Foreign investments

Structuring Foreign Investments Using UAE Holding Companies

A common dilemma faced by international companies is deciding on the jurisdiction to establish a holding company to hold its foreign investments.

A number of critical issues come into play in the decision-making process, such as: (a) tax efficiency (including the use of double tax treaties (DTA)), thin capitalization and transfer pricing risks and new substance requirements for holding companies; (b) the use of investment treaties (Parts); (c) exchange control and risk of repatriation; (d) the reputation and effectiveness of the applicable legal system (this is even more relevant in a joint venture situation as disputes may arise between the joint venture partners); and (e) depth of banking infrastructure and availability of banking products, for example currency hedging products.

In this article, we look at holding company structures using UAE holding companies established in the Dubai International Financial Center (DIFC) (based in the emirate of Dubai) and Abu Dhabi Global Market (ADGM) (established in the emirate of Abu Dhabi). It is true that other well-established free trade zones exist in the UAE offering attractive investment holding structures like, for example, the RAK International Corporate Center (RAK ICC). RAK ICC offers attractive holding company structures and the RAK ICC Bylaws have been amended to (amongst other things): (i) allow for the formation of separate holding companies and intellectual property holding companies; (ii) allow the redomiciliation of existing companies established in certain other jurisdictions; (iii) remove minimum capital requirements; (iv) incorporate special purpose vehicles; and (v) incorporate English common law principles into constitutional documents with access to the DIFC and ADGM courts.

Dubai International Financial Center (DIFC) and Abu Dhabi Global Mark (ADGM)

Financial free zones generally allow a wide variety of financial and banking activities to be undertaken, including banking, the establishment of trusts, investment advice, etc. Each of the DIFCs and ADGMs has its own legal system based primarily on English common law with independent courts established also based on the English court system staffed by seasoned common law judges. These financial centers have also set up arbitration centers modeled on the best international standards.

Although many holding companies are incorporated as “standard” private companies with limited liability, it is also possible to use more sophisticated legal entities such as separate holding companies or cell companies. A cell company is a limited liability company that consists of one or more cells. The revenue streams, assets and liabilities of each cell are isolated and independent of the telephone company itself (known as Heart) and the other Cells and as such there is no risk of cross-contamination between the Cells and/or the Core and the creditors of a specific Cell can only enforce the assets of that particular Cell. Additionally, each cell can have its own distinct group of shareholders. Cellular companies are increasingly being used by groups of companies that own businesses in different sectors and particularly where certain sectors are high risk (e.g. a multinational group involved in FMCG, Oil & Gas and trading commodities) because they allow multinational groups to keep the revenue streams, assets and liabilities of each business segment isolated from other business segments and thus reduce the risk of losses in one business segment affecting other sectors of activity within the same entity.

We have highlighted below some of the main advantages of using UAE holding companies as ultimate or intermediate holding companies.

S/N

The description

DIFC

ADGM

a.

Foreign ownership

100%

100%

b.

Corporation tax

0%

0%

vs.

Income tax

0%

0%

D.

Withholding tax (dividends, interest and royalties)

0%

0%

e.

Capital gains tax

No capital gains tax (CGT) when shares are sold.

No CGT on sale of shares.

f.

Stamp duty

No stamp duty on disposal of shares except where the holding company of DIFC or one of its subsidiaries owns real estate in the UAE.

No stamp duty on disposal of shares, except where ADGM’s holding company or one of its subsidiaries owns real estate in the UAE.

g.

Capital repatriation

No capital repatriation restrictions.

No capital repatriation restrictions.

h.

Currency restrictions

No currency restrictions

No currency restrictions

Certificate of tax residency in the UAE and double taxation agreements

In addition to the above benefits, a holding company established in the DIFC or ADGM can also apply for a certificate of tax residency. In the UAE, a certificate of tax residency is only issued after meeting certain basic economic substance requirements prescribed by the UAE Ministry of Finance, including: among othersthe applicant company must have been in existence for more than 12 months and have a business license, audited financial accounts and an office rental agreement.

After obtaining a certificate of tax residency, companies would be allowed to rely on CDIs entered into by the UAE. The UAE has an extensive network of DTAs with African countries. At present, the UAE has signed 23 DTCs with African countries, of which 13 are in force, including DTCs with: (i) Kenya; (ii) Mozambique; (iii) Mauritius; (iv) South Africa; and (vi) Egypt. For comparison, the Netherlands has 11 DTCs in force with African countries while Mauritius has 18 DTCs in force with African countries.

Bilateral investment treaties

BITs are agreements between two countries to establish terms and conditions for the treatment of private investors from one country in the other country. While the provisions of BITs will depend on negotiations between countries, BITs generally contain provisions aimed at:

  1. allow the free repatriation of funds in freely transferable currencies;
  2. fair and equitable treatment between all business partners;
  3. protect investments against non-commercial risks – for example, expropriation and nationalization; and
  4. possibility of submitting disputes between the investor and the country of investment to international arbitration.

In addition to having an extensive network of CDIs, the UAE has also signed BITs with 17 African countries of which 10 are in force with African countries, including: (i) Kenya; (ii) Mauritius; (iii) Egypt; and (iv) Morocco.

Flexible Benefits

In addition to legal and tax benefits, there are a number of perquisites that can be enjoyed to help businesses increase operational efficiency, such as:

  1. ease of travel to the MEA region from the UAE;
  2. relaxed visa regime in the UAE which allows employees (and their families) of the UAE holding company to obtain residency visas to live in the UAE;
  3. the availability of many international banks with high-quality, technology-driven banking systems;
  4. a maximum time difference of 4 hours between the UAE and countries in the MEA region;
  5. security – the United Arab Emirates is recognized as one of the safest countries in the world;
  6. higher standard of living for employees;
  7. a developed and modern infrastructure for sea and air freight, which includes the port of Jebel Ali, the first port in the Middle East; and
  8. short sea distance with most countries in the MEA region.

Conclusion

In light of the above, multinationals and family businesses investing or operating in the MEA region should review their current corporate structures and consider the benefits they could receive by incorporating a UAE holding company into their business structures. ‘business.

Furthermore, following the recent introduction of the Base Erosion and Profit Shifting (BEP) framework in almost all “no-tax or tax-only” jurisdictions, including the UAE, it will be necessary for companies established in the UAE to undertake an analysis and ensure compliance with the BEPs. diet. The BEP regime is similar in most “non-taxed or nominally taxed” jurisdictions and more information on the application of the BEP regime is presented in our article here https://ach-legal.com/blog/ UAE-Economic-Substance-Regulations -Published.