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United Arab
Emirates – New treaties, new free zone & other updates
Recent tax developments in the United Arab Emirates (UAE) of note to
foreign investors include newly signed tax treaties, emerging
difficulties in obtaining tax residence certificates, changes in
review procedures for banks in Abu Dhabi, and the introduction of a
new financial free zone.
Five tax treaties signed
The United Arab Emirates has been busy forging economic ties,
negotiating and signing tax treaties with a number of territories.
In the first quarter of 2013, the UAE signed tax treaties with
Hungary, Benin, Libya, Japan and Serbia, and an air transport
agreement with Senegal. The UAE continued its treaty negotiations
with Peru, Kyrgyzstan and Malawi.
UAE-Japan’s “liable to tax” criterion
Unlike other recent UAE treaties, the newly signed UAE-Japan tax
treaty takes a different approach to the test of residence. Under
article 4(1), the term “resident of a contracting state” includes a
“liable to tax” criterion for the treaty’s application, rather than
other criterion (such as “place of effective management” or
“incorporation”). This “liable to tax” condition could create
potential issues for UAE mainland companies and companies registered
in the Free Trade Zones (FTZ), since they arguably could be
considered not to be “liable to tax” due to lack of enforcement of
corporate tax decree or the tax holiday/exemption applied in the
FTZ.
Tax Residency Certificate – access to tax treaty benefits
Recent experience suggests that it is getting harder to access
benefits under UAE tax treaties, both locally and overseas.
Increasingly, foreign tax authorities are requiring Tax Residency
Certificates (TRC) in order to confirm the tax residency status of a
UAE entity.
Previously, obtaining a TRC was relatively straightforward and
routine. Now, however, businesses face issues over whether a UAE
resident entity can obtain a TRC and whether the UAE resident entity
or the counter-party are entitled to the relevant treaty benefits.
Mainland entities generally can obtain a TRC from the UAE Ministry
of Finance (MOF). However, the MOF currently is not issuing TRCs to
foreign companies that invest into other jurisdictions through
entities based in UAE free trade zones (FTZ) that are of a pure
“holding” or “investment” nature on the basis they lack substance.
We understand that the MOF has signed a Memorandum of Understanding
with three FTZs — Dubai International Financial Centre (DIFC), Jebel
Ali Free Zone (Jafza) and Fujairah. The agreement will require
entities established in these locations to provide assurance that
they are not “paper” companies and actually have substance. Thus, to
obtain a TRC, FTZ entities will need to provide annual audited
financial statements or, for newly set up companies, the half-year
accounts or an office lease of six months or more.
Even though new companies must satisfy these requirements to obtain
a TRC, overseas tax authorities could still challenge their tax
residency status if the relevant treaty contains the “liable to tax”
criterion for qualifying for treaty benefits.
Foreign banks – tax inspection and assessments in Abu Dhabi
The MOF has notified branches of foreign banks that it intends to
“audit” their tax affairs to ensure compliance with the Abu Dhabi
Bank Tax Decree (2007) and Central Bank Regulations. Although this
procedure is routine for (foreign) banks in Dubai, the Ruler’s
office in Abu Dhabi has implemented the initiative and
sub-contracted the inspection and assessment process to an
accounting firm.
New Abu Dhabi financial free zone – enhancing FDI
The UAE Federal Government has announced it will establish a new
financial free zone in Al Maryha Island – called the “Abu Dhabi
World Financial Market” (ADWFM). The aim is to promote Abu Dhabi as
a leading global market, develop the economic environment, attract
financial investment and, like DIFC, contribute to international
financial services.
In a bid to attract FDI into the Emirate and the UAE in general, the
financial free zone will provide foreign investors with 100%
ownership – with no requirement for a local sponsor or agent, a
guaranteed tax holiday/exemption (for 50 years), and ease of capital
repatriation. The ADWFM’s licensing categories and permissible
operations are expected to have restrictions similar to those of
other UAE FTZs.
The ADWFM is scheduled to be open by 2015. In the meantime, there is
work to be done on the legal and regulatory framework and how it
will be governed. As the initiative is still in its early
development stages, the relationship between ADWFM and DIFC—and
whether they would co-exist or compete—is unclear. However, given
the importance of developing the capital and financial markets, the
ADWFM’s establishment is expected to ultimately benefit the UAE.
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