UAE reboot raises concerns over ownership and tax
At the iftar gathering held by the Dubai Media Office this week, all the conversation was about the big changes to the UAE’s visa and corporate structure announced a few days before, which were heralded as a “reboot” for the country’s economy and business environment.
It was on the mind of Sheikh Mohammed bin Rashid Al-Maktoum, prime minister of the UAE and ruler of Dubai, who has taken the lead in promoting the new measures. “Do you think it will work?” he asked when an iftar guest congratulated him on the initiatives.
It would have been a brave man or woman who answered “no,” but away from the formalities, there was much talk among expatriates and Emiratis about the pros and cons of the proposals, and the challenges they present for business in the UAE.
In a nutshell, the Emiratis were worried about ownership and the expats were worried about tax.
The two key elements of the proposals are the granting of long-term residence visas to students, big investors, and in-demand workers in science, medicine and engineering, and allowing foreign businesses to own 100 percent of a company set up outside a free zone, without the 51 percent Emirati shareholder they need now.
Overwhelmingly, these measures were warmly welcomed. Long-term visas would give the holder a sense of belonging and commitment to the UAE; exceptional students would chose to stay in the country, adding to its bank of skills; sophisticated professionals and their families would boost economic activity as well as contribute to the rich variety of life.
The move to 100 percent onshore ownership would attract even more global corporate leaders to the UAE, and help remove the rentier mentality that is a left-over from the days of reliance on colonial powers.
It would force Emirati business people to compete on more equal terms with the best in the world, and that would be a good thing if it toughened up and modernized local companies.
"The devil is in the detail, and the detailed provisions on visas and corporate ownership are to come."
But it was when the conversations steered to the nitty-gritty that some reservations crept in. The devil is in the detail, and the detailed provisions on visas and corporate ownership are to come. Some of the guests foresaw challenges before the measures come into effect by the end of the year.
On ownership, there are several potential pitfalls. Many Emirati partners have got used to being a 51 percent shareholder, drawing a dividend without much executive responsibility in the running of the company.
They may not wish to sacrifice that position without adequate recompense, so many foreign companies looking to reboot as 100 percent onshore entities can expect a tricky period of commercial negotiation ahead of any transfer of share ownership.
Some foreign companies have chosen in the past to operate branches of their parent companies, rather than go for limited liability set-up, in part to get around the current restrictions. Will branches be included in the new proposals?
Another big impact can be expected on the UAE’s free zone infrastructure, which already allow 100 percent foreign ownership and which are reckoned by many to be the force behind the UAE’s economic progress over the past two decades.
The Dubai International Financial Center, Jebel Ali Free Zone and Dubai Multi-Commodities Center are among the most successful trading centers in the Middle East, but their attraction could be dimmed if foreign companies could set up just anywhere.
Above the whole iftar evening loomed the big question: Tax. The UAE has already said it is
considering some form of corporation tax, and this could be the moment those deliberations are taken further. If foreigners do not have to pay a 51 percent dividend to their Emirati sponsor, perhaps they would be happy to pay, say, 20 percent to the government.
UAE policymakers have insisted there are no plans for personal income tax, but a person holding a 10-year visa would have less cause to complain if a portion of their income went to provide the services on which they depended daily.
The consultations that led to the recent changes were held under the auspices of international consultants McKinsey & Co, a firm that tends to think things through before making a policy recommendation. It would be surprising if there was not, somewhere in the McKinsey vaults, a detailed study on a proposed national tax structure for the UAE.
Other Gulf countries in the midst of transformation, notably Saudi Arabia with the Vision 2030 strategy, will be watching the UAE moves closely. If it works in the Emirates, others can be expected to follow that lead and accelerate their own plans.
- Frank Kane is an award-winning business journalist based in Dubai. Twitter: @frankkanedubai