Overseas investments made by GCC investors often require detailed tax planning to maximise the tax efficiency of the investment and to preserve the low tax status of the GCC investor to the extent possible. In this e-bulletin we take a closer look at the use of tax treaties and why structuring an investment through a holding vehicle in a tax favourable jurisdiction may help to reduce the overall tax burden.
Key tax considerations
The two key tax considerations for an overseas investment are:
- efficient repatriation of profits on the investment - foreign withholding taxes may be applied in relation to any foreign earned dividends, interest or royalties when paid by the investment company to its parent company and/or corporate income tax may be payable by the parent company on receipt of these payments; and
- ease of exit from the investment - capital gains tax may be payable on the disposal of the investment by the parent company.
In order to reduce the tax bill for withholding, income and capital gains taxes, one commonly used structure is to insert an intermediate holding company between the investor and the investment entity, incorporated in a jurisdiction which has entered into tax treaties with the country in which the investment is based, and with the home country of the investor. This is particularly helpful in circumstances where there is no direct tax treaty between the country in which the investment is based and the jurisdiction of the investor.
Example of using tax treaties – The Netherlands as a holding jurisdiction
The Netherlands has long been a preferred jurisdiction for the establishment of an intermediate holding company. This is because The Netherlands has entered into a significant number of tax treaties with other nations, including all of the GCC countries (although the Saudi and Omani treaties have not yet come into force) and many Asian jurisdictions (including China, India, Japan and Malaysia). The Netherlands also benefits from being a member of the EU and therefore has the tax advantages of such as between other EU member states.
With regards to the United Arab Emirates, the UAE and The Netherlands entered into a tax treaty on 2 June 2010. This treaty provides a huge boost for UAE companies and sovereign wealth funds investing in the Netherlands, or using Dutch intermediate holding companies to hold investments in other jurisdictions. The treaty allows, amongst other things, for the following.
- tax free/low tax dividend payments – there is generally no foreign withholding tax on dividend payments made from an EU subsidiary of a Dutch intermediate holding company (or from a subsidiary in a non EU jurisdiction, if it is in one of the other countries with which The Netherlands has agreed a tax treaty). There is also no Dutch corporate income tax on the dividend receipt by the Dutch intermediate holding company from its subsidiary.
- Under special concessions in the UAE/Netherlands treaty, dividend payments by the Dutch intermediate holding company to certain UAE state bodies (including sovereign wealth funds and their subsidiaries) may be made without any dividend withholding tax being levied. For other UAE investors, the treaty provides for a reduced dividend withholding tax rate of 5% where the investor holds 10% or more of the shares in the company concerned. In all other cases, the maximum rate of 10% applies. Note, however, that with careful structuring dividend withholding tax liabilities can be reduced further under Dutch domestic tax law (for example, by using a Dutch Coop as a holding company);
- interest and royalties payments – provided that the interest and royalty payments are beneficially owned by a UAE resident, these payments should be exempt from withholding tax. This is also generally the position for interest and royalties from the investment company to the Dutch intermediate holding company and from the Dutch intermediate holding company to the investor;
- capital gains – the treaty stipulates that capital gains are (in principle) only taxable in the country where the seller is resident. Therefore, capital gains made by a UAE entity on shares in a Dutch company should not be taxable in the Netherlands. On a disposal, the UAE investor may sell the Dutch intermediate holding company, rather than the investment entity (although capital gains on the sale of shares in the investment entity by the Dutch intermediate holding company are also generally tax exempt).
The explanatory notes to the UAE/Netherlands treaty make clear that there are no tax regimes within the UAE that would qualify as a "special regime" and therefore not be able to benefit from the advantages accorded under the treaty. This means that companies located in existing UAE free zones should be able to benefit from the tax treaty in the same way as companies incorporated in the "mainland" UAE. Going forward, the UAE and the Netherlands will decide by mutual agreement whether a regime qualifies as a "special regime" and, consequently, be excluded from the application of the treaty.
In addition to the pure tax benefits, the Netherlands has a well developed system for obtaining tax rulings in advance and the national tax authorities are generally noted for their co-operative approach and accessibility. The Netherlands also has an extensive network of bilateral investment treaties from the perspective of investment protection.
This article was written by David Meijeren, a senior Dutch corporate lawyer and candidate civil-law notary at Stibbe, based in Dubai and Michael Molenaars, a tax partner at Stibbe, based in Amsterdam. Herbert Smith LLP, Gleiss Lutz and Stibbe are three independent firms which have a formal alliance. Stibbe Dubai is located at the offices of, and works in close cooperation with, Herbert Smith. Stibbe's presence in Dubai serves as a hub for its work throughout the region and enables it to provide 'on the ground' Dutch law advice for clients in the Middle East and North Africa.
New amendment to the UAE commercial agency law limits termination rights on expiry
The Commercial Agencies Law (Federal Law No. 18 of 1981 as amended) provides legal protections to commercial agents (including agents and distributors) who have an exclusive arrangement with a principal and have registered their commercial agency. Only UAE nationals and wholly UAE-owned companies acting as commercial agents may register their arrangements.
Under Federal Law No. 2 of 2010, a registered commercial agency agreement may not be terminated on expiry unless there exists a "material reason" for the non-renewal. This returns the law to the legal position before 2006. Since 2006, it has been acceptable for a commercial agency agreement to expire in accordance with its terms.
The 2010 amendment makes it more restrictive for foreign principals wishing to terminate their registered commercial agency agreements: from now on, they will not necessarily be able to rely on the fact that their commercial agency is a fixed term contract to restructure their arrangements on expiry. The foreign principal will need to be able to pinpoint a suitable commercial or legal reason which justifies replacing the current commercial agent, or the commercial agent will need to agree to the non-renewal.
In reality, this may mean that registered commercial agents will negotiate a price for their agreement to be terminated as agent on expiry. Therefore, foreign principals entering into new registered commercial agency agreements may consider whether to agree in advance the amount payable on non-renewal, or how to calculate that price in circumstances where there is no "material reason" for the termination. Defining what a "material" reason for non-renewal means as between the parties to the commercial agency agreement may also assist foreign principals where there is deterioration in the business relationship to ensure that non-renewal is not costly. However, neither the Commercial Agency Committee (see below), nor the UAE courts, need to consider themselves bound by that price or description. Foreign principals entering into commercial agency arrangements for the first time should also take legal advice on whether the arrangement should be registered in the first place.
The other change which the 2010 amendment law has reintroduced is the role of the Commercial Agency Committee which has jurisdiction to hear all claims under a registered commercial agency agreement. The matter may only be brought before the UAE courts on appeal from the decision of the Commercial Agency Committee. This is a measure which is designed to resolve disputes between agents and principals as quickly as possible.