On December 7 2011 a double tax treaty between the Russian government and the government of the United Arab Emirates was signed in Abu Dhabi. The treaty is unusual because it is not based on the Organisation for Economic Cooperation and Development's Model Tax Convention and the tax benefits will apply only between public entities in the two countries.
The main reason for Russia's choice of this unusual format is that the United Arab Emirates is an offshore jurisdiction for the purposes of Russian legislation, on the basis of its low tax rates and its information exchange network. The UAE tax regime provides no truly effective method of controlling all financial transactions and combating harmful tax avoidance. As such, the treaty does not apply to private companies.
In Russia, the treaty applies to financial or investment companies and offices that are wholly owned by the Russian state or a Russian subject. In the United Arab Emirates, it applies to:
- the UAE government;
- the governments of the emirates;
- the Central Bank of the United Arab Emirates;
- the Investment Office of the United Arab Emirates;
- the State Pension Fund of the United Arab Emirates; and
- any financial or investment organisation, establishment, agency, office or other entity that is wholly owned by the United Arab Emirates.
The treaty imposes no restrictions on profits in a signatory country on the basis of tax benefits and stimulus measures under that country's domestic legislation. This may be useful for strategic investment, when domestic legislation would impose a low tax rate (or would impose no tax charge) and there would be a 0% charge as a withholding tax rate on dividends under the treaty
The treaty's tax advantages will provide good opportunities for strategic investment for Russia and the United Arab Emirates, as well as other members of the Commonwealth of Independent States and other countries around the Persian Gulf. It may prove advantageous for private entities too, which can invest through public (ie, government) investment funds and derive additional profit as a result of the tax benefits. Clearly, such advantages apply only to genuine business investments and cannot be misapplied for abusive tax planning. The treaty may also simplify dealings within the UAE financial and with Islamic financial products.
For further information on this topic please contact Andrey Tereschenko or Ivan Zelenin at Pepeliaev Group by telephone (+7 495 967 0007), fax (+7 495 967 0008) or email ([email protected] or [email protected]).