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Mercans Country Intel

HR MANAGEMENT IN THE UAE

What you need to know for human resources management in the United Arab Emirates (UAE)

The United Arab Emirates is a federation of seven Emirates: Abu Dhabi, Dubai, Sharjah, Ajman, Umm Al-Qaiwain, Ras Al-Khaimah, and Fujairah.

  • Mercans’ specialists operate in 175+ countries, including the UAE. They are your direct point of contact for human resources management outsourcing services in the United Arab Emirates, guiding you with HR advisory and assisting with all your in-country PEO GEO EOR, recruitment, talent management, employee leasing, payroll outsourcing, local compliance and business process outsourcing needs. With unparalleled local market knowledge in the UAE and advanced methodologies matching the Emirati business environment, they will support you whenever and wherever you need support, e.g., in any of the seven emirates, regardless of the size of your organization or your industry. Mercans provides you with all the information you need to know to outsource human resource management in the United Arab Emirates (UAE).

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1Working Week in the UAE

  • According to the UAE Labor Law, the working week in Dubai and other emirates tends to vary between 40 and 48 hours, depending on the companies’ HR policy. Office hours are usually from 8.30 or 9.00 am to 5.30 or 6.00 pm, but some companies also split the working day into two, usually from 8.00 to 1.00 and 4.00 to 7.00. There is no difference between summer and winter hours. During the month of Ramadan, the working day is reduced to six hours and this should legally apply to all staff. However, many companies only apply it to Muslims, who fast during daylight hours.
  • Friday is the Muslim day of rest and, in the past, many companies had Thursday-Friday as the weekend. Nowadays the weekend is on Friday and Saturday since taking Thursday off would mean a reduction in the number of operational days in common with much of the rest of the world.
  • Mercans’ global payroll solutions allow handling payroll management and salaries effectively in the UAE, or any country in the Middle East or worldwide, with solutions capable of integrating ancillary payroll processes, other HR services, and employee benefits. Such solutions enable standardized processing of payroll input data in real-time. Regardless of where their employees are based, companies can manage their payroll in the United Arab Emirates with a completely consolidated view and in-depth analysis of payroll operations across all locations in the UAE, in the Middle East, or wherever they operate.

2Tax & Social Security in the UAE

  • The UAE federal government has exclusive jurisdiction to legislate regarding UAE taxes. However, no federal tax laws have been established to date. Instead, most of the emirates enacted their own general income “tax decrees” in the late 1960s.
  • In practice, however, the tax decrees have not been enforced to date and, consequently, tax is generally not levied under the decrees on companies operating in the UAE, except for following industries and activities:

    o Companies operating in the upstream oil and gas industry are subject to tax at rates specifically negotiated in the relevant concession agreements (up to 55%).
    o Specific banking tax regulations have been enacted by certain emirates including Dubai, Sharjah, Abu Dhabi and Fujairah, which apply to UAE branches of foreign banks. Under these banking tax decrees, the income of branches of foreign banks is subject to income tax at the rate of 20%. The tax decrees share common characteristics in the way they have been drafted. The Emirati decrees limit the scope of taxation to “bodies corporate” (i.e. companies, branches or similar business registrations) carrying out a trade or business activity in the respective emirate and there is not a provision for the taxation of individuals or unincorporated businesses owned by individuals. Generally, the existing tax decrees levy income tax on companies operating in the respective emirates at rates of up to 55%.

  • Further, entities established in the free trade zones (FTZ) are entitled to guaranteed tax holidays for renewable periods of between 15 and 50 years from the date the business is established.
  • The UAE introduced the value-added tax (VAT) on January 1, 2018, and is considering the implementation of new corporate income tax laws in the near future.

2.1 Overview

2.2 Corporate Income Tax

  • Currently, the United Arab Emirates do not have a federal corporate income tax (CIT) regime; however, most of the emirates introduced income tax decrees in the late 1960s, and taxation is therefore determined on an emirate-by-emirate basis.
  • Under the emirate-based tax decrees, CIT may be imposed on all companies (including branches and permanent establishments – PEs) at rates of up to 55%. In practice, though, CIT is currently only enforced in respect of corporate entities engaged in the production of oil and gas or extraction of other natural resources in the United Arab Emirates.
  • In addition, some of the emirates have their own specific banking tax decrees, which impose CIT on branches of foreign banks at the rate of 20%.
  • Free trade zones (FTZs) have their own rules and regulations and generally offer tax holidays to businesses (and their employees) set up in the FTZ for a period between 15 and 50 years (which are mostly renewable).
  • On the basis of the above, most entities registered in the United Arab Emirates are currently not required to file corporate tax returns in the UAE, regardless of where the business is registered.

2.3 Permanent Establishment (PE)

  • Registration of the company on the territory of the United Arab Emirates (UAE) may be performed with a partner – resident of the country in case of onshore registration and with full foreign ownership when registering a company in free trade zones. To do business in the UAE a license from the government authority of the relevant emirate is required.
  • Furthermore, there are various activities subject to license, including, for example:

    – Trading companies
    – Various productions processes
    – Transportation and logistics services
    – Tourism
    – Provision of variety of services to businesses and the public

  • To perform such activities, if the business is performed in the UAE, it is required to register the company on the domestic market of the emirate with permanent establishment.
  • In case of availability of local agent, the UAE laws allow performance of operations through such specialized agent, authorized to represent the interests of the company.
  • When registering a Permanent Establishment in the UAE, such entity constitutes an integral part of the company and performs actions for the benefit thereof. All contracts are entered into on behalf of the parent company or establishment. The establishment is not required to form authorized capital and file financial reports.
  • When registering an establishment or a subsidiary in the UAE, no risks arise in terms of tax consequences, since the emirati system of taxation exempts virtually all types of business from taxes, regardless of their status: permanent establishment – whether or not doing business in the UAE – or subsidiaries and branches.

2.4 Withholding tax

  • The UAE has the reputation of a tax-free country all over the globe. UAE tax laws are few and are very straightforward. The UAE is one of the countries that truly facilitates business with the help of full or partial tax exemption for both the residents of the United Arab Emirates and foreign citizens. If you are an entrepreneur working under the UAE law in one of the UAE free trade zones you will be exempt of a number of taxes, including income tax, dividend tax, interest tax and taxes on import and export.
  • Simplified procedures related to registering a business, promoting investment environment, and the government’s large-scale projects aimed at sustainable development of the UAE make this country a most welcoming place for entrepreneurs.
  • If you are doing business in one of the UAE’s free trade zones, you are fully exempt from the withholding tax as this tax is not applicable at all. All types of income – corporate and personal – received in the UAE – are free from any UAE withholding tax.
  • Withholding tax in Dubai is not an exception in the list of taxes both residents and non-residents are exempt of. It is not imposed on locals and foreign citizens. In the United Arab Emirates, there is no withholding tax on interest, royalties or income on real estate. Another important advantage of the tax-free environment in the UAE is that it makes no difference between foreign citizens and residents of the country regarding taxes, including the UAE withholding tax.
  • Thus, unlike many other countries of the world, the UAE is looking for the ways to truly boost businesses. The absence of the majority of taxes is clear evidence to the fact.
  • If you are looking for a place to start your business, consider the possibility of placing it in the UAE. Free Trade Zones, exemption of a number of taxes (including withholding tax) and the emirates’ promising prospects to thrive guarantee that your business will have a serious head start in comparison to the same enterprises in other countries of the globe.

2.5 Personal Taxation

  • There are currently no federal or emirate-level personal income taxes imposed on individuals working in the UAE.

2.6 Social Security

  • The General Pension and Social Security Authority (GPSSA) handles social security insurance for all the emirates excluding Abu Dhabi. Only UAE nationals who hold a family book, or Gulf Cooperation Council (GCC) national employees, are entitled to be enrolled in the GPSSA pension scheme and are therefore not entitled to receive an end-of service gratuity.
  • UAE nationals not eligible for registration with the GPSSA and expats in the UAE are entitled to receive an end-of service gratuity payment in accordance with the UAE Labor Law. To be eligible to receive GPSSA benefits, UAE nationals must have accumulated at least 25 years of social insurance contributions.
  • The employers in the UAE are liable for mandatory subscriptions for their GCC employees according to the social security law in their home countries in terms of registration and the subscription share for GCC nationals will be according to the law in their home countries, provided such share does not exceed the share the employer has allocated for UAE nationals. In case it exceeds the UAE national share, the variance (on employer contribution) needs to be borne by the GCC employee. The GPSSA then disburses the contributions to the social insurance authorities of the home states of these GCC Nationals.
  • Employee’s social security contribution is 5% and employer’s contribution 12.5%, subject to minimum salary floor of AED 1,000 and maximum salary cap of AED 50,000.
  • The Abu Dhabi Retirement Pension and Benefits Fund (ADRPBF) manages the social security contributions for UAE nationals in the emirate of Abu Dhabi. Considerations and obligations outlined above apply in Abu Dhabi.

2.7 Wage Protection System (WPS)

  • Effective since 1st September 2009, the UAE Ministry of Labor has introduced a mandatory electronic salary transfer system in UAE called the Age Protection System (WPS). The WPS is compulsory for all employers registered with the Ministry of Labor within the UAE. However, free zone companies are excluded from the WPS. The employer is required to select and formally engage an agent that has been accredited and licensed by the UAE Central Bank for the purposes of the WPS. The employer issues instructions to its bank for payment of salary (the bank can also be an accredited WPS agent).

    o The bank sends the payroll details for the employer to the WPS agent engaged by the employer.
    o The WPS agent forwards the details to the WPS electronically, which are then transmitted by the system to the Ministry.
    o The Ministry confirms to the WPS that the salary file corresponds with the details that are registered with it.
    o On the basis of this, the WPS sends the salary file containing the employee payroll details to the WPS agent with an authorization for payment.
    o The WPS agent makes the payment of the salaries to the employees. Salaries must be paid in the local currency (UAE dirham – AED).

2.8 Payroll in the UAE

  • Payroll requirements are governed by the UAE Labor Law. There is no specific guidance for payslips, however, in general practice, they are released to employees monthly. Payments are controlled as per the Wage Protection System (WPS) for non-free zone companies.
  • The employer will have to transfer salary payments via the WPS within two weeks of their due date, or on the dates specified in the work contract if such salary or wages are paid more frequently than monthly. It is mandatory to have a local employment contract and a salary transfer in UAE dirhams.

    Sample Payslip

    uae-payslip

3Employment in the UAE

  • Employment in the United Arab Emirates (UAE) is governed by the UAE Labor Law (Federal Law No. 8 of 1980, as amended) and applies to all staff and employees working in the UAE. Certain categories of individuals are exempted from the law, including federal and emirate-level government employees, domestic servants and agricultural workers. In addition to the UAE Labor Law, the Ministry of Human Resources and Emiratization (MHRE), previously the Ministry of Labor, has issued a number of ministerial resolutions and circulars which supplement certain provisions of the UAE Labor Law and in some instances have been used to clarify the application of certain provisions of the UAE Labor Law.
  • The UAE employment law affords certain protections for employees, including setting minimum standards on employing juveniles, working hours, vacation and public holidays, sick leave, maternity leave, employee records, safety standards, termination of employment and end of service gratuity payments. In January 2011, the Ministry of Human Resources and Emiratization introduced, for the first time, a minimum wage limit for different categories of workers.
  • Employee grievances are handled by a special program run by the ministry, and the ministry must also be informed if an employee is subject to the disciplinary code. Pensions and social security schemes in the United Arab Emirates are governed by the Pensions & Social Securities Law (Federal Law No. 7 of 1999, as amended) which applies to Emirati citizens and GCC nationals.
  • Some free zones have their own employment laws and employee grievance procedures, although these generally mirror the provisions of the UAE Labor Law. In some free zones, for example the Dubai International Financial Center (DIFC), the free zone’s laws will take precedence over the federal employment laws.
  • Most employees working in the UAE, including in the free zones, have written contracts of employment. The Ministry of Human Resources and Emiratization requires a standard form contract of employment to be entered into and filed with the ministry. However, many employers can enter into further, more comprehensive employment contracts with their employees.
  • The UAE federal law also sets out preferences for hiring UAE nationals and, for some administrative positions, requires that only UAE nationals be employed. If a non-free zone company has more than 50 employees, it must employ a minimum percentage of UAE nationals in accordance with the Emiratization policy of the UAE federal government as originally expressed in Council of Ministers, Order No. 259/1 of 2004, entitled “Resolutions on Training and Employment of UAE Citizens in the Private Sector.” The Emiratization policy applies to both the public and the private sector, and both local and international companies operating in the United Arab Emirates are subject to the Emiratization policy in the sectors for which such guidelines have been formulated.
  • A key provision of the UAE federal employment law is a requirement to pay a statutory end of service gratuity (ESG) to employees upon termination of their employment subject to satisfying certain requirements under the UAE Labor Law. The ESG regime in the UAE takes the place of a formal pension regime. ESG is calculated at a rate of 21 days of salary per year for the first five years of service and 30 days for each year thereafter, up to a maximum amount of ESG equal to two years of salary. The calculation of ESG is reduced if employment is terminated by the employee. ESG is payable as a lump sum on termination of employment. The DIFC has its own ESG regime, which is broadly similar to that applied in the wider UAE.

3.1 Overview

3.2 Employment contract in the UAE

  • For the companies governed by the UAE Ministry of Human Resources and Emiratization (MHRE), the hiring of any new employee, whether from within the UAE or abroad, requires executing a standard offer letter and submitting it to the Emirati authorities to obtain the necessary governmental approvals. The terms of the offer letter must reflect the terms of the final employment contract that will be executed at a later stage.
  • As part of the process of obtaining the work permit, a template employment contract issued by the MHRE (or relevant free zone authority if the employer is established in a free zone) must be signed by the parties and submitted to the MHRE (or free zone authority). The template employment contract includes basic employment terms and is drafted in English and Arabic.
  • Due to the basic nature of the MHRE (or free zone authority) template employment contract, it is common practice to execute a supplementary employment contract which includes additional terms that are not reflected in the basic MHRE or free zone employment contract template. Accordingly, it is common for employees in the UAE to hold two employment contracts: (a) a MHRE (or free zone) employment contract; and (b) a private employment contract which describes the employment relationship in more details.

4Leaves in the UAE

  • The statutory leaves for UAE have been summarized in the below table.

    uae-leaves

5Termination, Resignation or Retirement in the UAE

5.1 Probationary Period in the UAE

  • Probationary periods are common in the UAE. The maximum period of probation is six months. During – or at the end of – the probationary period the employer may terminate the employee’s employment, without notice, or end of service gratuity pay.
  • The probationary period is included in the calculation of the employee’s total period of service.

5.2 Term in the UAE

  • Employment contracts may be either for a fixed (limited) time or for an unlimited period of time.

5.2.1 Fixed-term contracts in the UAE

  • When a company is located onshore, fixed-term contracts cannot exceed a two-year term. In free zones, terms of three years are permitted. The contract can be renewed by mutual agreement at the end of the fixed term for equal or shorter periods. Any extensions will be considered part of the original term and should therefore be included in calculating the employee’s total period of service.
  • If either party wishes to terminate a fixed-term contract before the expiry date, compensation must be paid to the non-terminating party. In this regard, the employer must pay the employee a compensation of three months’ salary (or the salary due for the remainder of the contract, if less). The employee must pay the company compensation of 1.5 month’s salary (or the salary due for the remainder of the contract, if less).
  • After renewal of the fixed-term contract, either party may terminate the employment on notice. The notice clause can be for a minimum of one month and a maximum of three months. If the contract does not contain a notice provision, three months will be automatically applied.
  • The terminating party must also compensate the other party to the agreement. Compensation can be for a minimum of one month and a maximum of three months. If the contract does not contain a compensation provision, three months will be automatically applied.

5.2.2 Unlimited term contracts in the UAE

  • An unlimited term contract is for an indefinite period and is effective from the date of commencing employment. It can be terminated by either party for a “valid reason” (generally interpreted to mean any reason attributable to an employee’s performance or conduct, and subject to the disciplinary procedure set out in the Labor Law being followed) at any time by giving the other party a notice in writing, subject to the provisions of the Labor Law.

5.2.3 Legitimate Causes for Dismissal by the Employer under Article 120

  • Subject to complying with the process stipulated under Section 4.5, an employer is permitted to legitimately terminate the employment contract of an employee without notice and without any end-of service gratuity for the reasons stipulated under Article 120 of the Labor Law as follows:

    – Adopting a false identity or nationality or submission of forged documents or certificates
    – Dismissal occurring during, or at the end of, the probation period
    – Committing a fault that causes substantial material loss to the employer, as long as the employer notifies the labor department of the incident within 48 hours of learning of such fault
    – Breach of the workplace safety instructions, as long as the instructions are clearly displayed in writing in the workplace or are verbally communicated to illiterate employees
    – Non-performance of material duties stipulated in the employment contract, and the continuance of this failure despite formal investigation and the issuance of a dismissal warning if the non-performance subsists
    – Divulging secrets of the workplace
    – Conviction of the employee because of a final judgment for an offense involving honor, honesty or public morals
    – Drunkenness or operating under the influence of drugs during the employee’s working hours
    – Assaulting the employer, the manager of the employer or any of the employee’s colleagues
    – Unjustified absence for more than 20 intermittent days or for more than seven successive days in one year

5.2.4 Legitimate Causes for Termination by Employee under Article 121

  • An employee is also entitled to terminate the employment contract without notice if any of the grounds related to the employer’s conduct stipulated in Article 121 of the Labor Law are present. These grounds are as follows

    – The employer breaches its obligations prescribed in the employment contract or under the applicable laws
    – The employer or the employer’s representative assaults the employee

5.3 Process for Dismissal/Termination/Disciplinary Measures in the UAE

  • Disciplinary penalties expressly permitted by the UAE Labor Law include a warning, suspension, fine, forfeiture of promotion, termination with notice and termination without notice.
  • The following procedure must be conducted before imposing any disciplinary sanction, including dismissal, upon an employee:

    o The employee must be notified in writing of the charge or allegation
    o The employee must be given an opportunity to defend himself/herself against the allegations. In practice, employees will attend a meeting in this regard
    o The matter must be adequately investigated and the employee must be provided with written reasons for any penalty being imposed, which should also be recorded in the employee’s personnel file
    o An allegation cannot be raised after the lapse of 30 days from the date of discovery of the violation and a penalty cannot be imposed after the lapse of 60 days from the date on which the disciplinary investigation ended

5.4 Redundancies in the UAE

  • Redundancies are not recognized under the UAE Labor Law. As such, there are no specific economic reasons that would justify a termination. Instead, a redundancy process must fall within the existing termination provisions of the Emirati Labor Law.

5.5 Notice/Payment in Lieu of Notice in the UAE

  • In accordance with the UAE Labor Law, the minimum notice period for an unlimited contract is 30 days, with a maximum of three months. In a recent amendment to the Emirati labor regulations, limited contracts which have been renewed are now subject to an identical notice period requirement. The contract can also be terminated by the employer without notice if the employee is terminated for cause on the grounds outlined under Article 120, as stated in Section 4.3.
  • Notice cannot be waived or reduced. This means that an employer in the United Arab Emirates should pay in lieu of notice if it does not require employees to work during their notice period.

5.6 End-of-Service Gratuity

  • An employee whose employment contract in the United Arab Emirates (UAE) is terminated or expires and who has completed at least one year of service is generally entitled to an end-of-service gratuity. In the absence of any higher rate agreed by the parties, the end-of-service gratuity in the UAE is equivalent to 21 days wage for each of the employee’s first five years of service, and 30 days’ wage for each year thereafter.
  • If the employee resigns and the employment contract is for an indefinite period, the gratuity entitlement is reduced in the following manner:

    – If the employee has more than one year but less than three years of service, the employee will be entitled to one-third of the gratuity.
    – If the employee has more than three years but less than five years of service, the employee will be entitled to two-thirds of the gratuity.
    – If the employee has more than five years of service, the employee will be entitled to the full gratuity payment.
    – If the employee resigned from an employment contract for a fixed period and has less than five years of service, they will not be entitled to any gratuity.

  • End-of-service gratuities in the UAE are capped at an amount equivalent to two years wages and are proportionately calculated for any partial year worked. An employee is not entitled to an end-of-service gratuity if he is dismissed for a reason falling within Article 120 of the UAE Labor Law.
  • Employees employed on fixed-term contracts will also forfeit their end-of-service gratuity if they resign before the expiry of the term and have less than five years of service.
  • The payment of pension shall be due on the day following the date of end of service. The retirement age is 60. All pension payments will be made directly into the employee’s bank account. The pension will be payable for the duration of the employee’s life. Upon his death, the pension will be immediately stopped and redistributed to beneficiaries according to the law.
  • When pension contributions are paid late, the GPSSA may impose fines against the employer. They are calculated at the daily rate of 0.1% of the contributions payable for each day that the contributions are overdue. Similarly, where an employer has failed to register employees with the GPSSA, the employer can be fined AED 5,000 per employee.

6Immigration in the UAE

  • The UAE government requires that individuals seeking to reside in the United Arab Emirates (UAE) for employment purposes must be sponsored by their employer.
  • Below is an overview of the general steps necessary to secure a residency visa in the UAE. Please note that some procedures will vary based on the employee’s country of citizenship or their immigration status at the time of hire (if you are hired from within the UAE). Also, the immigration processes for free zone in the UAE may differ from the standard process.

Residency Visa Process

  • Employer prepares employee’s UAE Ministry of Labor Offer Letter

  • Employer obtains the employee’s work permit
  • Employer obtain an entry permit in the UAE for the employee
  • Employee enters the UAE
  • Employee takes the medical test and provides fingerprints
  • Employee’s residency visa in the UAE is issued
  • The employee’s Emirates ID is issued

Human Resource Management in UAE per Emirati Labor LawTo know more about how to do business in the UAE, please click here Mercans’ global payroll and human resources management experts in the United Arab Emirates are available for you and will assist you promptly.