Recent tax developments in the United Arab Emirates (UAE) of note to foreign investors include Foreign Account Tax Compliance Act (FATCA) reporting update, new Free Zone in Dubai to attract additional foreign investment, new protocol to the tax treaty between the UAE and Luxembourg, newly signed tax treaties, and an update on the new UAE Commercial Companies Law.
The UAE government has studied two models for implementing FATCA and enable the exchange of information between Ministry of Finance (MoF) and the US Internal Revenue Service (IRS) of the US Treasury. After reviewing Intergovernmental Agreement (IGA) Model 1 (government exchange of information) and IGA Model 2 (direct exchange of information between financial institutions and IRS), the UAE Cabinet decided on 14 April 2013 to adopt IGA Model 1.1
The first date selected to submit reports to the US Treasury for financial year 2014 is 1 September 2015, except for government institutions, sovereign funds and international organizations. The MoF is expected to sign the IGA with US at the beginning of June 2015, under which it will electronically transfer the agreed-upon data to the IRS in September 2015.
Local regulatory authorities, namely the UAE Central Bank and the Securities and Commodities Authority (SCA) have issued circulars / notices instructing all financial institutions to send the relevant information by 31 May 2015. The relevant local regulatory authority would then forward the same information to the MOF, which in turn would be responsible for submitting it to the IRS.
All four local authorities (i.e. Central Bank, SCA, Insurance Authority and the Dubai Financial Services Authority (DFSA)), are introducing online FATCA reporting systems through their portals, which can only be accessed by the financial institutions they govern. UAE Central Bank and the Securities and Commodities Authority have already initiated the FATCA reporting systems, while the systems of the Insurance Authority and the DFSA are still being finalized.
Financial Institutions will be required to download Excel templates from the portal of the local regulatory authority for reporting various returns. These templates are standardized for use by all financial institutions regulated by different local regulatory authorities.
There are no prescribed guidelines for ‘Nil’ reporting on the FATCA returns by the Central Bank, and so it is prudent for all banks to submit returns even in these cases. The SCA guidelines stipulate that individual returns can have a ‘Nil’ status, which implied that Nil returns are required by financial institutions governed by SCA.
Dubai Design District, known as d3, is the newest of TECOM Investments’ Free Zone business parks that allow 100-percent foreign ownership. Formed to stimulate investments in the arts, design and fashion industry, d3 recently become operational and has already attracted many international brands.
On 19 April 2015, the UAE cabinet approved an amending protocol, signed on 26 October 2014, to the Luxembourg-UAE tax treaty. The protocol not only tackles exchange of information related matters but also adds favorable measures for bilateral investments.
The protocol, which is pending exchange of ratification instruments, will have effect on 1 January of the calendar year following the year of its entry into force.
The new favorable provisions offer reciprocal investment opportunities. The protocol’s key points relate to capital gains, elimination of double taxation and the international standard of exchange of information upon request.
Additionally, the non-exhaustive detailed list of UAE financial institutions as defined under the treaty is amended to include:
The list of Luxembourg financial institutions2 is unchanged.
A new UAE Commercial Companies Law (CCL) has been issued and will reportedly be in force by July 2015. This marks the culmination of 6 years of legislative process during which there has been much debate about which aspects of the existing companies legislation should change, especially in the area of foreign ownership restrictions. In the end, the existing rules on foreign ownership have not been amended.
While the legislation’s framework is unchanged, the new law introduces a number of improvements that aim to modernize UAE company law and make UAE more competitive internationally. The new law introduces:
All companies must amend their memorandum to comply with the new law by 1 July 2016, or they will be deemed to be dissolved.
The new CCL will apply to companies (with some exceptions) incorporated in the UAE outside of Free Zones, and to the registration process for foreign companies doing business in the UAE outside of free zones.
The Ministry of Finance (MoF) has recently signed a memorandum of understanding (MOU) on transparency and information exchange with the Umm Al Quwain Free Trade Zone (UAQ FTZ). The MoF previously signed MOUs with the UAE Central Bank, the Dubai International Financial Center, the Jebel Ali Free Zone, the Fujairah Free Zone Authority, Dubai Multi Commodities Centre and Ras Al Khaimah Free Trade Zone.
As a result of the MOU with UAQ FTZ, companies established in the UAQ FTZ will be able to access UAE’s tax treaty network and obtain a Tax Residency Certificate from the MoF within a year.
The MoF is expected to sign another MoU with RAK Investment Authority (RAKIA) in May 2015.
The UAE signed new tax treaties with Liechtenstein, Comoros and Ethiopia were signed, and the tax treaty with Lithuania entered into force (applies from 1 January 2015).
The government of Kazakhstan issued a decree that removes Dubai, UAE, from the list of jurisdictions with a preferential tax regime, as of 1 January 2015.
Before this amendment, Dubai was on Kazakhstan’s ‘blacklist’ of tax havens, and dividends paid by a Kazakh company to a Dubai company were subject to a withholding tax (WHT) of 20 percent. The reduced WHT rate of 5 percent under the UAE-Kazakhstan tax treaty should now apply, assuming that a UAE tax residency certificate can be obtained.
On 22 April 2015, the Arab Economic Union Council met in Cairo to discuss the revision of the Arab Economic Union Council Income and Capital Tax Treaty (1997), which was signed on 3 December 1997 but is not yet in force. The Council agreed that the revised agreement is in line with the requirements of the Arab Economic Unity and inter-Arab trade and that it satisfies obligations for international economic cooperation regarding double taxation.
1No. (100/5 and/2) for 2013.
2For purposes of Article 10 (dividends) paragraph 3) of the Convention.