The UAE has been busy forging economic ties, negotiating and signing tax treaties with a number of territories. In the first quarter of 2013, the UAE signed tax treaties with Hungary, Benin, Libya, Japan and Serbia, and an air transport agreement with Senegal. The UAE continued its treaty negotiations with Peru, Kyrgyzstan and Malawi.
Unlike other recent UAE treaties, the newly signed UAE-Japan tax treaty takes a different approach to the test of residence. Under article 4(1), the term “resident of a contracting state” includes a “liable to tax” criterion for the treaty’s application, rather than other criterion (such as “place of effective management” or “incorporation”). This “liable to tax” condition could create potential issues for UAE mainland companies and companies registered in the Free Trade Zones (FTZ), since they arguably could be considered not to be “liable to tax” due to lack of enforcement of corporate tax decree or the tax holiday/exemption applied in the FTZ.
Recent experience suggests that it is getting harder to access benefits under UAE tax treaties, both locally and overseas. Increasingly, foreign tax authorities are requiring Tax Residency Certificates (TRC) in order to confirm the tax residency status of a UAE entity.
Previously, obtaining a TRC was relatively straightforward and routine. Now, however, businesses face issues over whether a UAE resident entity can obtain a TRC and whether the UAE resident entity or the counter-party are entitled to the relevant treaty benefits.
Mainland entities generally can obtain a TRC from the UAE Ministry of Finance (MOF). However, the MOF currently is not issuing TRCs to foreign companies that invest into other jurisdictions through entities based in UAE free trade zones (FTZ) that are of a pure “holding” or “investment” nature on the basis they lack substance.
It is understood that the MOF has signed a Memorandum of Understanding with three FTZs — Dubai International Financial Centre (DIFC), Jebel Ali Free Zone (Jafza) and Fujairah. The agreement will require entities established in these locations to provide assurance that they are not “paper” companies and actually have substance. Thus, to obtain a TRC, FTZ entities will need to provide annual audited financial statements or, for newly set up companies, the half-year accounts or an office lease of six months or more.
Even though new companies must satisfy these requirements to obtain a TRC, overseas tax authorities could still challenge their tax residency status if the relevant treaty contains the “liable to tax” criterion for qualifying for treaty benefits.
The MOF has notified branches of foreign banks that it intends to “audit” their tax affairs to ensure compliance with the Abu Dhabi Bank Tax Decree (2007) and Central Bank Regulations. Although this procedure is routine for (foreign) banks in Dubai, the Ruler’s office in Abu Dhabi has implemented the initiative and sub-contracted the inspection and assessment process to an accounting firm.
The UAE Federal Government has announced it will establish a new financial free zone in Al Maryha Island – called the “Abu Dhabi World Financial Market” (ADWFM). The aim is to promote Abu Dhabi as a leading global market, develop the economic environment, attract financial investment and, like DIFC, contribute to international financial services.
In a bid to attract FDI into the Emirate and the UAE in general, the financial free zone will provide foreign investors with 100 percent ownership – with no requirement for a local sponsor or agent, a guaranteed tax holiday/exemption (for 50 years), and ease of capital repatriation. The ADWFM’s licensing categories and permissible operations are expected to have restrictions similar to those of other UAE FTZs.
The ADWFM is scheduled to be open by 2015. In the meantime, there is work to be done on the legal and regulatory framework and how it will be governed. As the initiative is still in its early development stages, the relationship between ADWFM and DIFC—and whether they would co-exist or compete—is unclear. However, given the importance of developing the capital and financial markets, the ADWFM’s establishment is expected to ultimately benefit the UAE.