It is a well known fact that theUnited Arab Emirates (UAE)does not levy any income orcapital taxes. It is a lesser known

fact that the UAE has a comprehensivenetwork of double tax treaties that maybe used to reduce the burden of taxationin the home countries of foreigninvestors, or corporations with theirheadquarters in the UAE.

An important aspect for foreigninvestors and global companies is the useof a UAE “free zone” in establishing aUAE presence. The free zones are usedby foreign investors to retain 100%beneficial ownership and to avoid the 5%import duty on goods. The benefits of thedouble tax treaties will also apply to freezone entities established by foreigninvestors.

This article will focus on the use ofthe UAE treaty network for head officeoperations, or legitimate tax minimisationand tax planning by corporations andindividuals.

The combination of a free zone entitywith an international company (theoffshore vehicle) and a trust orfoundation can also be extremely effectivein providing for confidentiality whererequired in tax planning. Indeed the UAEis the only OECD “white list” jurisdictionthat has no taxes for internationalcompanies, free zone or local companiesor individuals.

Specifically, two emirates, Dubai andRas Al Khaimah, have also established thesystem of “International Companies”(ICs).

It is the combination of the IC and thefree zone entity, providing a confidentialflexible company with a physical presencethat becomes a powerful key unlockingthe benefits of the UAE bilateral treatynetwork.

The current UAE treaties and theirbases are as follows1:

LLC’s, Free Zone Entities andInternational Companies

A foreign investor wishing to establish alocal company in the UAE must have a localpartner with a 51% share. Foreign directinvestment is possible only via the free zoneswhere a foreign investor can retain 100%beneficial ownership.

The first UAE free zone was established inJebel Ali in 1985. The first bilateral tax treatywith a major OECD country was entered intowith France on 15 November 1989, years afterthe free zone was established.

More recently, the RAK Free Trade Zonewas established in 2000 and the RAKinternational company registry in 2006.

Do the UAE double tax treaties apply inthe free zones?

Prima facie, bilateral treaties do notdistinguish between companies established in afree trade zone and companies incorporated aslocal LLC’s within the UAE.

One clear exception is the UAE-Netherlands bilateral treaty which specificallyexcludes companies or individuals who areexempted from tax by a special tax regimeunder the laws of one of the contracting states.

Three issues may effect the application of abilateral treaty:

1. Is the entity a “person” to whom thetreaty has potential application;

2. Is the person “resident” in the UAE;3. Is there a limitation within the treaty that

prevents or limits the treaty from applying?“Persons” are defined in Article 3(1)(a) of

the OECD Model Convention, as an individual,company, and any other body of persons. Thiscould potentially allow for resident trusts,foundations and company hybrids to fall withinthe definition of person.

There has been debate over point two.The OECD Model refers to “Resident” as “aperson that is liable for tax”. The immediateassumption becomes that as there are no taxesin the UAE then the treaties are inapplicable,however, this is incorrect. Bilateral treaties wereentered into with the UAE with full knowledgethat there are no taxes and that the free zonesexist. It would be illogical to deny the benefit ofa treaty where the Articles do not expresslylimit or refer to any special economic zones.The question of liability to tax does not meanthe actual payment of tax, but rather it is a legalnotion that covers the undisputed right of theUAE to impose taxation. Whilst the free tradezones are established by decrees to allow fortax holidays, it is the sovereign right of the UAEto impose taxation on these entities by virtueof their incorporation, presence, or activities inthe UAE.

In order to avoid confusion, many of theUAE treaties do not follow the standard OECDModel definition of “Resident” for example the2007 Protocol of the UAE-India treaty is clearlyintended to apply to companies incorporated,managed and controlled wholly in the UAE andto individuals present in the UAE for a period of183 days or more in a calendar year. A few of

The UAE as a true global financial centre

By Jas Sekhon, International Tax Lawyerand Regional Director of RAK Free Trade Zone,Ras Al Khaimah

The Jurisdictions: United Arab Emirates

offshoreinvestment.com16

the UAE treaties use the term “subject to tax”,which arguably is a weaker link than “liable totax”, for example, treaties with Lebanon,Morocco and Syria.

The practical result is that bilateral taxtreaties will apply to Free Trade Zone entities,entities which are incorporated in the UAE, andindividuals who are resident in the UAE for taxpurposes.

It is of more importance to consider thelimitations in the use of treaties or the anti-abuse provisions as these are usually the areasunder which the availability of taxation benefitsmay be denied.

The “place of incorporation” criterionis part of many of the UAE treaties and simplyput, if a company is incorporated or created inthe UAE, then it will be a resident for thepurposes of that particular treaty eg, Armenia,Finland, Mauritius, Mongolia, Luxembourg, SriLanka, Austria, Switzerland, Mozambique, andNew Zealand.

Some countries impose the additional testof place of effective management eg, Germany,Korea, Spain, Romania, India and Canada. This isdetermined as a question of fact. Importantfactors include:

• Registered office location.• Place where meetings are held or initiated.• Domicile of controlling individuals.• Banking relationships.• Property and Intellectual Property held.• Head office mailing address.• Location of auditor and accounts.• Residence of the Manager or Management.

The free zones offer facilities such asoffices, managers, call centres, bankingrelationships etc. allowing companies to changetheir place of effective management, subject tothe provisions of the treaties.

Limitation on Treaty Benefits (LOB)Only a few UAE bilateral treaties include a

LOB clause, although the more recent treatiestend to include them. Treaties including LOBclauses include:

• India (New 2007 Protocol), requiring a bonafide business activity;

• Luxembourg (consultation where treatyshopping is found); and

• Belgium (requires special attention to begiven if improper use of the agreement isfound).A bona fide business activity can easily be

established through the use of a free trade zoneentity where trade, commercial or consultinglicenses are available together with residentvisas for staff.

Exchange of InformationThe majority of UAE treaties do not

contain the new OECD exchange ofinformation clause. This is of critical importanceas Article 26 on exchange of information hasbeen greatly expanded since July 2005. Prior to2005 one contracting state could not requestanother contracting state to provideinformation that could not be sought under thelaws of the other contracting state (in the

absence of criminal activity). The newprovisions make it clear that a state cannotrefuse a request for information solely becauseit has no domestic tax interest in theinformation (paragraph 4) or solely because it isheld by a bank or other financial institution(paragraph 5).

Even with a post 2005 OECD informationexchange clause, countries are not at liberty toenter into “fishing expeditions”.

Information exchange even under a newtreaty is far more restricted than, for example,information exchanges pursuant a TaxInformation Exchange Agreement (TIEA), thatmany OECD grey list countries will be forcedto enter into.

Strategies for utilising the UAE bilateraltax treaties

Suggested below are some generalstrategies for advisors considering the UAE forbasing head office, or global head officecompanies.

Strategy One - Establish a free zoneentity

The free zones allow you to have a UAEentity that is 100% foreign owned and yet takeadvantage of:

• low formation and annual costs;• visa sponsorships;• a range of options for physical presence

from flexi desks(virtual desks) to completebuildings and industrial developments;

• no taxes;• no exchange controls or thin capitalisation

restrictions;• access to the UAE double tax treaty

network; and• an individual acts as the “Manager” and is

required to be nominated for eachcompany.

Strategy Two - Combine a free zoneentity with an International Company.

Owning a free zone entity or creating afree zone branch of the IC provides thefollowing benefits:

• confidentiality of ownership andoperations;

• physical presence or management asrequired by some treaties for treatyprotection;

• restricted Custodian and Nomineeshareholdings;

• ability to have investments in the UAE (butnot carry on business);

• choice of any law (common law, civil lawetc.);

• no local meetings, audits, or local presencerequirements;

• migration in and out of the jurisdiction; and• OECD white list jurisdiction.

Strategy Three- global head officecompany/ IP holding company

In the majority of the UAE tax treatieswhich have look through limitation provisions,the use of the UAE as a head office of a

company to minimise global taxes is a vastlyunderestimated and underutilised strategy.

The relocation of the head office of theiconic US company, Halliburton to Dubai is onenotable example of this strategy, however, forthe majority of practitioners, the use of UAEtreaty networks in this manner has beenignored mostly for a lack of information.

The choice of law for ICs provides for thehead office company to own patents,trademarks, confidential know how andcopyright under the laws of any jurisdiction andto license this technology to a free zone entityor to other countries worldwide. The treatynetwork will reduce withholding taxes, imposeno taxes in the UAE and allow for peace ofmind in terms of legal enforceability, licensing,securities and charges outside the ambit of thelocal UAE or DIFC laws which may be aconcern when otherwise considering the UAEas a base to hold and develop intellectualproperty.

Strategy Four- Residence and domicilefor directors and senior staff

Whilst domicile in the UAE may not bepossible depending on the laws of the homecountry, certainly with a renewable residencevisa that is issued to persons or associates of afree zone entity, individuals may reduce oreliminate home country taxation. In many cases,following the OECD model, the treatiesprovide for directors fees paid to a non-domiciled director of a UAE entity to beexempt from tax in the home country.

The UAE presents a unique window ofopportunity. The system of InternationalCompanies combined with the benefits of thefree zones and the extensive network of doubletaxation treaties make the UAE a veryattractive proposition.

Jas Sekhon is an international tax lawyer andthe views expressed in this article are his personalviews and not those of the RAK Free Trade Authority.

END NOTES:1. Based on a list published by the UAE Ministry of

Finance and the official English versions of thetext, published by the same department, whereavailable. This list is also partly the result ofdiscussions with, and a paper presented byDavid Russell QC at the Offshore Investmentconference, Dubai, March 2009.

2. The dates have been taken from the officialUAE Ministry of Finance publication and mayindicate the date of entry into force. In manycases these are not the dates of execution asstated in the aforementioned publication.

United A

rab Emirates

OI 197 • June 2009 17