MG an air warrior, a political observer, and writer with wide experience.
Dubai is popularly referred to as the El Dorado of the east. Till 1960, it was a colony of the British. It was given independence and it formed a union with eight other Gulf states known as the United Arab Emirates. All the eight states however had a modicum of independence in their internal affairs and also economically they were supposed to manage their own finances. While states like Abu Dhabi had tremendous oil reserves Dubai did not have similar reserves. Without oil, the Dubai, rulers had to think of alternative methods to keep the economy going. One of these alternative methods is offshore banking.
Dubai is located on the edge of the great Arabian desert. It is a part of the UAE. It is a Muslim country but has peculiar demographic composition. The local population is only 20% and the balance of 80% consists of expatriates. They are mostly from the subcontinent but there are substantial numbers from Europe and the UK.
Dubai is a Muslim country that follows the Sharia. Lest people get alarmed the Sharia practiced in Dubai is entirely different from the pristine version in Saudi Arabia. It is a much more benign version. Even in the banking sector, the Islamic law of banking is not followed. Islamic banking does not allow payment of interest. This is not followed rigidly and the customer is given the option to follow it or not. Dubai thus follows the latest banking procedures as practiced globally.
Dubai needed to generate income primarily because the earlier development was financed by oil that had dried out. There were no oil reserves, unlike Abu Dhabi which has the sixth-largest oil reserves in the world. It was very important for the city-state to diversify into other fields. They latched on to tourism in a big way and they also decided to attract capital to the city.
One of the methods to attract capital and investment in Dubai was through offshore banking. What is offshore banking? It is a system to bring in capital and money from the home country to a distant place. An offshore bank is located outside the country of the depositor. Obviously to set up an offshore banking industry the banks will have to offer something more substantial than what is available in the home country. They create tax-havens. Many other perks and facilities are also thrown in.
Dubai is thus a tax haven and offshore banks are encouraged here. The government not only allows liquidity but also other investment opportunities. There is no income tax.
One of the principles of offshore banking is that the source of the funds is not questioned. The offshore system in Dubai accepts this and also follows the principles of privacy of banking accounts as practiced by the Swiss banks. Unlike most countries that have their own banking laws, the Dubai government has decided to follow the 1934 Swiss banking act. The most important provision of this act is that it guarantees the secrecy of accounts and deposits. Thus an investor can invest in offshore banks in Dubai without any fear that his investments will be tracked down and he will be asked to pay taxes. Dubai also has a zero-tax environment. The effect of this is that the investor has no obligation to pay any mandatory charges and has no tax liability.
One of the obligations of an offshore banking system is the liquidity of funds as well as a stable political environment. In both these, the investor can rest assured that the offshore system in Dubai caters to the liquidity of funds and of course it has an extremely stable political environment that makes UAE the safest place in the Middle East. Besides, the per capita income of the state is among the highest in the world and the lifestyle which one can live in Dubai is something which is not possible in most countries of the world.
The Maktoum family has successfully ruled the emeritus for the last100 years and they are a progressive lot that has turned Dubai into a city of Gold.
When an individual or company opens an offshore banking account in Dubai, whatever his reason, the banks will not ask any questions. It is something like, you just come invest and reap the benefits. Billions of dollars in investment funds have come to the offshore Banks and they have made the city one of the worlds leading financial markets. All the big names in the banking sector can be found in Dubai as well as the headquarters of many financial institutions.
The Dubai government is extremely liberal in granting licenses to operate banks and businesses. But a certain amount of vigilance is kept and this is carried out by the UAE central bank. It keeps an eye on any activities that could be prejudicial to the banking system as a fraud.
Big business houses have come to Dubai because there are no corporate taxes, income taxes, taxes on capital gains, property, and wealth tax. Besides, it offers easy accessibility to the money deposited.
MG Singh (author) from UAE on February 20, 2021:
Thank you ,Adil , for commenting
Adil Yunus on February 20, 2021:
Nice article. Been in dubai, swell place.