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Taxes, Investments and Opportunities in the Middle

East6th Asia/Africa IFA Regional Conference - May 10-11, 2012,

Mauritius

Thomas Hanzély

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General

• Taxes in the Middle East• Political Developments and the Economic

Situation – impact on tax policy• Focus on the GCC (in particular Bahrain, Qatar

and the UAE) – attractive for foreign investors• GCC as an economic union?

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Corporate Tax Rate Changes in the Middle East

Source: Ernst & Young, Tax Treaties - Recent Applications in the Middle East, 2010

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General II

• Corporate Taxation– Different tax rates for the hydrocarbon industry

• VAT – any harmonization of indirect taxes in the GCC in the near future?

• Personal Income Tax• Growing Treaty Network – availability of treaty

benefits, dispute resolution, aggressive approach in various matters (e.g. Permanent Establishments)

• Withholding Tax Regimes applied by most of the MENA countries

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General Issues III

• Lack of service-oriented administration?– However I: Ease of Doing Business report (World Bank, 2012) places

Saudi Arabia overall 12th, the UAE 33rd, Qatar 36th, Bahrain 38th – However II: Index of Economic Freedom (Heritage Foundation in

cooperation with the WSJ 2012) places Bahrain 12th, Qatar 25th, UAE 35th

• Communication with authorities– Interpretation of tax rules– Language

• No bankruptcy laws, no credit rating system• Anti-Fronting Laws• Still a safe haven for business?

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Economic Substance in GCC Structures

• ES is an emerging trend • ES can be implemented in the region – place

of effective management and control can be in GCC countries

• There are plenty of non-tax reason to establish a company in the GCC

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COUNTRY PROFILES

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BAHRAIN

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Bahrain – Tax Profile

• Only GCC country without any (statutory) tax– No corporate income tax (CIT), no capital gains tax

(CGT), no withholding tax (WHT), no personal income tax (PIT), no VAT

– Except a 46% corporate income tax levied on oil and gas companies

• Treaty network (25, in force, 8 pending)– a.o. Austria, China, France, Ireland, Netherlands,

Singapore– Pending treaties with Belgium and the UK

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Bahrain – at a Glance I

• Historical financial and trading hub in the ME• Not considered as a tax haven • 100% foreign ownership allowed• Business friendly environment• Good infrastructure• Costs• Political situation?

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Bahrain – at a Glance II

• Free Trade Agreement with the U.S. (2006)• Bahrain International Investment Park (BIIP)

– 0% Corporate Tax with a 10 year guarantee– Duty free access to the markets of the Gulf Cooperation

Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates)

– 100% Foreign Ownership– Availability of serviced industrial land at extremely

competitive rates– Renewable 50 year leases– No recruitment restrictions for the first 5 years– Dedicated assistance of a professional management team

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QATAR

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Qatar – Tax Profile

• New tax law effective since 1 January 2011• CIT and CGT 10% (flat rate); petroleum

companies are taxed at not less than 35% or as determined in the production sharing agreement (PSA)

• No personal income tax, no VAT• Anti-avoidance measures• Transfer pricing

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Qatar – Overview

• One of the fastest growing country worldwide – economy is based on the revenues from liquefied natural gas (LNG)

• Restricted foreign ownership (49/51) – 100% foreign ownership only in exceptional cases

• Role of the Qatar Financial Centre (QFC) – separate/parallel from Qatari legal system based on common law principles

• Qatarization laws• Costs • Treaty Network (37 in force, 7 pending)

– Many OECD countries, India, Singapore, China, Mauritius

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Qatar – Withholding Tax vs Contract Retention

• WHT at 5% (royalties, technical fees or management fees) or 7% on any other payments (e.g. director´s fees, brokerage fees, commissions, etc.)

• Contract retention applies if a company is not incorporated in Qatar or only for a period of less than a year and for a specific project. Contract retention it will be the greater of i) 3% of the contract value excluding the supply value and value of work done outside Qatar and ii) the final payment.

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UNITED ARAB EMIRATES

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UAE – Tax Profile

• Statutory CIT exists, but not enforced, currently 0% CIT

• Petroleum companies are taxed based on individual agreements – tax rates are not disclosed

• Branches of foreign banks are also taxed• No personal income tax, no CGT, no VAT• Treaty Network (47 treaties in force, 10 pending)

– Many OECD countries, India, China, Singapore, Mauritius, Mozambique

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UAE - Free Zones

• Free Zones– 100% foreign ownership only in free zones – new

company laws on the agenda– guaranteed tax holiday – no restrictions on hiring foreign professionals– State of the art infrastructure– Professional local authorities / procedures put in

place• More than 30 Free Zones in the Emirates

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UAE – Free Zones & Economic Substance

• Dubai International Financial Center (DIFC) Jebel Ali Free Zone (JAFZA) most well known– Most Free Zones allow for the implementation of

economic substance• Anti-avoidance provisions in tax treaties

– limitation of benefits– subject-to-tax / liable-to-tax (unclear whether UAE

residents are liable to tax in the context of the treaty)– Conclusion: bona fide business at least required in

order to benefit from tax treaties

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India – UAE DTT

Article 29 - Limitation of BenefitsAn entity which is a resident of a Contracting State shall not be entitled to the benefits of this Agreement if the main purpose or one of the main purposes of the creation of such entity was to obtain the benefits of this Agreement that would not be otherwise available. The cases of legal entities not having bonafide business activities shall be covered by this Article.

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UAE – Recent Developments

• Ras Al-Khaimah (RAK) – new offshore jurisdiction / is the UAE (still) promoting offshore structures?

• Since 1 January 2011 offshore companies may not acquire real estate in the UAE anymore – A result of the fight against money laundering and

a move towards greater transparency– Only entities registered with the Jebel Ali Free

Zone are eligible to register real estate

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GENERAL ISSUES

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General

• Greater Arab Free Trade Agreement (GAFTA)• Pan-Arab free trade greement (1997)• 14 signatory states • Full liberalization of goods with full exemption of customs

duties and charges • key benefits: reduction of usual 15/20% import duty

imposed by many MENA countries• To benefit from the GAFTA, the imported products must be

enhanced in one of the signatory states – the UAE is often used as a gateway to other GAFTA countries, since it has low import duties (5%)

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Legal Issues

• Legal Systems / Dispute Resolution– civil law (based on Egyptian law)– common law (e.g. DIFC and other free zones)– Shariah law (GCC countries have a dual system)– Arbitration– DIFC courts can be competent for disputes from

other GCC countries (since October 2011)

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Indian Double Tax Treaties

• Kuwait (in force, 2007)• Oman (1997)• Qatar (2000)• Saudi Arabia (2006)• UAE (1997, amended in 2007)

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CONCLUSION

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