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• IBFD details out of date and no English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• Ratification details with IBFD also out of
date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