A holding company is a legal entity that owns the assets or shares of other companies without engaging in operational activities itself. It serves to manage its subsidiaries and shield its shareholders from liabilities related to the subsidiaries.
How holding companies work in UAE
In the UAE, holding companies operate within the country’s business regulations. They can own shares of other companies but are not permitted to conduct trading, manufacturing, or direct customer service activities.
The process of establishing a holding company in the UAE is straightforward, with no specific requirement for paid-up capital. You can start with a minimum capital as low as $1.
Holding companies in the UAE are allowed to own and oversee shares and assets of various businesses across different sectors. However, they cannot directly engage in business activities except for managerial control over their subsidiaries.
Types of Holding Companies in UAE
There are two primary types of holding companies in the UAE:
1. Mainland Holding Company: This type of holding company operates within the UAE’s mainland and must be registered as a commercial business under the Ministry of Economy (MoE). It can conduct commercial and administrative activities through its subsidiaries but cannot engage in direct trading.
2. Free Zone Holding Company: These are established in one of the UAE’s economic free zones, such as Dubai International Financial Centre (DIFC), Jebel Ali Free Zone Authority (Jafza), or Abu Dhabi Global Market (ADGM).
Free zones offer advantages like tax exemptions, currency flexibility, and profit repatriation benefits to attract foreign investment. The UAE government has also announced that the free zone businesses will continue to enjoy zero corporate taxation.
Overall, holding companies in the UAE play a crucial role in consolidating corporate investments and providing a structured framework for managing subsidiaries while enjoying various ownership benefits and incentives provided by the UAE government.
The DED is the responsible government body for issuing all licenses for corporate entities or individuals who desire to carry out business in the mainland of Dubai, the territory in Dubai that falls outside the Dubai free zones.
How to Open a Holding Company in the UAE
Step 1: Choose Business Structure and Prepare Documents Decide between a Free Zone or Mainland setup for your UAE-based holding company. Mainland companies often opt for LLCs while Free Zone entities may choose FZEs or FZCs. Gather necessary documents such as business registration forms, owner/partner IDs, valid Dubai residence permit, NOC
for non-GCC nationals, and parent company documents if establishing a branch. Evaluate the advantages of each structure before proceeding.
Step 2: Open a Corporate Bank Account Select a suitable bank for your holding company’s corporate account based on your business requirements. Fulfil the bank’s requirements, which typically include presenting your company’s license, shareholder/director IDs, and possibly a business plan. An in-person meeting may be necessary. This account will handle financial transactions and operational expenses.
Step 3: Choose a Distinct Legal Name Select a unique commercial name for your holding company as per UAE’s business incorporation regulations. Ensure the name is different from your subsidiaries’ names to maintain separation between the parent company and its subsidiaries. Verify name availability on the DED’s Invest in Dubai website.
Step 4: Ensure Regulatory Compliance Complete registration with UAE authorities to meet local regulations and obtain necessary approvals. Establish internal policies for subsidiary management, emphasizing compliance and risk management for financial integrity and legal compliance.
Step 5: Apply for Business License Determine the appropriate commercial license type based on your business activities and location. Mainland companies typically need a Commercial or Professional License, while Free Zone companies must follow their Free Zone’s licensing requirements. Seek guidance from DED or the Free Zone authority regarding licensing based on your business structure and activities.
For Mainland setups, start by obtaining initial approval from DED or ADDED (in Abu Dhabi). Secure a tenancy agreement for office space, then submit required documents for the full license.
For Free Zone setups, obtain approval from the chosen Free Zone authority before applying for the license, following their specific process.
Costs of Establishing a Holding Company in UAE
Some of the costs associated with your holding company formation in UAE include:
· Initial approval: AED 120
· Trade name registration: AED 600
· Licence application: AED 600
The expenses associated with establishing a holding company in the UAE can vary significantly based on factors such as the chosen location (Free Zone or Mainland), type of license, and additional services required. Free Zone licensing fees typically start at around AED 15,000, but the total expenditure, including rental, administrative, and consultancy fees, can amount to AED 20,000 or more. For accurate cost estimates, it’s advisable to directly contact the relevant authorities or Free Zone administrations.
Business Centre Fees, which begin at AED 25,000, may apply if you opt for facilities within a business centre. This option is suitable for those seeking ready-to-use office space or
services. However, these fees may not be applicable if you choose to operate independently or virtually. For a thorough assessment of costs, it’s recommended to consult with the specific Free Zone or regulatory authority.
Here are the reasons justifying the choice of a Free Zone for your business:
1. Full Ownership: Foreign investors can own their companies entirely (100%) in free zones.
2. Complete Profit Repatriation: Companies operating in free zones can repatriate all their profits back to their home country, including 100% of their capital.
3. No Currency Restrictions: Free zones in Dubai offer freedom from government-imposed currency restrictions, making financial transactions more accessible and convenient.
4. No Logistics Challenges: UAE free zones provide ample warehouses and office space, making them ideal for SMEs and startups. Setting up a business in a free zone is a straightforward and quick process compared to other countries, with efficient immigration services saving time.
5. Strategic Location: Dubai boasts advanced financial services, world-class telecommunications, modern industrial infrastructure, efficient e-governance, and a diverse service industry. The strategic location of free zones contributes to a cost-effective lifestyle.
6. Global Connectivity: Dubai’s multicultural environment provides opportunities to network with a global business community.
Opening a branch with the DED through a free zone entity has specific legal requirements and restrictions in Dubai:
1. Free zones in Dubai generally don’t allow companies registered within them to conduct business outside the free zone in Dubai’s mainland. Any such company must obtain the appropriate license from the DED.
2. Law No. 13 of 2011 designates the DED as the sole authority for issuing licenses outside free zones in Dubai. It prohibits conducting economic activities in Dubai’s mainland without a license from the DED. Violators can face fines of up to AED 100,000.
3. Free zone entities seeking to operate in Dubai’s mainland can do so through legal forms like a civil work company, limited liability company, or branch.
· A civil work company is suitable for professional activities and can be fully owned by non-UAE individuals or foreign corporate bodies, provided their activities align
with those of the civil work company. A UAE local service agent must be appointed in such cases.
· A limited liability company must have at least 51% ownership by a UAE national or a company fully owned by UAE nationals.
· A branch of a free zone entity is wholly owned by the parent entity and bears the same trade name. A local service agent is required, except when the free zone entity is owned 51% or more by UAE nationals, in which case the branch is exempted from appointing a local service agent.
4. The local service agent for a branch doesn’t bear civil or financial responsibilities related to the branch’s business. Their role is to ensure the branch can operate in Dubai, without having any legal interest in its management, business, profits, or assets.
A branch of a free zone entity in Dubai has limitations on the activities it can conduct, even though Law No. 13 of 2011 doesn’t explicitly state these activities. The branch must register with both the Ministry of Economy and the Department of Economic Development (DED), with the Ministry of Economy imposing certain restrictions on permissible activities. For instance, the Ministry typically prohibits branches from engaging in trading, commercial agencies, labor supply services, or restaurant activities.
To register a branch office of a free zone company, both the DED and the Ministry of Economy are involved. While the DED’s registration requirements are relatively straightforward, the Ministry of Economy has additional criteria, including:
· Providing an initial approval certificate and trade name certificate from the DED.
· Submitting copies of the corporate documents of the free zone entity, including a notarized resolution for opening the branch and a power of attorney for the branch’s general manager.
· Presenting copies of the general manager’s passport and the local service agent’s passport or license (if the local service agent is a corporate entity).
· Notarizing the local service agent agreement at the notary public.
· Paying AED 15,000 as Ministry of Economy fees.
· Providing a bank guarantee of AED 50,000 in favor of the Ministry of Economy.
Starting from June 2023, Free Zone Businesses and Qualifying Free Zone Persons may be subject to a corporate tax rate of either 0% or 9%, depending on their Qualifying income. On the other hand, Mainland Businesses will face a standard tax rate of 9% on taxable income exceeding AED 375,000. This new tax policy, introduced by the Federal Tax Authority (FTA) and the Ministry of Finance, will be implemented in the UAE starting from June 2023.
The ownership of shares by a UAE free zone holding company (UAE Holdco) in a company established in another jurisdiction can offer tax advantages, contingent upon the provisions outlined in the relevant double taxation treaty. This is because, in such a scenario where shares are held, there are tax benefits (e.g., a 0% tax rate on dividends, interest payments, and capital gains received by the UAE Holdco). For these tax advantages to apply, the UAE Holdco must be a UAE free zone company and specifically meet the criteria set forth in the UAE Corporate Tax Law (Federal Decree Number 27 of 2022), qualifying as a Qualifying Free Zone Person with Qualifying Income.
Article 3 of the Corporate Tax Law (CT Law) outlines the tax rates applicable to Qualifying Free Zone Persons (QFZPs):
a.) 0% tax rate on Qualifying Income.
b.) 9% tax rate on Taxable Income that does not qualify as Qualifying Income under Article 18 of the CT Law and any Cabinet decisions related to this matter.
For a UAE Holding Company (UAE Holdco) to benefit from the 0% tax rate, it must first qualify as a Qualifying Free Zone Person (QFZP) and then generate Qualifying Income. Let’s delve into each requirement below.
Qualifying Free Zone Person:
Article 18 of the CT Law specifies the criteria for a Qualifying Free Zone Person, which includes:
· Maintaining substantial presence in the UAE.
· Generating Qualifying Income as per Cabinet decisions.
· Not opting to be taxed under Article 19 of the CT Law.
· Complying with relevant provisions regarding transfer pricing and related-party transactions.
· Meeting any other conditions set by the Minister.
Therefore, UAE Holdco must meet the definition of a Free Zone Person (a legal entity incorporated, established, or registered in a UAE Free Zone) and derive Qualifying Income to qualify as a QFZP and benefit from the 0% tax rate.
Qualifying Income
As established earlier, where a QFZP satisfies all stated conditions, it can benefit from 0% CT on its Qualifying Income only.
As per article 3 of Cabinet Decision No. 100 of 2023, Qualifying Income (income subject to 0% CT rate) includes the following categories:
a) All income derived from transactions with a Free Zone Persons, except for income derived from “Excluded Activities”.
b) Income derived from transactions with Non-Free Zone Persons, only in respect of Qualifying Activities that are not Excluded Activities.
c)Income derived from the ownership or exploitation of Qualifying intellectual property.
d)Any other income provided that the Qualifying Free Zone Person satisfies the de minimis requirements.
Please note income from other Free Zone Persons will only be considered as derived (i.e., will be regarded as qualifying income subject to 0% CT rate) if that Free Zone Person is the Beneficial Recipient of the corresponding Services or Goods.
The term “Beneficial Recipient” means a Person who has the right to use and enjoy the service or the Good and does not have a contractual or legal obligation to pass on such service or Good to another person.
Earning non-qualifying income (i.e., income from conducting non-qualifying or excluded activities) disqualifies a QFZP from this Free Zone Corporate Tax regime (i.e., being subject to 0% CT rate). However, there are certain de minimis requirements that prevent a QFZP from losing the benefit of the Free Zone Corporate Tax regime as a result of earning a small or incidental amount of non-Qualifying Income.
Under the de minimis requirements, a QFZP can continue to benefit from the Free Zone Corporate Tax regime where its non-qualifying income in a Tax Period do not exceed the lower or 5% of total adjusted revenues or AED 5 million. Where the de minimis requirements are met, any non-qualifying income earned in that Tax Period will also benefit from the 0% Corporate Tax rate.
However, if any non-qualifying income is derived which exceeds the de minimis threshold (lower of 5% of total adjusted revenue or AED 5 million), the entity will cease to be a QFZP for the current period and subsequent four tax periods.
The advantages of having a Freezone bank account for your business are numerous:
Multiple Accounts and Currency Options:
Freezone banks in the UAE offer the flexibility of having multiple business accounts under one owner’s name. Additionally, these accounts allow transactions in various currencies without any currency restrictions.
Confidentiality and Privacy Protection:
Freezone business accounts provide assurance regarding the confidentiality of business details, account information, and personal data, ensuring privacy and security.
Safe Funds Transfer Locally and Internationally:
Freezone bank accounts enable safe and secure transfer of funds within the UAE and internationally, reducing the risk of misplacing funds during transactions.
Access to International Banking Services and ATMs:
By having a Freezone business account, you gain access to exclusive services offered by international banks, including the use of their ATMs for convenient transactions.
Loan Accessibility:
As a Freezone business account holder, you can easily apply for various types of loans, such as personal loans or business loans, to obtain additional funds without complications.
Unlimited Credit Card Facilities:
Freezone business account holders can benefit from a range of advantages associated with the credit card provided with the account. There are no restrictions on purchasing options, offering flexibility and convenience for account holders.
The procedure to open a bank account for a Free Zone company in the UAE:
Prerequisites: Before starting the process, make sure you have the following:
1. Legal Documentation: This includes your Free Zone company’s incorporation documents, licenses, and permits.
2. Personal Identification: You’ll need passport copies, visa documents, and proof of residence, which may be required by the bank.
3. Business Plan: Some banks may ask for a detailed business plan outlining your company’s objectives and operational structure.
Steps to Follow:
1. Choose the Right Bank: Conduct research to select a bank that meets your business needs, considering factors such as service quality, fees, and accessibility.
2. Submit Application: Fill out the bank’s corporate account application form and provide all necessary documents.
3. Bank Review and Approval: The bank will review your application and documentation, a process that typically takes a few weeks.
4. Account Activation: Once your application is approved, visit the bank to complete the final formalities and activate your account.
Required Documents for Opening a Free Zone Business Bank Account: Basic Documents:
· Trade License
· Share certificate
· Memorandum Of Association/Article Of Association
· Passport, Visa & Emirates ID of all partners (if applicable)
· Office Tenancy (Physical office)
Supporting Documents:
· Six months bank statement (Personal/Company from UAE/Home country)
· Utility Bills as address proof
· Business Model/Company Profile/Website
· Customer Profile (CV)
· Name of existing or prospective clients (suppliers/buyers)
· Invoices/Bill of Lading/Shipping documents/Agreements/Custom Clearance, etc.
· Proof of Physical presence
Note: It’s mandatory to be physically present in the UAE for opening a Free Zone bank account due to Central Bank regulations. Any changes or amendments to the company’s original documents must be notarized and attested by the respective Free Zone authority. Additional documents may be required based on the bank’s specific requirements.