France and the United Arab Emirates are two key business partners. Approximately 350 subsidiaries of French companies are estimated to be settled in Dubai, whilst figures of the French presence in other Emirates has also been growing at a constant pace for more than ten years.
The UAE can be appealing to French individuals as well as companies, not only for the outstanding business opportunities it provides but also for tax purposes. This is partly due to the tax climate being quite harsh in France. The UAE tax system is, apart from a few exceptions that will be discussed further below, free from corporate taxes.
During the 1980’s both French and UAE authorities anticipated the growing potential of businesses between the two countries and agreed to address it from a tax perspective. This eventually resulted in the ratification of a Double Taxation Agreement signed on the 19th of July 1989 and amended on the 6th December of 1993 in Abu Dhabi (hereinafter referred to as “DTA”).
Tax relations between the two countries have since been governed by the provisions of the DTA. Such provisions prevail those that can be found in the French General Tax Code pursuant to Article 55 of the French Constitution, which outlines the superiority of treaties over national laws.
The UAE has signed more than 40 DTAs with different countries. Like every DTAs the purpose of this Treaty is to avoid double taxations and constitutes a real incentive to international investment.
The UAE legislation offers different business forms to foreign companies, each of these forms can, in theory, open the doors of the advantageous tax system of the UAE to French individuals and companies.
I. Criteria of application of the DTA
A. The principal condition to access the UAE tax free system: a permanent establishment or a residency in the UAE
French citizens who are considered as residents of the UAE are not taxed on their personal incomes; this includes all forms of salary and capital gains. French residents, on the other hand, are subject to important taxes.
The DTA outlines the different criteria of French residency, which are:
- Residency in France of at least 183 days within the year of reference, or
- A principal source of income from a professional activity performed from France, or
- France is where most of an individual’s assets are based.
If one of these criteria is met, the individual will be considered as a French resident in the sense of the DTA and will therefore be subject to French Income Tax even for earnings received from an activity in the UAE. On the other hand, if the individual meets one of these criteria of residency in the UAE, he will be considered a UAE resident and therefore subject to UAE Tax laws.
Article 3 of the DTA provides solutions to determine the country of residence that will prevail for individuals that are both residents of the UAE and of France.
Tax authorities will first look at where the individual has had the longest period of residency, within that particular year. If the length of residency is similar in both countries the nationality of the individual will prevail.
The determination of the location of a company is more complex as it is more subjective. The condition to access the UAE corporate tax free system is a permanent establishment of the business in the UAE. A company created in the UAE will not be subject to French corporate tax if the activity is only operated from the UAE, and has no connection nor association with any legal entity registered in France.
If the company is a subsidiary of a French company, its benefits will be subject to UAE tax laws if the subsidiary can be considered as a permanent establishment in the UAE.
According to Article 4 of the DTA the following can imply a permanent establishment:
“A head office, a subsidiary, a physical office, a factory, a workshop, a construction site that is settled for at least 6 months.”
The list is by no means exhaustive and in order to be more accurate in the definition of a permanent establishment, we need to look at the precedents of the Conseil d’Etat (the highest court in charge of tax litigation in France). Three cumulative criteria have been established to appreciate if a business is a permanent establishment: (1) a financially independent business, (2) a real economic activity, and (3) a physical presence in the country.
If a French company has a permanent establishment within the UAE, in the sense of the Article 4A of the DTA, the company, in proportion of the benefits resulting from its activity in the UAE will only be subject to UAE Corporate Tax.
In all cases, in order to assess if the above criteria apply, any taxpayer can submit an application describing their factual situation to obtain confirmation that the activities they carry out in France does not constitute a permanent establishment or a fixed place of business within the meaning of the tax treaty between France and the UAE. The tax authorities’ written approval is binding.
In order to prevent tax evasion, Article 21A of the DTA had introduced a form of cooperation between French and UAE authorities and has allowed both countries to access mutual information about taxpayers and their assets.
Therefore, it is recommended to keep all evidence of a presence in the UAE such as visas, evidence of journeys to and from the UAE, employment contracts for individuals, bank statements, leases that can justify a residency in the UAE or a permanent establishment for a company in case of a control from the French authorities.
B. The exception of real estate assets
The principle of taxation in the country of the business establishment or in the country of residency suffers from exceptions that can be found in the DTA. The most important exception is that real estate assets are subject to tax in the country of their location (Article 5 of the DTA).
That criterion of the location of the real estate will prevail on the residency the individual or the country of establishment of the company that owns the property.
Incentives are also outlined for UAE residents. The article 164-C of the French General Tax Code provides that a foreign resident that owns a residential property in France must pay a tax on the basis of the estimated price of the property if he is not subject to French Income Tax. The DTA outlines an exemption of this tax for UAE residents. (Article 18.3 of the DTA).
II. Possible risks of taxation
The findings above give an impression of an ideal tax system in the UAE. Nevertheless, investors should bear in mind several difficulties they might still possibly face.
A. Activities subject to taxes in the UAE
The federal government of the UAE has not promulgated any tax laws but most of the individual emirates have enacted corporate income tax decrees.
In practice, these decrees have only been enforced on the income of oil and gas companies, branches of foreign banks, and certain petrochemical companies under specific government concession agreements. The emirates of Abu Dhabi, Dubai, and Sharjah currently tax branches of foreign banks at a flat rate of 20% on the branch's taxable income which is earned or deemed to be earned in the emirate. Oil companies are taxed at a flat rate of 55% on their taxable income in Dubai and 50% in the other emirates.
Municipality service charges are levied on individuals living and working in the UAE. A service charge of 5–10% is charged on food purchased in some restaurants and hotels charge a 10–15% service charge per night on room rates.
Finally, in most emirates, municipal taxes are levied on residential and commercial tenants by reference to annual rent paid at 5% for residential premises and 10% for commercial premises.
B. The questions raised by dividends and profits
Besides those risks of taxation in the UAE, the risk of taxation from the French authorities is crucial.
Like in many others DTAs, Article 19.1 of the France/UAE DTA stipulates that all the profits of a company based in the UAE that will be transferred to a French resident will be subject to French taxes. More specifically, the provision of Article 8 of the DTA implies that the dividends that are related to a permanent establishment in the UAE and paid out to a French resident shareholder are subject to French tax law.
It is important to note that French authorities will not have a right to tax the company for that sole reason but only the French shareholder (article 8.1).
Article 123-B of the General Tax Code allows French authorities to tax French individuals that hold, directly or indirectly, 10% of the shares of a UAE entity on the profits that are not yet paid out as dividends. Concerns are rising about the compliance of this article regarding France’s international obligations, especially since several French administrative courts have interpreted this provision as being contrary to the European Regulation.
Article 209-B of the French General Tax Code, stipulates that when a French company holds at least 50% of a company based in a privileged tax jurisdiction such as the UAE, the entire profits of the company in the UAE should be subject to French corporate tax. This article typically applies to subsidiaries.
This procedure of corporate taxation has been censured in 2002 by the French highest court in charge of tax litigation – Conseil d’Etat
– and had been since reformed to become in accordance with the European principle of freedom of establishment. However, it seems like the CFC system is still in danger.
The Conseil d’Etat, in a recent case, has confirmed that this provision can only apply if the presence in the foreign country is only determined by tax purposes. According to this case, the company in the UAE controlled by a French company with an effective economic activity in the UAE, shouldn’t be taxed. CE, plen, fisc. 4 July 2014, No.357264, Ste Bollore SA.
It is only if the subsidiary set up is motivated by tax evasion that the benefits of the foreign company will be subject, in proportion with the percentage of French participation, to the French corporate tax on its benefits.
We can assume that the French authorities will soon not be able to tax corporate entities in the UAE based only on the fact that more than half of the company is held by a French company. Such legislations should still apply if the subsidiary is only implanted in the UAE for tax purpose as preventing tax evasion is legitimate for European governments.
We are still waiting for a new regulation or a condemnation from the CJUE, if the French government is not responding to the call of amendment made by the highest courts of the country.
Such potential changes in the French Tax Law will be likely to increase the attention of French companies and individuals who wish to establish a presence and foundation in the UAE.