The United Arab Emirates’ (UAE) economic environment remains positive despite a challenging global economic climate. The country’s 2015 budget projects increased government revenue and spending, and the UAE continues to grow its network of tax treaties to facilitate foreign investment.
On 7 December 2014, the Federal Cabinet approved a UAE budget for 2015 of 49.1 billion dirham (AED) (up 6.5 percent from 2014), projecting no deficit and increased revenue and public spending.
Even though oil prices have fallen by nearly one-half over the last 6 months, the UAE’s Ministry of Finance has ruled out any plans to impose any taxes in 2015.
The UAE continues to invest in infrastructure to grow its economy by committing to deliver on flagship projects such as Dubai Expo 2020, Dubai Plan 2021 and Abu Dhabi Vision 2030.
With the UAE’s stable political environment, diversified economy and favorable tax environment and with its increasing number of Free Trade Zones allowing 100-percent foreign ownership, KPMG in the UAE continues to see international companies creating a presence or headquarters in the country.
As discussed in more detail below, the UAE has signed a number of new tax treaties over the last 6 months, and negotiations continue with other important jurisdictions. The number of tax treaties now force in exceeds 70.
International companies in the region are challenged to structure their operations appropriately, ensuring there is adequate business substance in order to access treaty benefits. International companies are also keeping a close eye on developments regarding the OECD’s Base Erosion Profit Shifting initiative, and they are beginning to assess its potential impact on their global operations.
Outbound investment from the UAE is still substantial, particularly from sovereign wealth funds, which demonstrates the strength and stability of the UAE’s economy. Investments are being made in the Middle East, North Africa and the United States, with a focus on the healthcare, energy, infrastructure and real estate sectors. There has been substantially less investment into Europe, which may reflect the economic uncertainty regarding the Eurozone.
Tax continues to be a key consideration for all investments, especially in the areas of tax due diligence, structuring and planning. Investors are keen to ensure that tax strategy and planning are robust and able to withstand the current pressures and potential changes in the world of international tax.
At the start of 2015, some highly anticipated tax treaties came into effect, some of which were negotiated & signed in as early as 2013. UAE tax treaties that took effect on January 1, 2015 include those signed with Mexico, Japan, Hungary and Slovenia.
Foreign investors should take note that the treaty with Japan does not define residency using the ‘place of incorporation or management’ that generally appears in treaties negotiated by the UAE. The treaty with Japan uses the ‘liable to tax’ criterion instead. As a result, UAE companies seeking access to the UAE-Japan tax treaty should arrange for a UAE Tax Residency Certificate (even though obtaining the certificate does not necessarily mean that the ‘liable to tax’ criterion is satisfied and will be accepted by the Japanese tax authorities).
Some UAE treaties, including the treaty with Mexico, also have a limitation on benefits clause that should be considered.
As noted above, the UAE is actively expanding its international treaty network. In the last 6 months, UAE has signed treaties with Hong Kong, Kyrgyzstan and Uruguay. Protocols to existing treaties with Singapore, Luxembourg, and Poland have been negotiated and signed. KPMG in the UAE also understands that negotiations toward tax treaties with Australia and the United Kingdom are underway.