THE INTERNATIONAL TAX

SPECIALIST GROUP

DUBAI

28 April 2014

TAX RELIEF IN A HOT CLIMATE:

THE U.A.E. TAX TREATY NETWORK

David Russell QC

The UAE tax background

• No federal tax

• Income tax in 5 of 7 Emirates

• In practice restricted to banks and oil companies

• No personal taxation

UAE objectives in DTAs

• Stimulation of foreign direct investment• Encourage business ventures• Enhancement of co-operation• Encouragement of tourism• Encouragement of bilateral trade• Part of wider engagement in international

arrangements to combat money laundering, terrorist financing and improve capital market regulation

Drivers in DTA negotiations: UAE

• UAE federal structure

• Protection of returns of outbound FDI– Dividends– Interest– Royalties– Capital Gains

• Sovereign Funds

How UAE able to achieve its DTA Network?

• Has avoided features now defined as harmful tax competition

• No “ring fencing” or externally directed tax design features

• Lead Partner in OECD/MENA Dialogues, including Tax Treaty partnership

• Longstanding commitment to transparency and proper corporate governance, especially DFSA

Drivers in DTA negotiations: OECD

• “Harmful tax competition”

• Limitation of Benefits

• Exchange of Information

• Mutual assistance

Outcomes

• 1992 OECD Model Convention provides basic template

• Petroleum taxes outside most treaties

• Sovereign funds and private investors better protected than under many DTAs

• Articles 7, 8, 14 to 21 resolve most trading issues

• Significant areas of uncertainty.

The Treaties

• No comprehensive local list readily available until recently, and even then some uncertainties

• IBFD details out of date and no English translations of some treaties

• Ratification details with IBFD also out of date

• Officially said to be 50, but this includes some which may not be in force

Application

• Basic Rule is Article 2 of OECD Model Convention

• Doesn’t apply to Malaysia, New Zealand, Pakistan

Residence

• “Liable to tax” formula causes some debate – Indian experience

• Formula used in Belarus, Belgium, China, Czech Republic, Indonesia, Italy, Pakistan, Poland, Thailand, Tunisia, Turkey DTAs

• Other formulae also confusing: “resident for the purposes of its taxation law”

• Very restrictive definition in some treaties, e.g. Canada, Netherlands – and note special exclusion for Netherlands

Dividends, Interest, Royalties

• Treaties fall into 3 categories:– Residence based taxation– Participation exemption (dividends)– Low withholding rates

• GOC exemptions – Note participation levels

Articles 10,11 and 12 Problems

• Debt Instruments – Does “Interest” cover Islamic finance models?

• “Beneficially entitled” – what about a waqf

Capital Gains

• Gains on immovables, and movables associated with a PE or fixed base, generally taxable according to source.

• Other gains (including on shares in companies holding such assets) generally taxable in country of residence

• Note exception for shares in land rich companies in Belarus, Canada, China, India, Mozambique, Philippines and Spain

• Special rules for France, Korea and Turkey

Residual Income

• Most treaties follow OECD model in allocating this to country of residence.

• Note the exceptions: New Zealand, Pakistan, Seychelles, Singapore, Thailand tax locally sourced income

• Article 22 equivalents do, however, protect third country income from tax

Limitation of Benefits

• US very keen on concept

• First country to accede to its views was Australia in 1982

• Most UAE treaties don’t contain such a provision

• Note the exceptions: Canada, Germany, India, Korea.

• Special provision for Luxembourg

Exchange of Information

• Most treaties follow 1992 OECD Model Convention

• In practice this means UAE won’t be providing much information – see e.g. Article 26 of China DTA

• Note exceptions: Netherlands, New Zealand, Spain

• Special form of Pakistan DTA article

Suggested UAE objectives

• Include local taxes• Define “resident” more clearly, and use general

residence criteria• Address problem of free zone companies• Avoid restrictions based on “special regimes”• Use residence basis of tax for dividends, interest

and royalties• Avoid land rich capital gains provisions• Avoid Limitation of Benefits provisions• Avoid new Exchange of Information rules

Opportunities

• MENA Region – lack of Limitation of Benefits provision in all MENA DTAs makes UAE a highly attractive RHQ location from a tax perspective

• Of MENA high tax countries, only Iraq and Jordan not covered by a DTA with UAE

Opportunities (cont.)

• Europe – Austrian treaty• No tax on dividends unless shareholding

connected with an Austrian PE, interest or royalties

• No Limitation of Benefits provision (although Austria would regard a “brass plate” UAE company as abusive)

• Relative freedom of operation of Austrian company through Europe

THE END