The UAE has concluded nearly 80 double tax treaties, including with OECD countries.
Many of these treaties are attractive. For example, the treaties with New Zealand, Austria and the Netherlands. None of these have a liability to pay tax. The treaty with the Netherlands was ratified in June 2010. Its most important effect for outbound investment (from the perspective of the UAE) is that it limits the dividend withholding tax rate to 5 percent. The Netherlands is a particularly attractive country for inward investment into the UAE now, because for most types of income the Netherlands will exempt Dutch companies from corporate tax on UAE income even though it has not been subject to tax in the UAE.
Furthermore, the UAE is particularly well positioned to cope with the increasing pressures from onshore tax authorities to provide real economic substance. By making use of UAE free zones (FZ), there are now opportunities available to locate business functions there and realize tax savings and economic substance.
UAE is zero tax... with double tax treaties
Double tax treaties aim at making Dubai a more attractive territory in which to operate by reducing taxation levied in the foreign jurisdictions on profits remitted abroad by foreign corporations operating in Dubai.
Dubai has an extensive and growing list of double tax treaties, which currently numbers over 70. This network is appended and includes, inter-alia, treaties with China, Cyprus, France, Germany, India, Indonesia, Italy, Luxembourg, Malaysia, Malta, the Netherlands, Singapore, South Korea and Ukraine.
The “place of incorporation” criterion is part of many of the UAE treaties and, simply put, if a company is incorporated in the UAE, it will then be resident for the purposes of that particular treaty. This includes, inter alia, treaties with Armenia, Finland, Mauritius, Mongolia, Luxembourg, Sri Lanka, Austria, Switzerland, Mozambique and New Zealand and many more.
Many treaties are attractive. For example, the treaties with New Zealand, Austria and the Netherlands. None of these has a liability to pay tax. The treaty with the Netherlands was ratified in June 2010. Its most important effect for outbound investment (from the perspective of the UAE) is that it limits the dividend withholding tax rate to 5 percent. The Netherlands is a particularly attractive country for inward investment into the UAE now, because most types of income the Netherlands will exempt Dutch companies from corporation tax on UAE income even though it has not been subject to tax in the UAE.
Cyprus also concluded a tax treaty with the UAE. It has a similar participation exemption system regime as the Netherlands and exempts profits made by a permanent establishment abroad from tax, under domestic legislation. Even before the tax treaty was concluded, setting up a branch of a Cyprus company in the UAE was still an attractive option.
Some of the tax treaties of UAE may not be so attractive because of the Limitation of Treaty Benefits (LOB) clauses and inclusion of liable to tax clauses. Currently, not many UAE bilateral treaties include LOB clauses, although the more recent treaties tend to include them. Treaties covering LOB clauses include:
• India (new 2007 Protocol) requiring a bona fide business activity
• Luxembourg which includes consultation if treaty shopping is taking place
• Belgium requires attention to be given if improper use of the agreement is found
These treaties impose the additional test of “place of effective management”.
Determining factors include:
Inbound UAE and anti-avoidance
Domestic tax regimes of high tax jurisdictions often contain provisions for the avoidance of domestic and international double taxation. Generally there are two main methods to avoid double taxation: the credit and exemption methods.
Countries that apply the credit method, in principle, include items of income in their tax base, both from domestic sources and foreign sources, but allow a credit for foreign taxes against the domestic tax liability. This usually leads to taxation of income from foreign sources at the applicable tax rate of the state of residence of the company carrying out the foreign activities.
For countries that apply the exemption method
, it may be somewhat more complex to determine the tax consequences of a foreign investment but the outcome is usually more beneficial. Common exemptions in many tax regimes are exemptions for profits derived from a so called permanent establishment (“foreign branch exemption”), and exemptions for profits derived from a qualifying subsidiary (“participation exemption”).
For an investment in a tax free country like the UAE, the application of an exemption in the country of residence would clearly be beneficial over the credit system, as the company will effectively benefit from the fact that there is no domestic taxation of its business profits derived from the UAE.
The UAE is well positioned to cope with the increasing pressure from onshore tax authorities to provide real economic substance. By making use of UAE FZ there are opportunities available to locate business functions there and realize tax savings and economic substance.
It is fairly easy to set up in business in one of UAE’s FZ and to access the world’s labour pool and hire whom you need. No other zero tax jurisdiction in the world offers this. FZ as a concept was pioneered in Dubai, the first one being Jebel Ali FZ (JAFZA). Benefits of operating from a FZ include 100 percent foreign ownership, no restrictions on hiring foreign labour, streamlined procedures for dealing with government formalities and usually a guarantee against future imposition of taxation for a specified period.
Tax residence certificates
A FZ can issue residence permits and obtain tax residence certificates from the UAE authorities for its foreign owners and executives.
A FZ company, must have physical presence in the UAE and, in that respect, it must own or hire premises. If only a
are available by FZ in the northern emirates, notably Hamriyah
Furthermore, and if a local bank account is maintained with movements, the foreign owners and executives can apply to the UAE Ministry of Finance to receive UAE tax residence certificates.
A UAE residence permit and a tax residence certificate can be useful to foreign owners and executives who wish to register their tax residency in the UAE. It is worth noting, that banking institutions in UAE and many outside consider UAE tax residence certificates as sufficient proof of tax residency in the UAE.
UAE treaties apply in the FZ
Double tax treaties apply for companies established in a FZ and local LLCs.
An important aspect for foreign investors and global companies is the use of UAE FZ in establishing UAE presence. The FZ are used by foreign investors to retain 100 percent beneficial ownership and to avoid the 5 percent import duty on goods. The benefits of the double tax treaties also apply to FZ entities established by foreign investors.
The combination of a FZ entity with an international business company IBC known as RAK (UAE offshore company) and a trust or foundation can also be effective in ensuring confidentiality where required in tax planning. Indeed the UAE is the only OECD “white list” jurisdiction that has no taxes for international companies, FZ or local companies or individuals.
Strategy 1: Establish a FZ entity
The FZ allows to have a UAE entity that is 100 percent foreign owned and yet take advantage of:
• low formation and annual costs
• residency and visa
• a range of options for physical presence from flexi desks to complete buildings and industrial developments
• no taxes
• no exchange controls or thin capitalization restrictions
• access to the UAE double tax treaty network
Strategy 2: Combine a FZ entity with an IBC (RAK)
Owning a FZ entity or creating a FZ branch of the IBC provides the following benefits:
• confidentiality of ownership and operations
• physical presence or management as required by treaties for treaty protection
• ability to have investments in the UAE and yet not carry on business
• choice of any law – common law, civil law etc
• no local meetings, audits, or local presence requirements migration in and out of the jurisdiction
• OECD white list jurisdiction
Strategy 3: Global head office company/IP holding company
In the majority of the UAE double tax treaties which have look through limitation provisions, the use of the UAE as the head office of a company to minimize global taxes is important. The relocation of the head office of the known US company Halliburton to Dubai, is one example of this strategy.
know how and copyright under the laws of any jurisdiction and to licence this technology to a FZ entity or to other countries worldwide. The treaty network will reduce withholding taxes, impose no taxes in the UAE and allow for peace of mind in terms of legal enforceability, licensing, securities and charges.
Strategy 4: Residence and domicile for directors and senior staff
Whilst domicile in the UAE may not be possible depending on the laws of the home country, certainly with a renewable residence visa that is issued to persons or associates of a FZ entity, individuals may reduce or eliminate their home country taxation. In many cases, following the OECD model, the treaties provide for directors’ fees paid to a non domiciled director of a UAE entity to be exempt from tax in the home country.