Many investors, big corporations, and small startups are making their way into the United Arab Emirates through offshore companies.
But is forming an offshore company in the UAE a smart move for your business?
In this article, we will explore everything you need to know about forming offshore companies in UAE. We’ll highlight the pros and challenges of offshore company formation in the Emirates. We’ll also discuss the key aspects of a UAE offshore company and the basic requirements to form one.
This article contains:
(Click on the links below to go to a specific section)
- What Is An Offshore Company?
- 3 Key Aspects Of An Offshore Company In The UAE
- 5 Pros Of Setting Up A UAE Offshore Company
- 5 Challenges Of Operating As An Offshore Company In The UAE
- 3 Key Jurisdictions Offering Offshore Companies In The UAE
- 3 Requirements For Offshore Company Formation In The UAE
What is an offshore company?
An offshore company is a legal entity that operates outside the location of its ultimate ownership.
You shift your business operations to another country to enjoy the tax advantages and relaxed regulations that the country offers.
Generally, these offshore companies are formed in countries that levy very low or zero taxes on the capital gains of a company. The UAE is one such ‘tax haven’ that has steadily become a preferred offshoring destination for several businesses.
Starting an offshore company in the UAE is an ideal and cost-effective way to expand your international business without overwhelming administrative obligations.
3 key aspects of an offshore company in the UAE
UAE offshore companies are great for capitalizing on international markets.
But first, you must carefully learn about the different characteristics of an offshore business entity. Here are three key aspects of offshore companies in the UAE you should keep in mind:
1. Access to a corporate bank account
You can open both corporate and private bank accounts for offshore companies in UAE. Creating an offshore bank account to secure a company’s business activity or manage personal assets is very easy in the UAE.
This will play a crucial role in your business growth, especially if you’re looking to carry out international trading (outside of the UAE) through your offshore company.
2. Must follow the know your customer (KYC) process
Offshore companies in the UAE follow the Know Your Customer (KYC) process.
The KYC process will require you to submit documents such as a passport copy, proof of address, bank reference letter, and bio-data of your investors. You are to submit these documents to the authorities of the offshore jurisdiction you choose.
This helps refer to bank regulations of investors, track unethical practices such as identity theft, financial frauds, and money laundering.
3. Provides jurisdictional benefits
There are only three jurisdictions in the UAE that can help with offshore company incorporation in a particular Emirate of the UAE.
Each offshore jurisdiction provides different advantages suitable for different types of businesses. And hence it’s crucial to analyze all offshore jurisdictions before choosing one for your business.
Skip ahead to learn more about these jurisdictions in the UAE.
5 pros of setting up an offshore company in the UAE
Here are some advantages of forming an offshore company in the UAE:
1. International market expansion
Establishing an offshore company in the UAE could give you a cost-effective gateway to expand your international business.
You could have a Dubai offshore company on paper without actually having an expensive physical infrastructure in Dubai. This could open doors for new international deals and collaborations.
Additionally, you can use a single UAE bank account to carry out transactions in different currencies. This will save you transactional costs and help you navigate foreign exchange rates.
2. Business anonymity
Offshore companies in UAE can offer you high confidentiality with limited liability.
You wouldn’t have to publish your company’s financial information or its ownership details in any public domain.
Such sensitive information is never revealed to any third party unless the offshore company in question is suspected of criminal activities.
3. Multiple tax benefits
Tax avoidance and tax evasion are two very different things. And setting up offshore companies in the UAE are legitimate ways to avoid (not evade) taxes.
With an offshore company setup in the UAE, you would get an exemption from paying several different taxes such as corporate tax, income tax, sales tax, inheritance tax, property tax, and personal tax.
Additionally, you could also avoid the dreaded “double taxation” practice. When you conduct international business out of the UAE, you will not be paying the same tax twice to another country.
As of 2021, UAE has signed double taxation treaties with 117 countries. And because UAE has minimal taxes, UAE-based offshore companies will save a great deal of money.
4. Simplified procedures
The conditions for a business setup in the UAE are among the most favorable in the world.
Apart from being exempt from taxes, an offshore company is also exempt from annual auditing. This means that you don’t have to file audited financial statements in almost all Emirates of the UAE.
5. Have access to better global funding
The UAE offshore scene is well-positioned globally. Its formidable reputation would have a positive impact on how any foreign investor will look at your business.
Additionally, the current economic atmosphere in UAE is charged and will help your business thrive. The country’s economy is rebounding from the decline it faced during the pandemic. It is expected to grow by a steady 2.5% in 2021.
5 challenges of operating as an offshore company in the UAE
Offshore companies in UAE can act as double-edged swords. While they have many advantages, they come with a fair set of challenges.
Let’s take a look at some of them:
1. No access to a business license
Offshore companies in UAE are also referred to as “paper” companies. An offshore entity is a wholly foreign-owned limited liability company.
However, unlike an onshore company, it does not get a business or a trade license to carry out any business activity within the UAE.
Not having a business license has its consequences in the UAE.
Here’s a look at some of them:
- Offshore companies cannot carry out any commercial and profitable activities within UAE. This is why they are often used as holding companies.
- Offshore companies in UAE cannot conduct business with any person residing in UAE. This implies that they cannot hire staff within UAE.
Note: An offshore company must not be confused with a free zone company. The latter gets a commercial license to conduct business in some of the UAE free trade zone areas.
2. Limited options to buy real estate
It’s a lucrative business to own real estate in the Middle East. On average, the gross rental return is hovering over 7%.
Offshore companies are allowed to buy office space and other real estate assets in the name of their companies. However, this is restricted to only two jurisdictions, RAK International Corporate Centre and Jebel Ali Free Zone, in all UAE.
We’ll talk about this at length in the next section.
3. Limited use for business outside of UAE
For the businesses they carry out outside of the UAE, offshore companies can only engage in a few commercial activities. Some businesses are allowed only for an onshore company.
Here’s a breakdown of this:
A. Businesses that an offshore company can engage in
- International Trade
- Property Holding
- Intellectual Property (“IP”) Holding
- Shipping Business
- Online Advertising Business
- General Trading
- Distribution And Service Center Business
B. Businesses that an offshore company cannot engage in
- Insurance Business
- Media Business
- Aviation Business
- Conducting Business With Companies In The UAE
4. Relatively expensive when compared to other tax havens
With multiple global locations catering to the offshoring market, the prices have become very competitive.
Offshore company formation in locations like the U.K. can cost as low as $500.
An offshore company setup in the UAE would be relatively more expensive, owing to all its advantages. It could cost you well over $1000 to set up your offshore company in UAE.
3 key jurisdictions offering offshore companies in the UAE
The success of your offshore entity is purely based on the jurisdiction you choose to form it in.
But what’s a jurisdiction?
A jurisdiction is a state or an area where a particular court and system of law have authority.
In the UAE, the federation consists of seven different Emirates, and each Emirate has a judiciary of its own. Of these jurisdictions, only three have the authority to offshore companies in the UAE.
Here’s a closer look at them:
A. RAK International Corporate Centre (RAK ICC)
Ras Al Khaimah (RAK) is approximately an hour’s drive from Dubai and is one of the
fastest-growing Emirates in UAE.
In 2006, the Ras al Khaimah government launched the RAK ICC, a corporate registry for offshoring companies. This allowed the formation of International Business Companies (IBC) in the UAE.
Here’s why it is regarded as one of the best in the UAE:
- A RAK offshore company does not require any local shareholding.
- While there is a general prohibition on conducting business within UAE, RAK offshore companies can buy shares of local UAE companies.
- A RAK offshore company can hold a multi-currency offshore bank account in the UAE to perform routine international transactions.
- A RAK offshore company formation doesn’t require you to file your annual audit report.
- A registered agent would be a UAE national who can help you with your RAK offshore company registration. This means you don’t have to be physically present in the UAE for the company registration.
- RAK offshore companies are incorporated within a week of applying.
- RAK offshore companies are relatively more cost-effective.
- You will require a minimum of one director and one shareholder for your RAK offshore company incorporation.
- After a policy update in 2019, RAK Offshore companies can now buy real estate in UAE, even without a business license.
B. Jebel Ali Free Zone (JAFZA)
Jebel Ali is a major trading hub in Dubai and is an hour’s drive from Abu Dhabi.
The Jebel Ali Free Zone (JAFZA) was the first such free zone established in the UAE.
A JAFZA offshore company or a Jebel Ali Offshore Company has almost the same features as a RAK offshore company.
But some differences include:
- A JAFZA offshore company formation can help you establish your business in the main business hub of the UAE.
- A JAFZA offshore company incorporation is relatively more expensive.
- A shareholder would have to visit the UAE to complete the offshore company incorporation process.
- You would need to file an annual audit report to the JAFZA authorities.
- A JAFZA offshore company would need a minimum of one shareholder, one secretary, and two directors for incorporation.
C. Ajman Free Zone
As the name suggests, it is situated in the Emirate of Ajman in UAE. This UAE free zone has created its offshore regime and can incorporate your offshore company at competitive prices.
The features of an Ajman offshore company are again similar to those of a RAK offshore company.
However, the below-listed features make it a preferred choice in the business community.
- An Ajman offshore company is relatively cost-effective and requires a minimal budget for operational costs.
- Any amendment to the structure of your business can be carried out easily. For instance, you can incorporate a change in a corporate shareholder within a week.
- These companies require a minimum of one director and one shareholder for offshore incorporation. Plus, the shareholder and director can be the same person.
3 requirements for offshore company formation in UAE
Now that you have all the basic information about offshore companies in UAE, here’s a checklist of some final requirements for your UAE offshore company formation:
1. Name of the company
The name of your UAE offshore company must end with the suffix “Limited or Ltd” to denote its legal status as an offshore company.
2. Local offshore agent
A local offshore agent is registered under UAE Offshore authorities like the JAFZA Offshore Authority, RAK Offshore Authority, or Ajman offshore Authority.
You will require one of these registered agents to complete your UAE offshore company incorporation. Except for a JAFZA offshore company, where you will have to register the company in person.
3. Minimum share capital required
There is no minimum share capital requirement for anyone to set up an offshore company in the UAE.
Owing to an amendment to the Companies Law in 2009, offshore companies can now determine the share capital of their limited liability company. They must, of course, have enough capital to achieve their objectives.
Additionally, UAE offshore authorities will not ask to see a certain amount of capital in your bank before incorporating your offshore company.
Forming an offshore company in the UAE is a legitimate medium to help your business grow.
You can utilize the relaxed regulations and thrive in a tax-free business ecosystem. Offshore companies allow 100% foreign ownership and are great for asset protection and privacy.
However, as with anything, forming offshore companies comes with its own set of challenges. Use the information in this article to plan your next move and take a decisive step for your business’s growth.
Liam Martin is a co-founder of Time Doctor which is software to improve productivity and help keep track and know what your team is working on, even when working from home.