* UAE will cut Etisalat royalties, but no time frame given
* Etisalat key to federal budget: rates seen remaining high
* Royalty cut could be precursor to foreign share ownership
By Matt Smith
DUBAI, May 16 The United Arab Emirates will cut royalty charges or taxes for telecoms firm Etisalat ETEL.AD, a top regulatory official said on Monday, that would provide an instant boost to sagging profits at the former monopoly.
No timescale was offered for the reduction by the telecoms regulator but analysts expect some cut on the royalty rate paid on 2011 profits.
"At one time, we will have to reduce Etisalat," said Majed Almesmar, deputy director general of the Telecommunications Regulatory Authority. "When? That depends on the market share for Etisalat and du."
Etisalat pays half of its profit in royalties or taxes to the UAE government, while domestic rival du DU.DU paid 15 percent in 2010.
The latter has captured an estimated 40 percent share of the UAE's mobile market since launching services in 2007.
UAE royalty or tax rates are among the highest regionally. Operators such as Qatar Telecom QTEL.QA, Omantel OTL.OM, Saudi Telecom Co 7010.SE and Kuwait's Zain (ZAIN.KW) paid as much as 20 percent tax or royalties last year, according to their earnings statements.
Nasser Bin Obood, acting chief executive of Etisalat, said royalty rates had been under discussion for some time.
"It adds pressure," Obood added. "However ... we are sure that the government and all the stakeholders will come up with a reasonable plan."
Etisalat paid 7.6 billion dirhams ($2 billion) in royalties in 2010, providing more than a sixth of the 43.6 billion federal budget.
"The indications are the royalty question will be resolved by year-end, with operators paying the equivalent of a corporate tax rate of perhaps between 30 to 40 percent," said Irfan Ellam, Al Mal Capital telecoms analyst. "That offers big potential upside in terms of stock value."
Martin Mabbutt, Nomura telecoms analyst, forecast royalties would likely be cut to a probability-weighted 37.5 percent.
"There has been significant pressure on the UAE government to reduce the royalty rate ... we eventually see royalties being reduced for both telcos," he wrote in a note to clients.
Etisalat, which is majority-owned by a state fund and operates in 18 countries, pays royalties on its home market profit and consolidated profits from abroad, so is effectively taxed twice.
"I don't think the royalty will be cut to 15 or 20 percent, but there could be alternative solutions such as only taxing home profit," Marise Ananian, telecoms analyst at EFG-Hermes.
"The royalty will have to come down from 50 percent -- if it's not this year, it will likely be next."
Some analysts see du's surprisingly low royalty fee for 2010 as a sign the government will also reduce Etisalat's royalty ahead of opening both companies up to limited foreign ownership.
Etisalat has been in talks with the government to place it under commercial law and allow non-local ownership of its shares. Only UAE nationals are presently allowed to own shares.
"Foreign ownership would increase liquidity," added Al Mal's Ellam. "This would also boost valuations, because illiquid stocks have a built-in discount." (Editing by Jane Merriman)