Taxation Planning for Middle East Operations Taxation Planning for Middle East Operations A Research Study sponsored by the Kuwait Office of Peat, Marwick, Mitchell & Co. and presented for the obtainment of the final degree of Ecole S uperieure des Sciences Fiscales, Brussels by ROSE M.CLERIN-LISON 1978 Springer-Science+Business Media, B.V. Cover design: Pieter J. van der Sman ISBN 978-90-200-0515-8 ISBN 978-94-017-4477-5 (eBook) DOI 10.1007/978-94-017-4477-5 © 1978 Springer Science+Business Media Dordrecht Originally published by KLuwer, Deventer, The Netherlands in 1978. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form by any means, electronic, mechanical, photocopying. recording or otherwise, without the written permission of the publisher. Preface If investment in the EEC countries has been the major preoccupation of the international business community in the 1960's, contracting in the Arab states seems to become one of the major trends of the 1970's. The need for multicountry business and tax information was felt simultane ously. Language difficulties, scarcity of legal and other sources, distance and, most of all, the novelty of business expansion in this direction made such information still more necessary than in the European or inter American setting. A few symposiums were held, corporate and tax laws were translated, research studies were initiated, among which the book of Mr and Mrs SIIILLING on Doing Business in Saudi Arabia and the Arab Gulf States, a rich mine of general business information. I was therefore very pleased when Mrs CLERIN, completing her tax studies at Ecole Superieure des Sciences Fiscales in Brussels, mentioned that she was going to live in the Middle East, had the opportunity to work with a well-known international accounting firm and proposed to focus her final dissertation at the School on the tax planning of operations in Arab countries. She devoted months of research to the study of sources both in Middle East and in industrial ized Western countries, to come up with a true planning study, clear, readable and practical. The description of the tax and corporate structure of the operating territories will be found in the first half of the book. The treatment of income in the investor's country is described in the final part of the work. Planning considerations are present through the book and will stimulate the exercise of tax and business judgment in structuring operations. It may also remind legislators and treaty negotiators of lost opportunities. As Mrs CLERIN rightly puts it, where tax exemptions are granted in the Middle East on the condition that the tax benefit is not lost locally, an intermediate company may have to be used. As early as 1957, Mr Dan T. SMITH, Deputy to the Secretary of the Treasury, testified before the US Senate Foreign Relations Committee in saying that 'operation of the present law in effect nullifies the tax concessions that foreign countries make' and that 'the tax sparing laws should be recog nized subject to appropriate safeguards'. The Middle East is a vast field 5 PREFACE not only for industrial and business development, but also for improved legislation and cooperative treaty making. Jacques MALHERBE A vocat, Brussels bar Professor of International Tax Law at Ecole Superieure des Sciences Fiscales 6 Contents Introduction 9 Part I Structure and Planning II Chapter I: Structure 13 Chapter 2: Other Factors 18 Chapter 3: Branch or Company 21 Chapter 4: Taxation of Commercial Income 23 Chapter 5: Taxation Interactions 27 Chapter 6: Tax Havens and Intermediate Companies 41 Part II The Operating Territories 49 Introduction 51 Chapter I: Egypt 53 Chapter 2: Iraq 62 Chapter 3: Saudi Arabia 69 Chapter 4: Sudan 77 Chapter 5: The Gulf States in Summary 81 List of Principal Relevant Statutes in Operating Territories 91 Part III The Investors Systems 93 Introduction 95 Chapter I: Belgium 96 Chapter 2: France 102 Chapter 3: West Germany 109 Chapter 4: Japan 116 Chapter 5: Netherlands 121 7 CONTENTS Chapter 6: United Kingdom 129 Chapter 7: United States 136 Index 143 8 Introduction Businessmen, Contractors, Bankers, Traders doing business in the Middle East are often surprised to learn that they could become liable to tax in most of the States. In their rush for contracts, many tend to neglect to ascertain the tax legislation in force relying on a general belief that all these States are tax havens and that contracts are tax exempt. The reality is very different since most of the Middle East States have tax decrees. Only a few States have no tax law and even in these no guarantee exists that this situation will continue. Some States already enforce the tax legislation whilst others have hitherto mainly taxed oil companies. If the situation sounds like paradise today, the signs are there to indicate that this will not last. ~ Government officials have stated the need to enforce taxes to increase consciousness of National Identity, ~ In Kuwait, one of the very richest in per capita terms, foreign corporate entities trading in the State have recently been asked to fill in tax returns. It is however true that many of the Gulf States do have sufficient monetary reserves not to be concerned with taxing foreign interests and to use tax exemptions for their citizens as a business incentive or a way of redistributing the oil income. This publication has been aimed at making investors conscious that tax problems may arise, and that the tax position of potential contracts in the Middle East should be analysed as carefully as they would be if the activity were to be contemplated in any industrialised country; it also considers the practical problems that tend to face the foreign company seeking to operate in the Middle East State either as a manufacturing investor or as a contractor. The framework is to consider: ~ Structure and Planning for operations in Middle East States, ~ The system of taxation of foreign capital in force in selected Middle East operating territories, ~ The system of taxing foreign income in force in 'key' investors States. 9 INTRODUCTION It should be emphasized that the publication is concerned with general principles and cannot therefore be regarded as providing specific guidance for particular cases; it does however seek to draw attention to the strategies that are available and the type of situation in which they are likely to be most appropriate. The detailed information set out in this publication is based on the legislation and official practice in force on 30th of June 1977. The geographic coverage has been limited to: - Key investing or supplier States to the Middle East, - Key Middle East States, - Selected locations for intermediate and tax haven companies. The choice within each category has inevitably been somewhat arbit rary and a case can be clearly made for including other States. The States considered are: Investor Middle East Haven Belgium Egypt Ajman France Iraq Bahrain Germany Saudi Arabia Bermuda Japan Sudan Netherlands Netherlands GulfS tates Liberia United Kingdom Ajman* Panama United States Abu Dhabi* Ras AI-Khaimah Bahrain Dubai* Fujeirah* Kuwait Oman Qatar Ras AI-Khaimah* Sharjah* Umm AI-Qawain* • Member of the United Arab Emirates. In considering any specific business decision, it must however, be strongly emphasized that many of the jurisdictions concerned interpret the legislation with a wide degree of administrative discretion, and it will often be desirable to review the facts of a particular case with the officials concerned prior to entering into a commitment. In researching this book I have been much assisted by the Partners and tax staff of Peat, Marwick, Mitchell & Co. (and their associated firms) in the locations I have considered; my thanks are due to all of them. Kuwait, September 1977 Rose M. CLERIN 10