A subsidiary company is a company that is fully or partly owned and controlled by another company, known as the parent company. In the United Arab Emirates (UAE), the formation and operation of subsidiary companies are regulated by various laws and regulations. This article will examine the implications of establishing a subsidiary company in the UAE, including the legal and financial requirements, and the benefits and challenges of operating in this market.
The purpose of this article is to provide insight and information for companies considering entering the UAE market through a subsidiary company.
In the case of a subsidiary in the UAE, a separate legal entity is created, and the main entity outside UAE owns the company inside UAE. As there are two different companies involved (holding & subsidiary) in 2 different countries, different rules, and standards will be applicable to both.
One of the most important aspects of the company law of the United Arab Emirates is the area you decide to set up a subsidiary company. A foreign company planning on setting up a registered office of a subsidiary company in UAE has 2 options, that is setting up the subsidiary company in the mainland or the free zones.
Free zones in the UAE generally have a relaxed set of regulatory compliances. On the contrary, if you are planning to set up a subsidiary company on the mainland of the UAE, then you shall have to comply with a stricter set of laws.
Setting up a subsidiary company in the UAE’s mainland requires the approval of the concerned Department of Economic Development (DED). For more details on regulatory compliance of mainland subsidiaries, you can refer to our other blog titled Setting Up a Subsidiary Company in UAE.
After deciding on the intended location of your subsidiary in the UAE, you must choose a trading name for the company and register it with the DED of the relevant emirate. The cost of incorporation of a company also varies from one emirate to another.
In this blog, we will discuss the implications and factors applicable to the UAE Subsidiary, which are to be considered if you are planning on setting up a holding company in UAE.
Tax implications on Subsidiary Company
a. Corporate Tax
Until now there was 0% Corporate Tax in UAE. However, on 9th of December 2022, the UAE MoF published the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, which will be effective from financial years starting on or after 1 June 2023. As per the new law, the revised CT rate is
- 0% for taxable income between AED 0 and AED 375,000,
- 9% for taxable income above AED 375,000.
UAE entities within a large multinational group that is subject to BEPS pillar two (i.e., those with consolidated global revenues of more than €750m, or approximately AED 3.15bn) will have a different rate, which is still to be announced (but which is likely to be 15%, given the global minimum effective tax rate proposed by the OECD)
Companies operating within the UAE’s free zones will be subject to the new federal tax.
However, they will continue to be eligible for the free zone CT ‘holiday’ or 0% CT rate provided they follow certain conditions:
- Capital Gains Tax – There is no capital gains tax in UAE.
- Capital Gains Tax – There is no capital gains tax in UAE.
- Withholding Tax – No withholding tax in UAE.
- Withholding Tax – No withholding tax in UAE.
b. Tax Incentives
The UAE has established free zones that offer tax benefits to corporations including but not limited to 15- to 50-year tax holidays (renewable), and an exemption from import duties on goods brought into the zones.
Corporate Governance In UAE
The regulatory framework for corporate governance in UAE is divided into two broad categories:
a. Legal Regulation (including quasi-legal regulation).
The key rules that relate to these aspects of the regulatory framework are :
- Ministerial resolution No (518) of 2009 concerning governance rules and corporate discipline standards
- Federal Law No. (8) of 1984 concerning commercial companies
b. Governance Rules and Corporate Discipline Standards.
Auditing
For companies registered in mainland UAE, such companies must comply with the auditing requirement of UAE Commercial Companies Law, Federal Law No. 32 of 2021. As per Article 27 of the Commercial Companies Law, every company is obligated to have one or more auditors to audit the accounts yearly and to prepare annual financial accounts including the balance sheet, the profit and loss account to give a clear and accurate idea of profits and losses. The Commercial Companies Law states that a Company while preparing its periodical and annual accounts shall apply the International Accounting Standards and Practices.
Free zone companies on the other hand should comply with the requirement of their respective free zones. For example, some jurisdictions such as DMCC free zone and Dubai South free zone, etc., require all companies to file audited reports annually. Whereas IFZA free zone and RAKEZ free zone currently do not require companies to submit annual audited accounts.
Ease of doing Business
The UAE has a cutting-edge investment atmosphere and established policies that make it easier and quicker to set up companies through digital means. The government has also made modifications to the Companies Law to reflect this. These efforts have allowed the UAE to maintain its advanced standing in the ‘Ease of Doing Business’ index, ranking 16th out of 190 nations in 2019. Additionally, the UAE was ranked first for business efficiency, second for government efficiency, and seventh for economic performance.
Business Environment/Ecosystem for Technology Companies
The United Arab Emirates (UAE) has rapidly become a hub for technology companies, attracting startups and established players from around the world. With its favorable business environment, modern infrastructure, and supportive government policies, the UAE offers a unique and thriving ecosystem for technology companies and has been ranked in top positions on the ease of doing business reports of various organizations.
A few of the relevant positions are mentioned herein below:
- The UAE ranked first in the MENA region and 16th worldwide in the World Bank’s 2020 Ease of Doing Business report.
- The UAE ranked first globally for trade to GDP ratio in 2021, according to the IMD World Competitiveness report.
- Dubai ranked first in the MENA region and 19th worldwide among 114 cities surveyed in the 2021 Global Financial Centres Index.
- The UAE ranked first in the region and fourth worldwide in the 2020 Global Entrepreneurship Index (GEI), up from fifth in the 2019 report.
The Dubai government has taken numerous steps to enhance its entrepreneurial ecosystem and promote start-up creation. Small and medium enterprises (SMEs) receive ample support in the form of incubators, accelerators, public-private partnerships, venture capital, government initiatives, and favorable policies.
Technology-focused start-ups have access to innovative incubators and accelerators such as FinTech Hive, Dubai Technology Entrepreneur Campus, which has its own Venture Capital fund, the only Intel® Internet of Things Ignition lab in the MENA region, Intelak Aviation and Travel Tech incubator, and Dubai Smart City Accelerator. Other noteworthy incubators include the C3 Social Impact Accelerator and TechStars Dubai.
Conclusion
In conclusion, setting up a subsidiary company by a foreign holding company can have significant implications for both the parent company and the subsidiary.
From a legal perspective, the subsidiary must comply with all local laws and regulations, including those related to tax, employment, and corporate governance. On the financial front, the subsidiary must manage its finances independently, while still being accountable to the parent company.
Despite the challenges, establishing a subsidiary can provide several benefits, including access to new markets, increased efficiency, and greater flexibility in decision-making. It is essential for foreign holding companies to seek professional legal advice to ensure that the process of setting up a subsidiary is carried out smoothly and in accordance with all relevant laws and regulations.
