The UAE should establish a “Tax Zone”

The United Arab Emirates has been a pioneer in the Middle East with the launch of Free Zones. Most businesspeople and executive are familiar with these zones. Simply, in the Gulf region where you cannot open a company “onshore” without a local partner or national guarantor an “offshore” company gives you the right to own 100% of the shares. So, a Free Zone is an area where you can establish a company and usually with 0% taxes on profits or no taxes.

In the UAE, like the rest of the region, the zero taxation has made the fees for company set up and maintenance expensive compared to the rest of the world. So, a company that would cost you 300 USD to set up in Europe or the US will cost you more than 3000 USD. At the same time rental costs will be higher and often an obligation linked to the license. In Europe, for example you can set up a company and only have a POBOX whereas for a Free Zone company in the Middle East there is an obligation to rent an office. This has made the company formation quite expensive for startups and entrepreneurs.

As the UAE has always been a pioneer in the Middle East, I am wondering if it is not time to set up a “Tax Zone”. A zone where you could set up a company with little fees, low rent costs but would have to pay a 10% tax on your revenues with the obligation to present audited financial report to the fiscal authorities. This zone could also have -if possible- better bilateral tax agreement with other jurisdictions, especially when it comes to withholding taxes that are at the maximum level for the GCC.

I am sure this “Tax Zone” could be a starting point for the transformation the GCC needs to go through from a “rentier state” to an active diversified economy. It would clearly diversify income sources for the government.

Shareholders from any free zones would have the possibility to migrate their companies to this zone and choose to pay taxes regardless of their activity: trade, services or financially regulated. It is in my view an important step GCC governments need to start implementing. It is nevertheless impossible to do with the high fees’ companies pay. It is an either, or situation.

It would also be positive to have an oversight of the fiscal authorities on businesses’ financials. This would reduce money laundering and fraud risks. It would also make it easier and more attractive for cross-border investments between various jurisdictions.

Time for a “TAX ZONE”.