New Abu Dhabi Free Zone

PUBLICATIONS / Newsletters / 2013 / Newsletter April
Just weeks before its opening (and weeks after publishing a Federal Decree nr 15/2013 by which it was established), the Abu Dhabi World Financial Market is the ‘talk of the town’ in UAE.Located on the Al Maryah Island, northeast from the Abu Dhabi city centre and covering the area of 1.6 million square meters, this new financial free zone is expected to enter into a tough competition with the existing Dubai International Financial Centre (DIFC), Bahrain Financial Harbour, Qatar Financial Centre in Doha and King Abdullah Financial District in Riyadh.
UAE free zones facilitate businesses to operate with full foreign ownership while remaining subject to the commercial and civil laws of the Emirate in which they are based.
In some cases, free zones enforce their own internal regulations in addition to the general framework while certain municipal regulations and requirements don’t apply. However, the financial free zones enjoy the freedom of creating of laws and regulations of their own.
This means that the Abu Dhabi World Financial Market will be able to develop a new legal and regulatory framework under which companies active within the jurisdiction will operate.
Abu Dhabi World Financial Market will be the emirate’s fifth free zone. The existing four are Khalifa Industrial Zone Abu Dhabi, the media hub twofour54, Masdar City and Abu Dhabi Airport Free Zone.
Especially the proximity of DIFC, located just some 90 car minutes far from Abu Dhabi, has been discussed a lot. The critics fear lack of space for 2 major financial centres in a rather small area.
The ones who favour the new project counter the criticism by comparing the competition model e.g. with Europe where many financial hubs peacefully co exist next to each other. While London is known for its focus on asset management, Luxembourg provides the domicile for funds and Ireland is being used for their administration. The competition and efforts to attract new clients will in fact force both organizations to perform as efficient and cheaply as possible.
The rivalry between Abu Dhabi and Dubai goes far and many successful projects were brought into life by that. Think about Etihad Airways, established in Abu Dhabi to face the competition with Dubai’s Emirates Airline. But there are many more examples of a fruitful interaction between the two emirates: while Dubai attracts foreign tourists by the luxurious hotels built along the coastline, Abu Dhabi ‘steals’ them to show them local branches of Louvre and Guggenheim museums.
The construction works on Sowwah Square, Al Maryah Island’s central business district, are almost finished and despite the criticism, the four towers and a lower central building of the Abu Dhabi World Financial Market start welcoming their new tenants already. The name plates already witness presence of companies like Deloitte, General Electric, JP Morgan and others.


Tax Measures In Cyprus

The first tax measures have been adopted by the Cypriot parliament in the context of the bailout deal reached last month the with Eurogroup finance ministers.
In particular, it has voted and approved the below measures:
1.    An increase in the corporate tax rate from 10% to 12.5%;
2.    The Special Contribution for Defense Tax (SDC) on interest will be increased from 15% to 30%. This tax is only applied on interest that is not derived in the ordinary course of business of the company or is closely connected to it (this applies to bank interest for instance). Interest that is derived in the ordinary course of business is taxed at the corporation tax rate;
3.    Special tax on credit institutions to be increased from 0.11% to 0.15%. This will be applied retrospectively from January 1 2013.
Cyprus is very keen to ensure that new measures do not make it less attractive to foreign investors and negatively affect its attractiveness as an international financial centre. With the corporation tax rate of 12.5% it is still one of the lowest in the EU. And while 12.5% is not as nice as 10%, it is not the headline tax rate that makes the Cyprus tax system one of the most attractive in the EU. Just to give you a brief run down of what makes Cyprus so attractive and continues to do so:
  • No withholding taxes for payments to non-residents, whether companies or individuals, except on royalties related to IP rights exercised in Cyprus,
  • No transfer pricing or thin capitalization rules,
  • No exit taxes except on unrealised gains on fixed assets,
  • No entry taxes,
  • 2% effective taxation on IP holdings,
  • Possible to obtain certainty upfront by way of tax rulings,
  • The most generous participation exemption possible, with no minimum shareholding requirement,
  • Easy straightforward, non-intrusive taxation system,
  • No tax on permanent establishments abroad,
  • Non resident Cyprus companies are not taxed,
  • A very flexible fund management regime as well as the least expensive licensing regime in the EU.
While there are still more measures to be announced they are unlikely to reduce the attractiveness of Cyprus as an international financial center significantly. Various proposals that have been in the pipeline are likely to come to fruit in the short term.
One such proposal is to introduce a mid-tier fund management regime, in addition to the regime for private investments funds which are not allowed to solicit funds from the public as well as minimum investments of EUR 50000, and in addition to the more stringently regulated UCITS regime (funds which can be marketed to the general public).
Also, the current government is likely to finally legalise gambling, a plan that had been on the table for a long time but had been shelved by the previous government. It would allow Cyprus to take a share of the sizable international online gaming industry. It is well positioned to do so with its extensive professional services infrastructure, low labour costs and low taxes.
 


Wag The Dog: Free Zone In Russia

The idea of Russian prime Minister Dmitry Medvedev to make Russia more attractive for the local ultra high net worth individuals is becoming more realistic these days. Medvedev does not want to see the extremely rich and influential Russian entrepreneurs leaving the country (and taking their funds with them) so he aims to create a tax paradise for them at home.
The idea is simple: A new free zone with a special tax and legal framework should be established in the Kuril Islands and Sakhalin area in the Russian Far East. This project would be lead and financed by the International Investment Bank (IIB). Historically, IIB created in 1970, was the bank of socialist countries. The member states nowadays include Russia, Bulgaria, Vietnam, Cuba, Mongolia, Romania, Slovakia and Czech Republic and the headquarters is in Moscow.
As an international bank, the IIB enjoys a special status. It is actually already almost an offshore bank. It is not regulated nationally nor internationally (the member states cannot control it), it has international immunity and could be reformed into an international financial centre within the new free zone.
Wealthy Russians are being attacked from many angles, at home and abroad. Recently, they were massively leaving Cyprus (while their funds remained frozen there). At the same time, the Russian president Vladimir Putin announced his intention to dismiss all politicians and state employees unless they give up their foreign bank accounts. The question therefore is if the Russians will gain confidence in a project blessed by the government that makes their life hard already.
 


Tax Haven Discussion Has The Completely Wrong Focus

Those who followed the news lately might have realized that the Western media and politicians are heavily debating offshore finance. The focus lies on tax evasion.
It comes to no surprise why this is. Western governments are bankrupt. Their spending policies, bailouts, (unfunded) entitlement programs and corruption has let them on a quest for money to burn.
A responsible government would look at balancing its budget, but this is unpopular. Cherry picking bureaucrats turn to the economic philosophy of Keynes to support their claim that the government should have an active role in stimulating the economy (conveniently forgetting the part that mentions saving during the “good times”).
So governments will keep spending even if it means that central banks have to debase the currency to fund it and that the future generations will inherit a debt that they never will be able to pay back.
Increasing taxes is the other option. But this is of course highly unpopular.
So what is the alternative? Look for easy victims. Those who are not part of the national tax base because they operate internationally.
So more rules and regulations are implemented as we speak to limit the options for internationalizing your assets and your business. The big multinationals have an army of tax lawyers ready and can easily comply. The individual and the small and medium sized entrepreneur, however, face more and more restrictions and administrative burdens in their everyday live.
All this is of course paid for by the consumer.
Challenging the paradigm
But what will be the results of all of this? Lets look at the current paradigm.
Nowadays, the Western population accepts that they are increasingly taxed by governments that spend the money like there is no tomorrow.
To put this in perspective, a little story:
In the 16th century, The Netherlands were controlled by Philips II of Spain. His local henchman was the much hated Duke of Alva. This man made the mistake to crack down on the population with a whopping 10% VAT tax. This was the start of a public outcry so fierce that it let to an 80 year war for independence (last year, the VAT in the Netherlands was increased from 19% to 21%, which was passively accepted).
The independence from the central authority led to the golden age of the Netherlands. With a decentralized society, low taxes, no regulations and entrepreneurship The Netherlands became the richest country on Earth. A flourishing time for trade, business, art, architecture and inventions.
The current situation
We are far from a golden age now. Stir less and visionless European politicians try everything to keep the European dream alive. They spend 3% in GDP in deficit a year and think they are doing a good job. And they don’t even achieve this goal!
Moreover, xxpressing the deficit in relationship to the GDP also creates massive distortions. To take The United States as example: Their deficit for 2013 is app. 6.2% (which seems reasonable). In practice the government spends 29% more then they real in as revenue in 2013!
Calculate it for yourself here (www.usdebtclock.org). Do not forget to check out 124 trillion in unfunded liabilities (7x GDP) which the government has promised to its citizens in pensions, welfare and health care, but for which there are absolutely ZERO funds available.
Is more tax the solution?
The Western world’s current problems are caused by misallocation of capital by governments and the centralized financial system.
The European dream is a fantasy lala land of centralist politicians who praise themselves for not having had a major war in Europe for 70 years, happily ruining the economies of Cyprus, Spain, Greece in the process.
The state of the United States economy is sufficiently explained by the link provided.
Will increasing taxes to support more of this system solve the problem? Not a change, but the governments think so and they will increasingly crack down on privately owned wealth to perpetuate the failed system. Make yourself no illusions: there are many examples in history where governments have resorted to confiscating the wealth of its citizens for “the common good”.
Conclusion
The solution that our politicians have is to increase taxes. The current road will lead to more and more regulations, taxes and government control. Everybody has to decide for himself if he thinks that is a good or a bad thing.
But we think that throwing money at a failed project will not solve it.
Besides standard reasons for diversifying your assets around the world like estate planning, protection your assets for lawsuits, centralizing you intellectual property, benefit from different markets and tax planning, we can now identify a strongly emerging new reason, which is:
Protecting your capital from bankrupt governments!

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