Establishing a regional treasury centre in ADGM

14 November
Night-time cityscape of Abu Dhabi

Business-friendly legislative and tax regimes in the UAE’s Abu Dhabi Global Market make it an attractive location for regional treasury centres

As capital commands a price, multinational corporations (MNCs) operating in the Middle East, Africa and surrounding regions are increasingly looking to centralise their treasury functions, leading to the development of regional treasury centres (RTCs). These RTCs bring together regional (or global) treasury functions in a single location, to achieve better working capital and liquidity management, standardise processes, improve controls and reduce costs, among other objectives.

A number of RTCs have been established in the United Arab Emirates (UAE) in recent years, including in the Abu Dhabi Global Market (ADGM). European and US headquartered groups have chosen the UAE and ADGM in particular as their location because of the business-friendly environment, political stability and its internationally aligned regulatory and judicial regime. The quality of infrastructure, favourable tax environment and a geographic location particularly convenient for treasury management across the Middle East, Africa and Europe are also factors.

This article highlights some of the tax and regulatory considerations around the question of performing treasury operations in the wider region from ADGM.

 

Legal and regulatory considerations

A robust and transparent legal and regulatory framework is one of the factors to consider when determining the optimal location for an RTC.

ADGM is a federal financial free zone located in Abu Dhabi with its own civil and commercial laws, and independent courts. ADGM is the first jurisdiction in the Middle East that directly applies English common law (including the rules and principles of equity), offering RTCs established in ADGM and their customers and suppliers a familiar legal regime and high levels of legal certainty.

In addition, ADGM has robust insolvency regulations based on English company law, does not require RTCs to maintain (minimum) compulsory reserves, and treasury activities do not require further regulation or licensing requirements.

An RTC in ADGM can be established as a company or a branch, and the RTC regime in ADGM allows RTCs to carry out physical and notional cash pooling, and similar intragroup borrowing and lending transactions.

Tax considerations

The overall tax position and efficiency of an RTC will depend on the tax regime of the location where the RTC is based, and the interaction with the other tax regimes that apply to the MNC’s group members.

 

The ADGM tax regime

ADGM offers RTCs and their employees a 0% tax regime, and the UAE does not impose capital taxes, stamp duty, withholding tax, (net) wealth taxes or employment taxes.

Interest income and FX margins should generally not be subject to VAT in the UAE or would be zero-rated. The provision of advisory and transaction services may be zero-rated or subject to 5% VAT, depending on the nature of the service and the location of the recipient. Consequently, an ADGM RTC should generally be able to recover at least a portion of the input VAT it incurs on costs.

 

International tax considerations

A common feature of the tax regimes in the wider region is the relatively high (and rising) withholding taxes on interest and other outbound payments.

An ADGM RTC can benefit from the extensive UAE double tax treaty network, which includes 92 in-force treaties and a further 40 in various stages of negotiation, signature or ratification, which compares favourably to many other countries’ treaty networks. Additionally, many of the UAE’s treaties reduce withholding tax on interest payments to zero or, if not zero, the lowest withholding tax rate that is generally available under double tax treaties.

As a member of the Organisation for Economic Co-operation and Development’s (OECD’s) Base Erosion and Profit Shifting initiative’s Inclusive Framework, the UAE has made significant legislative efforts to address concerns from the OECD and the EU related to offshore structures or arrangements, and to improve tax transparency. Notably, the ratification of the multilateral instrument to implement the tax treaty-related BEPS measures and the introduction of country-by-country and economic substance regulations are further evidence of the UAE’s commitment to curbing international tax avoidance and improving transparency. These efforts are also expected to result in the UAE’s removal from the EU’s list of non-cooperative jurisdictions for tax purposes in 2019.

 

Conclusion

The trend for establishing RTCs looks set to continue and while each MNC will have its own assessment criteria, from both a tax and regulatory perspective, the UAE and in particular ADGM offer an internationally aligned and favourable environment for RTCs.

 

More information

For further information, please contact:

Farrell Sheridan

Head of strategic development, Abu Dhabi Global Market

farrell.sheridan@adgm.com

Jochem Rossel

Tax partner, Middle East M&A/international tax services leader, PwC

jochem.rossel@pwc.com

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