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COUNTRY DATE STATUS(TERMINATION ENTRY INTO FORCE)

EXCHANGE OF INFORMATION*(NOT OF INFORMATION LOCALLY REQUIRED)

LIMITATION OF BENFEFITS CLAUSE

1. Algeria 28/11/2001 Indefnit term OECD NONE 2. Armenia 29/12/2004 Indefnit term OECD NONE 3. Austria 27/04/2004 Indefnit term OECD NONE

4. Azerbaijan 30/04/2007 Indefnit term OECD NONE

5. Belarus 02/02/2001 Indefnit term OECD NONE 6. Belgien 26/06/1997 Indefnit term OECD NONE Special

Consultation 7. Bosnia &

Herzegovina30/04/2007 Indefnit term OECD NONE

8. Bulgaria 22/01/2008 Indefnit term OECD NONE 9. Canada 07/01/2004 Indefnit term OECD NONE

10. China 05/06/1994 Indefnit term OECD NONE

11. Czech Rep. 26/06/1997 Indefnit term OECD NONE

12. Egypt 26/03/1995 Indefnit term OECD NONE

13. Finland 24/02/1997 Indefnit term OECD NONE

14. France 15/11/1985 Indefnit term OECD NONE

15. Germany 18/03/1996

(Expired)

New protocol being nego-siation

OECD ARTICLE 23

16. India 04/09/2007 Indefnit term OECD ARTICLE 29

17. Indonesia 17/06/1996 Indefnit term OECD NONE

18. Italy 20/11/1995 Indefnit term OECD NONE

19. Jordan Not in force OECD NONE

20. Korea 04/05/2004 Indefnit term OECD ARTICLE 23

21. Lebanon 25/10/1998 Not official English version

22. Luxembourg 07/05/2006 Not in force OECD ARTICLE 28

23. Malaysia 17/06/1996 Indefnit term OECD NONE

24. Mauritius 20/06/2007 Indefnit term OECD NONE

25. Malta 13/08/2006 Indefnit term NONE

26. Mongolia 29/11/2002 Not in force OECD NONE

27. Morocco 26/09/1999 Indefnit term OECD NONE

28. Mozambique 04/05/2004 Indefnit term OECD NONE

29. Netherlands 29/11/2007 Not in force NEW OECD PROVISIONS

NONE

30. New Zealand 04/05/2004 Indefnit term NEW OECD PROVISIONS

NONE

31. Pakistan 29/01/1994 Indefnit term OECD (check) NONE

32. Philippines 29/12/2004 Indefnit term OECD NONE

33. Poland 29/01/1994 Indefnit term OECD NONE

34. Romania 09/01/1996 Indefnit term OECD NONE

35. Seychelles 06/02/2007 Indefnit term OECD NONE

36. Singapore 17/06/1996 Indefnit term OECD NONE

37. Spain 13/08/2006 Indefnit term NEW OECD PROVISIONS

NONE

38. Sri Lanka 24/09/2003 Indefnit term OECD NONE

39. Sudan 28/11/2001 Not in force OECD NONE

40. Syria 11/06/2000 Not official English version

41. Tajikistan 29/01/2000 Indefnit term OECD NONE

42. Thailand 12/11/2000 Indefnit term OECD NONE

43. Tunisia 24/02/1997 Indefnit term OECD NONE

44. Turkey 29/01/1994 Indefnit term OECD NONE

45. Turkmenistan 24/11/1994 Indefnit term NONE

46. Ukraine 28/02/2004 Indefnit term OECD NONE

47. Uzbekistan 26/10/2007 No information48. Yemen 25/08/2001 Not official

English version

It is a well known fact that the United Arab Emirates (UAE) does not levy any income or capital taxes.

It is a lesser known fact that the UAE has a comprehensive network of double tax trea-ties that may be used to reduce the burden of taxation in the home countries of foreign investors, or corporations with their head-quarters in the UAE.

An important aspect for foreign investors and global companies is the use of a UAE “free zone” in establishing a UAE presence. The free zones are used by foreign investors to retain 100% benefi cial ownership and to avoid the 5% import duty on goods. The ben-efi ts of the double tax treaties will also apply to free zone entities established by foreign investors.

This article will focus on the use of the UAE treaty network for head offi ce operations, or legitimate tax minimisation and tax planning by corporations and individuals.

The combination of a free zone entity with an international company (the offshore ve-hicle) and a trust or foundation can also be extremely effective in providing for confi den-tiality where required in tax planning. Indeed the UAE is the only OECD “white list” juris-diction that has no taxes for international companies, free zone or local companies or individuals.

Specifi cally, two emirates, Dubai and Ras Al Khaimah, have also established the system of “International Companies” (ICs).

It is the combination of the IC and the free zone entity, providing a confi dential fl exible company with a physical presence that be-comes a powerful key unlocking the benefi ts of the UAE bilateral treaty network.

The current UAE treaties and their bases are as follows1:

LLC’s, Free Zone Entities and Internation-al Companies A foreign investor wishing to establish a lo-cal company in the UAE must have a local partner with a 51% share. Foreign direct in-vestment is possible only via the free zones where a foreign investor can retain 100% benefi cial ownership.

The fi rst UAE free zone was established in Jebel Ali in 1985. The fi rst bilateral tax treaty with a major OECD country was entered into with France on 15 November 1989, years after the free zone was established. More recently, the RAK Free Trade Zone was es-tablished in 2000 and the RAK international company registry in 2006.

Do the UAE double tax treaties apply in the free zones? Prima facie, bilateral treaties do not distin-guish between companies established in a free trade zone and companies incorporated as local LLC’s within the UAE.

One clear exception is the UAENetherlands bilateral treaty which specifi cally excludes companies or individuals who are exempted from tax by a special tax regime under the laws of one of the contracting states. Three issues may effect the application of a bilat-eral treaty:

1. Is the entity a “person” to whom the treaty 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 apply-ing? “Persons” are defi ned in Article 3(1)(a) of the OECD Model Convention, as an individual, company, and any other body of persons. This could potentially allow for resident trusts, foundations and company hybrids to fall within the defi nition of per-son.

There has been debate over point two. The OECD Model refers to “Resident” as “a per-son that is liable for tax”. The immediate assumption becomes that as there are no taxes in the UAE then the treaties are inap-plicable, however, this is incorrect. Bilateral treaties were entered into with the UAE with full knowledge that there are no taxes and that the free zones exist. It would be illogi-cal to deny the benefi t of a treaty where the Articles do not expressly limit or refer to any special economic zones. The question of li-ability to tax does not mean the actual pay-ment of tax, but rather it is a legal notion that covers the undisputed right of the UAE to impose taxation. Whilst the free trade zones are established by decrees to allow for tax holidays, it is the sovereign right of the UAE to impose taxation on these entities by virtue of their incorporation, presence, or activities in the UAE.

In order to avoid confusion, many of the UAE treaties do not follow the standard OECD Model defi nition of “Resident” for example the 2007 Protocol of the UAE-India treaty is clearly intended to apply to companies incor-

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porated, managed and controlled wholly in the UAE and to individuals present in the UAE for a period of 183 days or more in a calendar year. A few of the UAE treaties use the term “subject to tax”, which arguably is a weaker link than “liable to tax”, for example, treaties with Lebanon, Morocco and Syria.

The practical result is that bilateral tax trea-ties will apply to Free Trade Zone entities, entities which are incorporated in the UAE, and individuals who are resident in the UAE for tax purposes.

It is of more importance to consider the limi-tations in the use of treaties or the antiabuse provisions as these are usually the areas un-der which the availability of taxation benefits may be denied.

The “place of incorporation” criterion is part of many of the UAE treaties and simply put, if a company is incorporated or created in the UAE, then it will be a resident for the pur-poses of that particular treaty eg, Armenia, Finland, Mauritius, Mongolia, Luxembourg, Sri Lanka, Austria, Switzerland, Mozambique, and New Zealand.

Some countries impose the additional test of place of effective management eg, Germany, Korea, Spain, Romania, India and Canada. This is determined as a question of fact. Im-portant factors 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 as offices, managers, call centres, banking relationships etc. allowing companies to change their place of effective management, subject to the pro-visions of the treaties.

Limitation on Treaty Benefits (LOB) Only a few UAE bilateral treaties include a LOB clause, although the more recent trea-ties tend to include them. Treaties including LOB clauses include:

● India (New 2007 Protocol), requiring a bona fide business activity;

● Luxembourg (consultation where treaty shopping is found); and

● Belgium (requires special attention to be given if improper use of the agreement is found). A bona fide business activity can easily be established through the use of a free trade zone entity where trade, com-mercial or consulting licenses are available together with resident visas for staff.

Exchange of Information The majority of UAE treaties do not con-tain the new OECD exchange of information clause. This is of critical importance as Arti-cle 26 on exchange of information has been

greatly expanded since July 2005. Prior to 2005 one contracting state could not request another contracting state to provide informa-tion that could not be sought under the laws of the other contracting state (in the absence of criminal activity). The new provisions make it clear that a state cannot refuse a request for information solely because it has no do-mestic tax interest in the information (para-graph 4) or solely because it is held by a bank or other financial institution (paragraph 5).

Even with a post 2005 OECD information ex-change clause, countries are not at liberty to enter into “fishing expeditions”.

Information exchange even under a new treaty is far more restricted than, for exam-ple, information exchanges pursuant a Tax Information Exchange Agreement (TIEA), that many OECD grey list countries will be forced to enter into.

Strategies for utilising the UAE bilateral tax treaties Suggested below are some general strategies for advisors considering the UAE for basing head office, or global head office companies.

Strategy One - Establish a free zone en-tity The free zones allow you to have a UAE en-tity that is 100% foreign owned and yet take advantage of:

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

from flexi desks(virtual desks) to complete buildings and industrial developments;

● no taxes; ● no exchange controls or thin capitalisation

restrictions; ● access to the UAE double tax treaty net-

work; and ● an individual acts as the “Manager” and is

required to be nominated for each com-pany.

Strategy Two – Combine a free zone entity with an International Company. Owning a free zone entity or creating a free zone branch of the IC provides the following benefits: ● confidentiality of ownership and opera-

tions; vphysical presence or management as required by some treaties for treaty pro-tection;

● restricted Custodian and Nominee share-holdings;

● ability to have investments in the UAE (but not carry on business);

● choice of any law (common law, civil law etc.);

● no local meetings, audits, or local presence requirements;

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

Strategy Three- global head office com-pany/IP holding company In the majority of the UAE tax treaties which have look through limitation provisions, the

use of the UAE as a head office of a company to minimise global taxes is a vastly underes-timated and underutilised strategy.

The relocation of the head office of the iconic US company, Halliburton to Dubai is one no-table example of this strategy, however, for the majority of practitioners, the use of UAE treaty networks in this manner has been ig-nored mostly for a lack of information.

The choice of law for ICs provides for the head office company to own patents, trade-marks, confidential know how and copyright under the laws of any jurisdiction and to li-cense this technology to a free zone entity or to other countries worldwide. The treaty net-work will reduce withholding taxes, impose no taxes in the UAE and allow for peace of mind in terms of legal enforceability, licens-ing, securities and charges outside the ambit of the local UAE or DIFC laws which may be a concern when otherwise considering the UAE as a base to hold and develop intellectual property.

Strategy Four- Residence and domicile for directors and senior staff Whilst domicile in the UAE may not be possi-ble depending on the laws of the home coun-try, certainly with a renewable residence visa that is issued to persons or associates of a free zone entity, individuals may reduce or eliminate home country taxation. In many cases, following the OECD model, the treaties provide for directors fees paid to a nondomi-ciled director of a UAE entity to be exempt from tax in the home country.

The UAE presents a unique window of oppor-tunity. The system of International Compa-nies combined with the benefits of the free zones and the extensive network of double taxation treaties make the UAE a very at-tractive proposition. Jas Sekhon is an inter-national tax lawyer and the views expressed in this article are his personal views 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 the text, published by the same department, where available. This list is also partly the result of discussions with, and a paper presented by David Russell QC at the Offshore Investment conference, Dubai, March 2009. 2. The dates have been taken from the official UAE Ministry of Finance pub-lication and may indicate the date of entry into force. In many cases these are not the dates of execution as stated in the aforemen-tioned publication.