IBDE

The United Arab Emirates (U.A.E) is a federation of seven independent city states, or Emirates, formed in 1971. Of the seven economically autonomous states – Abu Dhabi, Dubai, Sharjah, Umm al-Qaiwain, Fujairah, Ajman and Ra’s al-Khaimah – Abu Dhabi and Dubai account for 50% and 30%, respectively, of Gross Domestic Product. The U.A.E was made a member of the World Bank in 1972 and the World Trade Organisation in 1996; it is a founding member of the Gulf Co-operation Council formed in 1981. In 2009 the U.A.E economy took knocks from the global financial crisis, a decline in oil prices as well as the bursting of the Dubai property bubble. However, the response of vigorous countercyclical policies and financial sector support measures will likely usher in a new chapter of slower, more sustainable growth (as compared to the years preceding the financial crisis) for the U.A.E economy. The domestic political scene is broadly stable; however there is a risk of regional tensions over Iran’s nuclear programme.

Geography and Demographics

The U.A.E is situated on the southeast of the Arabian Peninsula on the Persian Gulf, sharing land borders with Oman and Saudi Arabia and sea borders with Qatar, Bahrain, Kuwait, Iraq and Iran. It has a population of just over 5.5 million, made up of predominantly South Asian ethnicities – Indian, Pakistani and Bangladeshi nationals, as well as smaller Arab and European ethnicities. Emirati nationals constitute just under 20% of the population. While Arabic is the official language, English is widely understood.

Exports and Imports

The U.A.E’s most important natural resources are its oil and natural gas reserves. According to a 2009 report by the WTO, more than 85% of the country’s economy relies on petroleum and gas exports. As the world’s fifth largest exporter of crude oil and possessing the seventh largest reserves of natural gas, Abu Dhabi is at the centre of the U.A.E’s hydrocarbon wealth. The country’s major export markets are Japan, South Korea, India and Iran. Its major supply markets are China, India, the U.S and Japan, importing mainly machinery, chemicals and food.

Macroeconomic Stability

The United Arab Emirates has an open and diversifying economy. Further to its petroleum and gas exports, the U.A.E economy is experiencing a growing manufacturing sector and a huge construction boom – according to the WTO there is currently US$350 billion worth of active construction projects nationwide. The IMF estimates real GDP to have grown by 2.6% in 2010, and expects it to continue to grow by 3.5% in 2011 and 5.5% in 2012. Inflation is estimated to have increased by 0.8% in 2010 and is expected to increase by a further 1.7% in 2011. The U.A.E dirham is pegged to the U.S dollar at a rate of Dh3.67:U.S$1.

Free Zones and Foreign Direct Investment

Current legislation requires at least 51% local citizen ownership in all businesses operating in the U.A.E. However, there are a number of ‘free zones’ in each Emirate which allow 100% foreign ownership. In 2010 the United Arab Emirates secured more than US$13 billion in Foreign Direct Investment. The 2010 A.T. Kearney FDI Confidence Index report ranked the U.A.E as the 11th global FDI destination. The federal government is currently preparing to introduce a Foreign Investment Law - not applicable to investments in ‘free zones’ or to investments in oil, gas, electricity or water - which would protect FDI and attract investments in both geographically and economically underdeveloped areas of the country.

Free Trade

The U.A.E has a liberal trade regime, adopting the Most Favoured Nation principle. As a member of the GCC and the Greater Arab Free-Trade Area (GAFTA) it shares a free-trade zone with a significant number of Middle East and North African states. The country has also signed bilateral trade agreements under consideration with the U.S and Australia. Outside of these agreements import tariffs remain low at around 5% on virtually all goods.

Tax System

There is no federal tax system in the U.A.E; each Emirate manages its own fiscal policies. Indeed, while municipal taxes are levied in most emirates, the rates and application vary. Currently in the U.A.E, there is no tax on individual income, investment income or rental income; there is no capital gains, wealth or property tax and no stamp duty. There are also no consumption taxes, however, according to an IMF report; consideration is being given to the introduction of a value added tax system, with a view to promoting economic diversification and sustainability.

Advantages for Investors

·         Strategic location for Middle East and Asian markets

·         In the post-GFC context, government policies focussed on steady growth

·         UAE Dirham pegged to U.S Dollar

·         100% foreign ownership in Free Zones

·         Proposed Foreign Investment Law

·         Low tariffs

·         No personal or investment income tax, no capital gains or wealth tax, no rental or property tax, no stamp duty

·         Highly developed infrastructure

·         No minimum capital investment requirement