the management of a limited liability company can be vested in the foreign or national partners or a third party.

The following steps are required in establishing a limited liability company in Dubai:

Select a commercial name for the company and have it approved by the Licensing Department of the Economic Department;

Draw up the company's Memorandum of Association and have it notarised by a Notary Public in the Dubai Courts;

Seek approval from the Economic Department and apply for entry in the Commercial Register;

Once approval is granted, the company will be entered in the Commercial Register and have its Memorandum of Association published in the Ministry of Economy and Commerce's Bulletin;

The licence will then be issued by the Economic Department;

The company should then be registered with the Dubai Chamber of Commerce and Industry.

The Commercial Companies Law also covers the formation and regulation of branches and representative offices of foreign companies in the UAE and stipulates that they may be 100% foreign owned, provided a local agent is appointed.

Only UAE nationals or companies 100% owned by UAE nationals may be appointed as local agents (which should not be confused with the term "commercial agent"). Local agents -- also sometimes referred to as sponsors -- are not involved in the operations of the company but assist in obtaining visas, labour cards, etc and are paid a lump sum and/or a percentage of profits or turnover. In general, branches and offices of foreign commercial companies are not licensed to engage in importing activity except for re-export or in the case of products of a highly technical nature.

To establish a branch or representative office in Dubai, a foreign commercial company should proceed as follows:

Apply for a licence from the Ministry of Economy and Commerce, submitting an agency agreement with a UAE national or 100% UAE owned company.

Before issuing the licence, the Ministry will forward the application to the Economic Department to obtain the approval of the Dubai government and will forward the application specifying the activity that the office or branch will be authorised to undertake in the UAE, to the Federal Foreign Companies Committee for approval;

Once this has been done, the Ministry of Economy and Commerce will issue the required Ministerial licence specifying the activity to be practised by the foreign company;

The branch or office should be entered in the Economic Department's Commercial Register, and the required licence will be issued;

The branch or office should also be entered in the Foreign Companies Register of the Ministry of Economy and Commerce;

Finally the branch or office should be registered with the Dubai Chamber of Commerce and Industry

In setting up a professional firm, 100% foreign ownership, sole proprietorships or civil companies are permitted. Such firms may engage in professional or artisan activities but the number of staff members that may be employed is limited. A UAE national must be appointed as local service agent, but he has no direct involvement in the business and is paid a lump sum and/or percentage of profits or turnover. The role of the local service agent is to assist in obtaining licences, visas, labour cards, etc.

Although Dubai is a 'no-tax' jurisdiction, the ownership restrictions on companies in the normal economy mean that only the Jebel Ali Free Zone offers an 'offshore' option to foreign operators. Operations inside the Free Zone can be carried out under various different types of license, but most often a foreign company will use a a 'Free Zone Establishment'.

Companies approved for operation in Jebel Ali Free Zone will be granted one of the following types of licences, renewable annually for as long as the company holds a valid lease from the Free Zone Authority:

Trading licences will be granted to companies holding a valid licence issued by the Dubai Economic Department or an equivalent authority in the UAE, and to companies incorporated outside the UAE. In each case, the permitted activities on the Free Zone licence must conform to those on the existing licence. Trading licences are also issued to Free Zone Establishments (FZE).

Industrial licences are issued to companies incorporated outside the UAE and to Free Zone Establishments.

Service licences are only granted to companies holding a valid UAE licence.

National Industrial licences are issued to industrial companies registered within or outside the UAE, provided they meet the conditions of having at least 51% AGCC (Gulf Cooperation Council) equity and their local production accounting for at least 40% value added. Such companies must obtain the provisional approval of the UAE Ministry of Finance and Industry.

A National Industrial licence grants its holder the same rights as those of national and AGCC companies, and products exported to AGCC states will be exempted from customs duties

Amongst the incentives offered to companies operating within the Jebel Ali Free Zone are:

Corporate Income Tax: No corporate income tax on profits. The exemption is for a period of 15 years with a guarantee of an extension for a further 15 years in the event that corporate income tax is introduced in Dubai. Currently only banks and oil companies are assessed to corporate income tax in Dubai. 

The key difference with companies operating in JAFT is the guarantee of exemption in the event that corporate income tax is imposed by the Government.

Withholding Taxes: No withholding taxes.

Import Duty: Exemption from all import duties on goods imported into the free trade zone.