An update on Dubai

Date: 05 Jul 2023

Ashleigh John

Citywealth speaks to industry experts for an update on Dubai: how are recent regulatory and political events shaping the region and how is Dubai positioned for the future?

Dubai has had no shortage of press coverage over the last few months, running the gamut from regulatory restrictions, relations with other countries and raising the bar even higher for economic innovation.

Impact of the ‘grey list’

A big news item last year was the decision of the Financial Action Task Force (FATF) to ‘grey list’ the UAE for ‘strategic deficiencies’. The FATF’s ‘grey list’, otherwise known as its ‘other monitored jurisdictions’ list, is comprised of countries that the FATF has deemed to require a particular focus on the financial goings-on of the country, to ensure they are meeting the recommendation criteria set out by the organisation. We are now just over a year on from this decision, so we asked our experts how this decision has impacted business in Dubai.

Tim Searle, Chairman of Globaleye, based in Dubai, explained: “The impact of the listing varies and black being the most severe is shared by countries like North Korea, DRC and Iran where their ability to legally trade and freely exchange currency is hampered usually accompanied with sanctions and other trade/political hurdles. Above black the list is grey and unfortunately the UAE shares this with the likes of Yemen, Haiti and Albania which, on the face of it, are poles apart; however, I know which country I would prefer to go on holiday in. While not as severe as black, it sends a strong message to the country that it should enhance its fiscal and monetary policies demonstrating robust procedures to meet internationally agreed and recognised standards. Countries who are not on the grey list may not wish to transact with those who are and the heightened sense of risk were you to do so could jeopardise your own listing. Being on the grey list is not a good place to be for any modern and progressive economy with aspirations of being on the global stage.”

Dan Toft, Director and Senior Executive Officer for Praxis Group, UAE, said: “Fundamentally, being considered a non-compliant, or even only a partially compliant jurisdiction for any significant period will be damaging to the growth trajectory of the UAE’s financial services sector. In terms of continued growth, there hasn’t been any immediate impact on becoming ‘grey listed’, as it is generally accepted that the jurisdiction would need some time to take the appropriate measures so that they can be removed from the list. We have continued to deal with large financial institutions cross border, globally so to date, nobody is deterred from working with the UAE. If there is a prolonged inclusion on the list, continued growth may be impacted due to the potential reputational damage which may lead to some taking the decision not to deal with the UAE and those connected with it. This is something that the UAE are working hard to avoid.”

“Where we have noticed an impact on business, is the heighted focus on compliance, particularly AML/CFT and Targeted Financial Sanctions legislation and the ever-increasing knowledge and reach of our regulators, who themselves are under increased scrutiny, to ensure that they are properly monitoring and regulating those performing the financial services functions within the UAE. There have been a number of recent examples of the FSRA and DFSA heavily fining businesses and individuals who were not meeting their regulatory obligations and we see this as a positive demonstration of the improvements made in country. We are hopeful that the UAE will be considered for removal from the list at the next FATF plenary session in October 2023.”

Andrew Horbury, Managing Director – Dubai, Fairway Group, added: “Being grey listed undoubtedly makes international trade harder for businesses, ever more so for financial services businesses. Opening and maintaining accounts or even finding providers willing and able to work with a business in a higher risk jurisdiction introduces additional cost and friction. It does however seem like this isn’t too far from coming to an end. Significant work has been undertaken to ensure the UAE is compliant with the FATF recommendations and there has been a notable increase in enforcement action from the various financial services regulatory authorities . The agencies have also been working actively with other countries on cross border financial crime, and we’ve recently seen a number of high profile prosecutions and extraditions in relation to financial crime.”

Relations with Russia

In recent news, the UAE’s name has been twinned rather frequently with Russia’s, as meetings between Sheikh Mohammed bin Zayed, President of the UAE, and Vladimir Putin make headlines. As sanctions around Russia remain in full force as the Ukrainian war continues, it feels fair to ask: is there nervousness around sanctions to Dubai from other countries as the UAE appears to become closer with Russia? And, are UHNW individuals being deterred from Dubai because of this?

Dan Toft doesn’t think so. He expands: “I should say that the UAE Government wouldn’t consider themselves as ‘pro-Russia’ or ‘becoming closer; with Russia. Diplomatically, the UAE has always maintained good relationships with the West, Russia and China which makes its status unique and perhaps appropriate to consider it the ‘Switzerland of the Middle East’. The UAE has publicly condemned the war in Ukraine and reiterated its desire to assist in bringing about a de-escalation through diplomatic means, ultimately resulting in a cease to the war. What the UAE has done, which differs to the US, UK and EU, is largely open its arms and made welcome the Russian citizens who have fled the country due to the ongoing conflict and this is not only of benefit to those individuals but the UAE economy as a whole. Personally, I feel this is more than reasonable as the idea that you cannot do business with anyone just because of where they were accidentally born does not sit well with me, it is discriminatory.”

“In terms of UHNW individuals being deterred from Dubai, we are seeing the direct opposite in terms of an inward migration into Dubai and Abu Dhabi in particular. During 2022, UAE had the highest net inward migration of millionaires globally and it has been estimated that UAE will likely have the second highest during 2023, behind Australia. UHNW’s are attracted to its geographical location, low personal tax environment, first class leisure facilities and infrastructure, pleasant climate and general pro-business environment. The UAE’s proximity to KSA (Kingdom of Saudi Arabia), which itself is going through its own transformation and the opportunities that come from doing business in countries of such vast wealth, will always be an attractive proposition for entrepreneurs.”

Tim Searle considers the future if relations continue progressing, alongside the aforementioned regulations: “There is no doubt that many wealthy individuals have moved to the UAE not only for the appealing fiscal status but much wider benefits of security, climate, food, shopping and family life. That said, UHNW may relocate physically but their money will remain in the traditional offshore financial centres like Switzerland, US, UK, Singapore and so on who, more importantly, are not on the grey list. There is a risk of contagion bringing money to Dubai (or sending it out again) coupled to the widely reported amount of Russian money in the Emirates. With no end to the conflict with Ukraine in sight, the propensity of further Russian money is inevitable and there is a risk that external political pressure from the region and G7 members could reflect negatively on the UAE; the FATF listing being just one lever.”

A new Economic Agenda

Stepping away from politics, further news of note coming out of Dubai was the announcement of D33 at the start of this year. ‘D33’ is another name for the new Dubai Economic Agenda, which aims to double the size of Dubai’s economy over the next decade and to consolidate its position among the top three global cities. The project is astonishingly ambitious and includes 100 transformational projects. We asked what opportunities this economic agenda will create for those already in or considering Dubai.

Tim Searle said: “The D33 innovation is pivotal to the growth of the UAE and I believe the developments over the coming decade will dwarf those of the last 10 years. The UAE has expertly navigated the diplomatic choppy waters and is no doubt mindful of its present role and aspirations for the future ensuring that all parties to effect this are kept on an even keel. Any perception of the UAE flouting international standards is reflected in a committed revision of its regulatory and enforcement progression with notable arrests of fugitives in cooperation with international bodies like Interpol.”

Dan Toft discussed the importance of D33 in building on Dubai’s success with an eye on the future: “Dubai has a finite amount of natural resources, perhaps only 20-25 years left in terms of oil resources, so it has already made great strides in removing reliance on this as a means to generate revenue. Less than 1% of its GDP was derived from oil and natural resources during 2022, which demonstrates what a good job they’ve done in diversifying their economy already. The D33 agenda has a number of facets to it, but it will look to expand this diversification through investment into a ‘scale-up/ programme for SME’s which will help to identify companies of high potential and support their growth story so it’s a great time to consider setting up a start-up entity in the UAE. It will attract a huge amount of foreign direct investment into private sector and real estate, the latter of which has already seen significant growth over the last 24 months. The opportunities both personally and professionally will be endless in the UAE over the next 10 years and many others obviously feel the same as it can be demonstrated in the continued population growth we are seeing.”

Andrew Horbury commented on the advances in technology and innovation that D33 aims to bring: “Dubai is firmly establishing itself as a leader in technology and innovation, creating a wealth of opportunities in the digital sector in line with the D33 agenda. Dubai established its own specialist regulator for the crypto industry last year, the Virtual Assets Regulatory Authority, positioning Dubai as a major crypto hub. More recently, HH Sheikh Hamdan opened the Dubai Centre for Artificial Intelligence which will foster the adoption of AI in the digital transformation of government services. The DIFC also recently announced the creation of its own Web 3.0 and AI campus expected to be the the largest cluster of artificial intelligence and tech companies in the MENA region. The D33 agenda also includes commitments to launch economic corridors with Africa and Southeast Asia which means Dubai may represent an excellent location for headquarters for those deploying capital into these economies.”

Introduction of corporate tax

Known globally for its favourable tax regime, how crucial is minimal taxation in attracting UHNW individuals to Dubai? Tim Searle said: “It is no secret that the UAE’s highly favourable tax code is incredibly attractive. Notwithstanding, corporation tax has now been introduced to complement the other indirect tax methodologies the UAE deploys.”

As of June this year, Dubai has introduced a 9% corporate tax rate. Could this move to introduce corporate tax impact the business Dubai has been drawing in?

Andrew Horbury said: “Generally speaking, individuals will still enjoy a tax free life with no income, capital gains or inheritance taxes. Noting the importance of proper succession planning, provision has been made in the corporate tax law to allow foundations structured in the DIFC and ADGM to be considered fiscally transparent and therefore not subject to the corporate tax, just as if assets were held personally, which is promising news for UHNWs who may now want to consider local structuring options. Personally I don’t think corporate tax will change Dubai’s appeal. The general trajectory globally is a minimum corporate tax and 9% puts it with some of the lowest in the world. I genuinely believe most people don’t mind paying tax, they mind how it’s spent and when you enjoy incredibly low crime rates, clean roads and well-kept public infrastructure alongside 0% personal tax, 9% corporate tax doesn’t seem all that bad.”

Dan Toft added: “I can say that we are seeing less and less people migrating and setting up businesses or family offices in the UAE due to the tax regime than we would perhaps have seen 5-10 years ago. As little as 10 years ago, most people moving to the UAE would have done so as a means to make a ‘quick buck’ on a tax-free basis and leave the country after a 2-5 year period having done so and move back to their home country. Over the last 24 months in particular, there has been a shift in mindset with many people new to the country, but also existing residents deciding to put down roots in the country, through business and property ownership. The UAE Government has made great strides in terms of legislative reform to make it easier for people to stay long term and the post covid malaise in Europe, further exacerbated by the war in Ukraine, has made returning to Europe not a very attractive proposition for many. June 2023 has seen the implementation of Corporation Tax in UAE for the first time. It is still considered a low tax jurisdiction comparatively to other corporation tax regimes and given the UAE’s excellent double taxation treaty network, along with all of the other benefits of being here, I do not believe it is significant enough to preclude companies from choosing UAE as it’s home.”

Final thoughts

With plenty to chew on when it comes to Dubai, we asked our experts for their concluding thoughts and comments on the general temperature of those UHNW individuals who have established themselves in Dubai.

Dan Toft: “Over the last 5 years there has been such significant development in the UAE [that] I suspect, had you suggested then where we would be today, people wouldn’t have believed how far it would come in such a short space of time. The country is maturing rapidly and whilst it will no doubt still be subject to ‘growing pains’, given its relative immaturity, the benefits of living and working in the country far outweigh any perceived or real negatives. Some of the biggest financial institutions are setting up here, or further investing in their existing infrastructure and teams already on the ground. The professional services industry generally has also come such a long way. It is no longer a place where those that might not have been quite good enough to ‘make it’ in London, New York, Paris travel to, it is a genuinely legitimate choice that excellent practitioners are making to live and work here. This only bodes well for those already here, but also those considering a move as there will naturally be more opportunity to get into a market that is often considered difficult to penetrate. It is one of the safest places in the world, a great place to bring up a family and has such great connectivity, it is now an obvious choice for many to choose to live. We are confident that all of the good work done by the Ministries of Economy and Finance over the last 24 months will result in the UAE being removed from the FATF ‘grey list’ in the very near future and this will act as a springboard to its continued success.”

Andrew Horbury: “UHNW expats have consciously taken the decision to relocate to Dubai and build a life here and for many, that has happened in the last 18-24 months with record inflows. The UAE like other GCC members, has seen strong GDP growth during a period in which major western economies are seeing negative or very low GDP growth. Generally speaking, UHNW expats are enjoy such a high quality standard of living that would be difficult to create elsewhere.”

Tim Searle: “The headline of the UAE continues to be very positive, dynamic, safe, forward thinking, modern and a great hub to live, work and bring up family. This is coupled or rather countered by the fact that some unsavoury individuals have also made this their home, its notoriety as a conduit for Russian money and/or others who have taken advantage of a weak AML/KYC environment which has resulted in the FATF grey listing. Post COVID, the UAE has made a strong commitment to ensure that this listing will be improved through adopting and deploying international standards which in turn will reinforce their position on the global stage.”