UAE / Corporate Structuring
Sherif RahmanPartner,Corporate Structuring
Nazanin MaghsoudlouSenior Associate,Corporate Structuring
Shaima MahmoudParalegal,Corporate Structuring
Re-domiciliation – the process of migrating a corporate entity from one jurisdiction to another – is increasingly popular in the United Arab Emirates (“UAE”) and in particular in the emirate of Dubai. It can be very important when complex legal structures are being simplified or optimised - especially with the recent implementation of economic substance regulations in many offshore jurisdictions (further explained below).
As this article explains, inwards re-domiciliation from outside the UAE into certain Free Zones (“FZs”) of the UAE is possible. Migration from one FZ to another FZ in Dubai has been made easier as well.
As for mainland Dubai, it is possible to redomicile or migrate a company established in one of the FZs or outside the UAE to the onshore jurisdiction. However, local regulations do not cover migrating an entity from onshore Dubai or from a Dubai FZ to a jurisdiction outside the UAE.
Re-domiciliation is a legal process that allows a company (the “Migrating Company”) to transfer its domicile/seat of incorporation from one jurisdiction to another while maintaining the same legal entity. This enables the Migrating Company total continuity of its existing entity such as the ability to continue its business operation under the same shareholding and management and to maintain all of its history and track record from the date of its formation.
The maintenance of the legal identity can significantly reduce costs relative to setting up a completely new company in the new jurisdiction and transferring assets to it. For example, contracts in place do not have to be terminated and re-signed: however, consideration would still need to be made as to whether the Migrating Company can continue to carry on its obligations under its existing contracts.
Economic Substance Regulations (“ESR”)One reason we are seeing an uptick in the migration of corporate entities into the UAE is due to the introduction and implementation of the ESR in many offshore jurisdictions. Similarly, in April 2019, the UAE issued the ESR - Cabinet of Ministers Resolution No. (31) of 2019 as amended by Cabinet of Ministers Resolution No. (57) of 2020 (“the Regime”). The main development under the Regime, introduced the concept of businesses having to prove an actual economic presence in the UAE into the country’s legal framework. Under the Regime, a company must, on an annual basis, demonstrate economic presence in the form of analysing and reporting its core income generating activities and headcount amongst other test-criterions. The requirements under the Regime apply to all companies from sectors broadly identified under the Regime, registered in either FZs or mainland, be it branch of a local or foreign company.
Where the Migrating Company is captured under the ESR in the offshore jurisdictions and its board of directors are located in the UAE as well as the core business of the Migrating Company’s affiliated entities is in the UAE, re-domiciliation of the Migrating Company to the UAE can make board meetings to become easier to convene and as such, re-domiciliation to the UAE will be a useful option to optimise/simplify the legal structure of the Migrating Company’s business.
TaxAnother reason contributing to the increase in companies migrating to the UAE is due to the adverse tax implications in jurisdictions of Migrating Companies such as the decrease in profits generated from the company or the impact of the ESR in ‘no or only nominal tax’ jurisdictions. Moreover, the UAE provides Migrating Companies an opportunity to avail the country’s international network of more than 90 double tax treaties. Overall, in practice, a Migrating Company is unlikely to face adverse tax implications in the UAE.
While the UAE Federal Corporate Income Tax is expected to be introduced in 2023 and effective for financial years starting on or after 1 June 2023, the corporate tax rate under UAE law is still competitive compared to tax rates in other jurisdictions. Under the UAE’s new tax regime, all mainland companies will be subjected to corporate tax at the rate of 9% and as for FZs, it remains to be seen whether the Federal Tax Authority (“FTA”) will impose corporate tax requirements on free zones, or whether they can continue to enjoy lengthy tax-free periods (i.e. 50 years) as before. However, according to the information shared by the Ministry of Finance (“MOF”), entities established in FZs will be taxable at the rate of 0% provided that they comply with all regulatory requirements and do not conduct business with UAE mainland.
Further, based on the information provided by the MOF, a FZ entity will not be considered as doing business with the mainland if the income derived from the UAE mainland is limited to ‘passive’ income (e.g. interest, royalties, dividends and capital gains arising from the sale of shares in UAE mainland companies) and therefore such income will be subject to tax at 0%. In addition, if FZ entities receive income from related entities within the UAE mainland the income will be subject to tax at 0%. Any other income derived from the UAE mainland will result in the entire income of the FZ entity to be taxable at the standard rate of 9%.
Migrating entities from one FZ toanother or from a FZ to the mainlandFZ companies are subject to certain limitations in terms of the activities that they can carry out. For example, FZ companies are generally, not permitted to do business directly in the UAE mainland unless they are specifically licensed to do so.
One of the reasons in which a FZ entity would consider migrating into the mainland is for the purposes of expanding its business within the mainland. Traditionally investors used to choose UAE FZs to benefit from rules that permit 100% foreign ownership.
Currently, the new default position under Federal-Decree Law 32/2021 is that all companies incorporated in the UAE mainland may be wholly owned by non-UAE nationals unless a specific restriction is created that partly or entirely prohibits such ownership. Therefore, the possibility of migrating a company from a FZ to the UAE mainland has become a more desirable option for many business owners.
Further FZs may wish to migrate to another FZ for the purpose of operating in a corporate environment that may be specialised and conducive to the Migrating Company’s area of business. In terms of expansion within the country, the Migrating Company will have many FZs - each offering services and facilities that are specialised and tailored to the specific needs of the industry - to choose from dependent on the business activity of the Migrating Company.
For example, Dubai International Financial Centre (DIFC) or Abu Dhabi Global Market (ADGM) are globally recognised as financial hubs; Dubai Development Authority (DDA) focuses on services relevant to the industries of IT, Media, and Technology; the Dubai Multi Commodities Centre (DMCC) focuses on services relevant to industries in oil and gas, precious metals and diamond trading; Jebel Ali Free Zone (JAFZ) focuses on services relevant to trading, manufacturing, and logistics. While at present, only certain FZs offer the option of migration, through the presence of several FZs in the UAE, the country is considered to be one of the most competitive and versatile structuring hubs globally.
Each FZ provides various options in terms of office space, rent, activities, renewal fees etc. This means that, if an investor is interested to do business in a certain FZ, they can consider migrating their existing entity instead of setting up a new entity.
In sum, the ease of migrating companies into the UAE has significantly improved over the years due to an increase in the demand from companies seeking to change their jurisdiction and the UAE FZs have proven to become attractive jurisdictions for in-country re-domiciliation.
There are a number of jurisdictions in the UAE that have specific re-domiciliation provisions within their respective companies’ legislation.
Within the UAE, and particularly in the emirates of Dubai and Abu Dhabi, there are a number of FZs which allow inwards re-domiciliation of an entity, whether from overseas or elsewhere in the UAE. Examples include:
Jebel Ali Free Zone;
Dubai Development Authority;
Dubai International Financial Centre;
Dubai World Trade Centre (rules have been issued but not fully implemented yet);
Dubai mainland/onshore jurisdiction (inward migration only);
Dubai Multi Commodities Centre; and
Abu Dhabi Global Market.
A Migrating Company moving to any of the above UAE FZs would be required, as part of the re-domiciliation process, to comply with the companies’ regulations applicable in the new jurisdiction, such as share capital requirements, management structure, office space, memorandum, and articles of association and so on.
Generally speaking, the re-domiciliation process is similar to that of the incorporation in that it entails submitting an application together with a number of required documents. It also entails obtaining the initial government approval of both the original and new jurisdiction.
When a Migrating Company decides to initiate re-domiciliation, a number of factors must be taken into account.
These include, but not limited to, issuance of the new constitutional documents; opening of a new bank account in the new jurisdiction (where necessary for its local operation); termination of existing leases and obtaining a new lease or flexi desk arrangement within the new jurisdiction; updating of the insurance policies as well as loans and other financial facilities; updating the corporate documents of any subsidiary, review of the existing agreements (in particular the ones which are material to its business) to ensure that there are no contractual restrictions within those agreements that prevent the re-domiciliation of the Migrating Company.
In additional, the Migrating Company should also check if there are any Intellectual Property (“IP”) items registered in its name, in which case an amendment to its IP registration certificates will be required post re-domiciliation. Further, in terms of any ongoing litigation, a number of steps may be required post re-domiciliation including the issuance of a specific notification to the Court and the parties in dispute. The list is not exhaustive and will be dependent on the specific Migrating Company’s business and activities.
In summary, the UAE provides various options for companies incorporated in a foreign jurisdiction or any of its FZs that wish to redomicile. There are three main advantages. First, re-domiciliation may make it a lot easier to comply with the ESR that has recently been introduced in offshore jurisdictions such as British Virgin Islands and Cayman Islands as well as the UAE. Second, re-domiciliation may make it possible or easier to do business in mainland UAE, with the commercial opportunities that this implies. Third, re-domiciliation may make it cheaper and easier for an entity that is based outside the UAE to take advantage of the relatively low tax rates in the country.
For further information, please contact Sherif Rahman or Nazanin Maghsoudlou
Published in November 2022
