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Welcome to the UAE – You have a Travel Ban!

UAE Free Zones started with legal execution of claims

There was a very attractive double taxation agreement (DTA) between Germany and the United Arab Emirates (UAE) up to and including 2008, using the so-called exemption method. In other words, in the UAE generated corporate profits of companies with tax duty in Germany were ultimately tax-free.

Many founders and entrepreneurs took advantage of this incentive. They incorporated zealously independent companies or branches in numerous existing free trade zones of the UAE - or even in mainland itself.

In 2009, this DTA then experienced a harsh conversion to the so-called imputation method: corporate profits from the UAE were now taxable in Germany - taking into account the taxes previously paid in the UAE. But creditable was and still is - nothing. The UAE is a tax haven, corporate and income taxes are simply not collected.

The UAE companies affected by the loss of this tax advantage were often simply "left behind" by their owners: the registrations and licenses were not renewed annually as required against payment of fees, but they were also not liquidated.

As a result, very often charges and rent receivables against these "sleeping" companies ran on without anyone caring: the entrepreneurs not - but also not the administrations of the free-trade zones.

However, for many years now, it has become standard practice in many of UAE's free trade zones to threaten license holders with legal consequences in the course of their notifications of due or overdue renewal of licenses if they do not act - that is, pay. The threats vary from enforcement to court judgments and debt collection up to the issuing of a travel ban on entry, exit and even transit.

Now it probably came to the first actual case in which a free trade zone authority has initiated the enforcement of their expired claims against a businessman!

Alexander Ottavio, Chief Legal Officer at MCI CLT, describes the case roughly: “An entrepreneur neither renewed his free-trade zone license nor liquidated his company and thereby extinguished the license in the free trade zone. Year after year, the full license fee and the office rent along with the usual late penalties accrued for these claims. The Authority therefore initiated the enforcement and ordered the issuance of a travel ban and an INTERPOL warrant ("Red Note") against the entrepreneur. Since every free trade zone administration is a government agency, it is not necessary to conduct the claim procedure at a civil court. This is most comparable to the practice of German tax offices, which can issue their enforcement titles themselves and autonomously.”

The businessman returned from his holiday in Europe and was arrested on the spot at Dubai airport. He has since then been detained. The legislation of the UAE stipulates that the debtor remains in detention until his debt is settled.

Martin Kraeter, Managing Director of MCI CLT, said: “The case makes it clear that everyone should operate and 'maintain' his free trade zone company in the UAE in line with regulations - as he would do it also in any other country.”

Kraeter continued: “Carry out the regular license renewal within the set deadlines - just to avoid additional problems including penalty fees! If you have decided to abandon the business operations of your Free Zone Company: initiate the liquidation and de-registration of the Company, also within the deadlines set. The completion of this process is the issuance of a de-registration and cancellation certificate by the authority. These documents protect you, even in the case of erroneously upheld claims by the Free Trade Zone against you.”

It is also common practice at airports in the UAE to enforce existing travel bans, even in international transit sections. If there is a ban, it is not even necessary to actually enter the UAE. Even “only” during a stopover there is the risk to be detained.

Kirsten Kraeter, Head of Free Zone Management at MCI CLT, on how to proceed if enforcement measures have already been taken: “In enforcement cases, MCI CLT can determine in advance whether a ‘travel ban’ has already been issued. I also recommend that you start negotiations with the authorities about a friendly settlement: It is often not compulsory that in the case of expired license renewal periods, all royalties and all rental payments simply have to accrue or may continue!”

In such cases, MCI CLT will negotiate appropriate settlements with the relevant departments of the Free Trade Zones.

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