The Role of UAE Central Bank
The regulatory framework for banking in the United Arab Emirates is incorporated in the Federal Law No 10 of 1980. The Law provides for and establishes a Central Bank which regulates the banking and monetary systems operating or wishing to operate in the country. It is the Central Bank that is authorized to issue licenses and regulations for the banks and other financial establishments that are distinctly categorized into:
From the ambit of the law are excluded statutory public Credit Institutions, Government Investment Instructions, Development Funds, Private Savings, Pension funds and the Insurance Sector. The Representative Offices of the foreign banks are expressly barred from conducting the banking activities.
Banks are broadly categorized into four namely Commercial banks, Merchant or Investment banks, Islamic Banks and Industrial banks. As long as a bank is unable to identify itself as the one falling into an excepted category, it is subject to the regulations and control of the Central Bank. Except the Islamic Banks that are two at the moment, other banks are authorized to undertake interest bearing banking transactions.
In United Arab Emirates there are 48 banks with the local banks out numbered by the foreign banks. There are 27 foreign banks s against 21 locals. Over the years the local banks have been performing better by drawing larger segments of the customer’s deposits, reflecting better application of the funds and gradually improving their profitability rations. In addition to the five top market leaders there are selected representative banks from Americas, Europe, Iran, Pakistan and India to reflect the performance of the banking sector.
Moneychangers
Money exchange is a thriving business in the UAE owing to a demographic structure, which contains a large number of expatriates regularly transferring remittances to families and relatives in their home countries. The number of moneychangers operating in the country and volume of their transaction has increased rapidly in recent years, hence prompting the Central Bank to issue Resolution NO. 123/7/1992, dated 29.11.1992 promulgating the new regulation for moneychangers. One of the most important provisions of the resolution confines licensing for carrying on money changing business to institutions and companies established per provisions of the commercial companies’ law.
The resolution also requires that the natural person be a UAE national of not less then 21 years of age. In case of companies, the national shareholding should not be less than 60% of the total paid-up capital. The regulation set the minimum capital at AED once million or AED two million depending on the scope of activities the applicant wishes to undertake.
Financial Investment Companies
In order to organize and promote the business of financial Investment companies to the appropriate internationally recognized standards and protect investors, the Board of Directors of the Central Bank issued Resolution No. 164/8/94 dated 18.4.1995. The resolution defines financial investment companies as those conducting one or more than one of the following business:
1. Opening investment accounts and managing portfolios on behalf of others, whether individuals or companies.
2. Preparing feasibility studies for projects and marketing allotments and stocks of shareholding companies.
3. Establishing and/or managing investment trust funds.
4. Establishing and/or managing other investment funds and act as trustee of funds entrusted to it by a trust to manage on behalf of a beneficiary.
5. Subscribing to companies’ capital and participating in syndicated loans.
A financial investment company should be a juridical person with a minimum capital of 25 million Dirhams liable to be increased according to the business the company intends to undertake. The resolution also requires that national shareholding should not be less then 51% of the paid-up capital, in addition to other terms and conditions set forth in the regulation.
Banking, Financial and Investment Consultation Establishment or Companies
The Board of Directors’ Resolution NO.164/8/94 dated 18.4.1995 defines business established for banking, financial and investment consultations as follows:
1. Preparation of feasibility studies regarding investment in banking, financial or consultation projects in money markets and in various securities.
2. Drawing-up various strategies aimed an enhancing performance of existing banking, financial or investment schemes.
3. Providing council or opinion to a natural or juridical person, directly, in writing or through publication with regard to value or securities or any other financial instruments or any banking services at present in the country or likely to provided in the future.
4. Recommending to a natural or juridical person, directly, in writing or through publication, carrying out of banking businesses or utilization of banking services provided by banking institutions or to invest or show interest in investing in securities or any other financial instruments, or to purchase or sell such securities or instruments.
5. Seeking technical investments methods of higher returns and providing information or guidelines relating to banking services or development of investment packages.
6. Issuing periodical or occasional reports of limited circulation on the banking system or on available banking service or services expected to become available in the future on available securities or any other financial instruments, including inter-alia, analysis and promotion thereof.
A consultation sole proprietorship/company may be a natural or juridical person provided that the paid-up capital is not less than one million dirhams and the national shareholding should not be less than 51% in the case of company, and in the case of natural persons, the person must be a UAE national.
Financial & Money Intermediaries
The Central Bank’s Board of Directors Resolution No.126/5/95, dated 25.6.1995 regulates the business of intermediating in the sale and purchase of domestic and foreign stocks and bonds, currencies and commodities, as well as intermediating in money market transactions. According to the resolution, the intermediary should be a UAE citizen n the case of natural persons, and national shareholding should not be less than 60% of total paid-up capital in the case of companies. The regulation sets minimum capital at dirham one million, dirham two million or dirham three million according to the scope of activities the intermediary intends to carry on.
Finance Companies
A finance company is defined as a company established in accordance with provision of Federal Law No. 8 of 1984 (commercial companies law) and any amendments thereto, which undertakes one or more of the following major financing activities:
1. Extend advances and/or personal loans for various personal consumption purposes.
2. Financing trade and business opening credit and issuing guarantees in favor of customers.
3. Subscribing to the capital of projects and/or issues of stocks, bonds and/or certificates of deposit.
However, contribution of the financing company to the capital of projects, issues of stocks and/or bonds, or certificates of deposit should not exceed 7% of its own capital.
The paid-up capital of a financing company to the capital of projects, issues of stocks and/or bonds, or certificates of deposit should not exceed 7% of its own capital.
The paid-up capital of a finance company should not be less than dirham thirty five million and national shareholding should not be less than 60% of total paid-up capital, without prejudice to provisions of Federal Law No. 8 of 1984 and any subsequent amendments there to.
As per the Amendments to the Resolution of the Central Bank Board of Directors No: 123/7/92, dated 19/11/1992, regarding money changing business, the legal status of the business enterprise may either be a Sole Proprietorship in the name of a UAE citizen or a company having one of the legal forms stipulated in the Federal Law NO. (8) of 1984 (as amended) regarding commercial companies. However, if the company takes the forma of a “Limited Liability Company”, its minimum paid-up share capital should not be less than AED 50 million.
Representative Offices
A representative office undertakes one or more of the following activities:
1. Representing the financial institutions licensed to deal inside the country, including contacts on its behalf with concerned agencies as well as promoting its services in the local market.
2. Providing the head office of the licensed financial institutions with data relating to economic developments in the country.
3. Providing customers of the licensed financial institution with information on the local market.
4. Providing data to local agency, which intends to develop its business at countries wherein, the licensed institution conduct its business.
5. Providing customers with banking, financial and investment consultation services.
6. The representative offices should represent a bank or any other financial institution incorporated outside the country, holding a valid license obtained from competent authorities. Such bank or financial institution should also be subject to the direct supervision and examination of the said authorities at the country of origin and/or the head office as per laws of the country.
7. Financial Institutions Not Subject to Central Bank’s Licensing
These include any remaining financial institutions; specialized banks (the industrial Bank and the Real Estate Bank), Investment institutions (Abu Dhabi Investment Authority and Abu Dhabi Investment Company), development institutions (Abu Dhabi Development Fund and UAE Development Bank) and insurance companies.
Banks in the UAE
1. Locally Incorporated and Foreign Banks
Banks in the U.A.E are divided into two major categories: Locally incorporated banks and these are public shareholding companies licensed in accordance with provision of Union Law No.(10) of 1980, and branches of foreign banks that have obtained Central Bank’s licenses to operate in the country as per provision of the said Law.
Historically, national banks (with majority national share holding) and foreign banks existed prior to the establishment of the former Currency Board and, hence, before the Central Bank was created and commenced its operations. Within such historical circumstances the number of banks and their branches in the country and abroad increased very rapidly on obvious disproportion with the capacity of the local market, hence the monetary authority at that time to withhold issuance of licenses to any new bank and set about reducing the number of branches of a foreign bank to a maximum of eight branches.
2. Restricted License Bank
A restricted License Bank is a commercial bank that is not authorized to accept deposits from residents in Dirhams, but may receive deposits in foreign currencies. Such bank may also extend credit facilities to residents and non-residents. There is only one restricted license bank operation in the country at present namely, Banca Commercial Italiana.
3. Investment Banks
Union Law No.(10) of 1980 defined investment bank as bank that does not accept deposits whose maturities are less than two years, but may borrow from its head office, from local or foreign banks, or from financial markets.
UAE Taxation
Income Tax
The UAE does not have any enforced federal income tax legislation for general business. An income tax decree has been enacted by each Emirate, but in practice, the enforcement of these decrees is restricted to foreign banks and to oil companies. This practice is not likely to change in the near future as the relevant mechanisms with which to implement the tax decrees have not yet been established. The decrees indicate, however, that if taxation were enforced, taxes could be imposed retroactively.
Foreign banks are taxed at 20 percent of their taxable income in the Emirates of Abu-Dhabi, Dubai and Sharjah. The tax is restricted to the taxable income which is earned or deemed to be earned in that particular Emirate. Oil Companies (which include any chargeable person that deals in oil or right to oil both off-shore and on-shore) pay a flat rate of 55 percent on their taxable income in Dubai and 50 percent in the other Emirates. In addition, they pay royalties on production.
Personal incomes, including all forms of salary and capital gains wherever arising, are not subject to taxation in any of the Emirates.
Customs Duty
Under the terms of an agreement on customs tariffs with countries of the GCC, all Emirates are bound to levy a minimum customs duty of 10 percent on luxury goods and 4 percent on the C.I.F. value of all other goods imported, excluding certain items such as alcohol and cigarettes. Recently, the federal government has approved a tobacco tax rate of 50 percent.
In practice, however, exemptions are made for a wide range of goods. In cases where customs duties are charged, it is generally restricted to 1 percent.
Other Local Taxes
Municipal taxes are levied in most Emirates on annual rental paid at 5 percent for residential premises and 10 percent for commercial premises.
Other local taxes include a 5 percent tax on hotel services and entertainment.
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