13 July 2016

A tax office in a tax free country

‘Never a dull moment’ has probably never been more true for tax professionals than it is today. Tax is on the political agenda worldwide and the topic catches headlines in all reputable media on a near daily basis. New terminologies are being introduced to the boardrooms of multinationals and the lives of HNWIs: in the corporate world, BEPS is changing the international tax arena and in the private banking and asset management world FATCA, CRS and the 4th AMLD are common terms. 2016 is all about ‘substance’ and ‘transparency’ in tax planning. Music to the ears of … the United Arab Emirates (UAE)!     

UAE inbound

One of the biggest stimuli for the growth of the UAE’s reputation and popularity as a safe haven for foreign investment has been the favourable tax (free) regime in the Emirates. However, the UAE have also managed to establish an impressive tax treaty network: 67 double tax treaties (DTTs) are currently in force and another 30 in various stages of negotiation, renegotiation, signature, ratification or translation. Most recently (i.e. 12 April 2016) the long awaited DTT between the UAE and the UK was concluded between both jurisdictions. The treaty provides for some interesting opportunities as it may reduce UK interest withholding taxes and capital gains taxes for example. Needless to say, from a UAE inbound perspective, the combination of a favourable domestic tax regime with a wide treaty network has always been a recipe for success for jurisdictions such as the UK, the Netherlands, Luxembourg, Singapore and Hong Kong. The UAE, and the emirates of Abu Dhabi and Dubai in particular, may increasingly be seen by multinationals, Private Equity firms, financial institutions as well as by families and family offices as suitable alternatives for the traditional holding jurisdictions.

It is not surprising, therefore, that the UAE government is investing heavily in infrastructure to accommodate newcomers to create ‘substance’ in their country. A key component in this respect is the so-called free zones across the country. They offer business-friendly platforms providing for benefits like longstanding tax exemptions, absence of foreign ownership restrictions and, in certain cases, even separate legal regimes (and dedicated courts) based on UK law rather than local laws. By doing so, the UAE creates the ‘golden triangle’ for international tax planning: a favourable domestic tax regime, DTTs and substance.

Simultaneously, the UAE has been an active member of the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes and the latest Automatic Exchange of information (AEOI) Implementation Seminar took place in Dubai on 21-23 March of this year. The country has committed to CRS and FATCA and its tax treaties tend to follow the OECD model for the mutual exchange of information. The UAE Ministry of Finance announced, last August, that it has made progress in respect of the potential introduction of corporate income tax, in line with the IMF’s recommendations and the international call for a tax administration to facilitate the exchange of information with the UAE. Whilst there have not been any publications or announcements on concrete plans regarding corporate income tax, the UAE will introduce VAT (5% rate) in 2018, as part of an initiative by the Gulf Cooperation Council (GCC) to introduce one VAT regime for the entire region.

The domestic market in the Gulf region is largely driven by family businesses, which can account for 70% of the GDP of most Gulf countries. For these families, asset protection, succession planning and discretion are important items on their agendas. In Dubai (DIFC and DMCC free zones) Abu Dhabi (ADGM free zone) and Doha (Qatar Financial Centre), specific Single Family Office regimes are created to facilitate domestic as well as international families to preserve family wealth, ensure efficient estate and succession planning, and mitigate potential risks. The DIFC has its own Trust and Wills & Probate regimes, whilst many local families are also very familiar with international succession tools such as Foundations and Trust and Private Trust Company (PTC) structures.

UAE outbound

From an outbound perspective, the eyes of the world have been closely on the major sovereign wealth funds in the Gulf region, including (but not limited to) the Abu Dhabi Investment Authority (ADIA), Mubadala, the Qatar Investment Fund (QIA), the Investment Corporation of Dubai (ICD), the Kuwaiti Investment Authority (KIA) and the State General Reserve Fund (SGRF). The importance for countries to invest in diversified assets to create a non-oil/gas dependent income source has recently been underlined by the Saudi Arabian government in its announcement of the establishment of a new SWF with a size exceeding three times that of the largest SWF presently. Known for their impressive international investments, including real estate and equity stakes in the US, EU and the Far East, the BEPS agenda will also show its impact here. Country by country reporting (CbCr) and the increasing substance requirements in intermediate holding jurisdictions are triggering immediate action from the SWF’s tax departments. The actions by these powerhouses may even set precedents for international Private Equity firms, Pension Funds and other international investors. Although the Gulf States have favorable DTTs with many target countries, the SWFs are, for example, still using Benelux platforms to benefit from treaty benefits and are expected to increase their substance to avoid potential treaty shopping discussions.

UAE as a hub

Internationally, recent tax developments in India (closing the capital gains protection routes via Mauritius and Singapore for investments from April 2017 onwards, resulting from the new protocol to the India-Mauritius DTT) may lead to an increasing number of investments into India via the UAE as the UAE-India DTT will become on par with Singapore and Mauritius. Effectively, only the DTT between the Netherlands and India can potentially provide for full capital gains protection, but the UAE route may be favoured from a substance requirement perspective.

Furthermore, whilst there may be countries with a larger treaty network into Africa at present, the UAE government is focused on becoming the logical gateway to Africa. Logistically and commercially, Dubai may already be regarded as a hub between the Far East and Africa (due to its geographical location and its airlines and strategic ports). The tax treaties of the UAE with Egypt, Mozambique, Turkey and Morocco already offer attractive features. Many will follow, considering the list of treaties with African states that are in various stages of negotiation.

All in all, ‘never a dull moment’ for a tax adviser, even in a tax free environment such as the UAE. A timely moment to set up a tax advisory office for Withers in Dubai to assist our local and international, corporate and private clients with their affairs.

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