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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 160+ 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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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

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).

3Employment in the 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.

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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

5.6 End-of-Service Gratuity

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.