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How To Benefit From The Attractive UAE Tax Treaty Network

Freemont Group
02 July, 2013

The UAE offers a economic model distinctly different from anywhere else in the world: no direct or indirect taxes on personal or corporate income, no forced contributions to a social security or pension scheme, very low import duties (5%), no taxes on luxury goods, de facto free immigration (for anyone with a job), limited interference in labour markets, and unilateral free trade.

The UAE also offers an extensive and steadily expanding tax treaty network; enabling foreign investors and businesses to reap the tax benefits of using a UAE based entity. Whileas countries in the past have often been hesitant to allow for significant benefits in treaties with zero-tax countries like the UAE, many newer treaty partners have realized the advantages of being able to benefit from inward investments by one of the wealthiest countries on earth. Some of the UAE’s recent treaties have been very favourable for the UAE investor despite the fact that the UAE is blissfully free of taxation.

There are several key features to look out for in a treaty with the UAE which can make it attractive:

  • Absence of a “liable to tax” requirement.
  • Low or zero withholding tax rates.
  • UAE source income is exempted rather than tax credits being given.
  • Limited anti avoidance provisions

Liable to tax

It is usually a requirement in tax treaties that in order to benefit from a treaty a person needs to be liable to tax. In the case of the UAE such a clause would introduce a certain amount of doubt. Since, if there is no tax, can it be liable to tax?

This forces one to look at the domestic law of the country providing the tax relief. Most countries grant that a resident of the UAE is considered liable to tax since the UAE could impose tax, and exemption is not due to a special regime available only to certain entities.

In cases where it is relevant to demonstrate that the UAE does consider a person liable to tax, a certificate of the Ministry of Finance can be obtained. Nonetheless, in order to remove any doubt, certain treaties do not have a liable to tax requirement; for instance: Austria, Bulgaria, Georgia, , Malta, Mozambique, the Netherlands, and New Zealand.

Low or zero withholding tax rates

Below a list of countries where in one or more respects the UAE offers the best way out of the source jurisdiction for respectively dividends, interest, royalties and capital gains (that are not associated with immovable property or a permanent establishment in the source country) which are payable to a company considered tax resident in the UAE under the treaty:

Bulgaria: 5%-2%-5%-0%
China: 7%-7%-10%-0%
Georgia: 0%-0%-0%-0%
Indonesia: 10%-5%-5%-0%
Mozambique: 0%-u*-5%-0%
The Netherlands: 5%-0%-0%-0%
India: 10%-12.5%-10%-0%**
Poland: 5%-5%-5%-0%

*u = unlimited (no treaty protection)

** While as there is no protection against capital gains tax levied in India on the sale of an Indian company by a UAE company, there is protection against capital gains attributed indirectly to the UAE company. So, if a UAE company, holds shares in an Indian company through an intermediary jurisdiction, and the UAE company sells its shares, then India cannot levy capital gains tax on the basis that it was an indirect transfer, as it tried to do in the Vodafone case when a Cayman Island company indirectly sold its shares in an Indian company.

Exemption of UAE source income

A few possible UAE sources can be: a UAE subsidiary, a permanent establishment in the UAE, employment income, director’s fees.

The Netherlands is an example of a country that exempts income and gains from a subsidiary or a permanent establishment, even if not subject to tax (provided the income is not considered passive income-but it doesn’t include income from real estate).

A few countries follow an exemption (with progression) system for foreign employment income that is derived from an employer resident in a source state. So for instance, in case a resident of the Netherlands works for a UAE company in the UAE then the salary that can be attributed to that work is exempt from tax (with progression) in the Netherlands.

The tax treaty with Poland and Bulgaria provides for exemption with progression on director’s fees. So director’s fees derived by a resident of Poland or Bulgaria from a company resident in the UAE, benefit from exemption (with progression) in the respective countries.

Anti-avoidance provisions

These should always be checked. Suffice it to say here that in the mentioned treaties the anti avoidance provisions are relatively limited. It is also noteworthy that the UAE has some very attractive options for non-treaty based tax planning.

The above list of countries have some of the most attractive treaties with the UAE, if you have, or are considering, business operations in one of these countries consider the UAE as an attractive holding, financing or IP-holding jurisdiction, to accumulate profits tax free and to reinvest them in a tax advantageous manner making use of the increasingly wide treaty network.

For internationally active trading or consulting companies it is frequently an attractive option to run the business from the UAE. For residents of Bulgaria and Poland it is in particular attractive.


About the Author

Freemont Group

Freemont Group is a comprehensive provider of fiduciary services, including corporate formation and administration, trust, fund formation, legal-and tax services. Contact: info@freemontgroup.com


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