Tax, this is pharma

ME PoV Summer 2018 issue

The pharmaceutical market in the Middle East, and in particular in the United Arab Emirates (UAE), is expected to grow significantly over the next couple of years especially with the UAE quickly gaining popularity as a medical tourism destination. While foreign pharmaceutical companies have recognized the potential of certain markets in the Middle East, their legal, as well as physical, footprint in the region remains comparatively light.

Common operating models

Very rarely do foreign pharmaceutical companies manufacture their own products in the Middle East, though some do outsource certain manufacturing/packaging operations locally under manufacturing arrangements.1 Foreign pharmaceutical companies may maintain, or own, a trading/logistics hub in the region (e.g. in a free zone such as Jebel Ali or KIZAD) though rarely do they have their own distribution channels or entities in the destination markets and instead typically rely on third-party distributors to service local markets. To provide on-ground support and due to other regulatory reasons, foreign pharmaceutical companies maintain representative/scientific offices in the local markets with regional headquarter functions generally performed in the UAE.

The reason for the relatively light footprint is manifold. For one, the regulatory environment, notably protective measures such as foreign investment limitations, prevent foreigners to set up wholly owned companies in some Middle Eastern countries. In the UAE for example, foreign investors can only hold up to 49 percent of their businesses outside of the free zones. Within the free zones, where they are allowed full ownership, they are restricted in their ability to do business on the mainland. The UAE government has decided that it will remove these restrictions, although specific details have yet to be released. On another hand, branches of foreign legal entities are sometimes limited in their business scope and may not be permitted to perform trading activities in certain markets.   

Against this background, pharmaceutical companies, in many instances, either have to enter into joint venture arrangements or outsource their operations to third parties in order to conduct business operations in such markets. Both options bring their own inherent challenges.

Manufacturing side

The foreign pharmaceutical companies that do maintain their own manufacturing facilities in the region, operate in the UAE. We understand that there is an increased pressure from local governments to produce locally and meet local content requirements in order to be granted access to public tenders. Certain manufacturing operations are outsourced and performed locally in the destination markets under respective toll/contract manufacturing arrangements. However, such arrangements may pose challenges in practice and should be carefully reviewed.

Pharmaceutical companies entering into toll manufacturing arrangements2 on a cross-border basis may be particularly exposed to a set of challenges. In a number of Middle Easters countries, foreign entities are prohibited from trading or owning goods in said country unless they are duly licensed and registered with the competent authorities. Likewise, such arrangements may put pharmaceutical companies at risk from a tax perspective as they could be deemed to have created a permanent establishment and become taxable on any trading gains.3 The foreign companies may further be considered as making domestic supplies leading to a VAT registration and filing requirement. The disconnect between the ownership and legal/beneficial title to the goods (lack of beneficial ownership) can lead to issues such as non-recoverability of VAT on imports.4 The manufacturer as the importer may also be viewed as making inaccurate representations to the customs office.

Distribution side

In the absence of having their own distribution companies, pharmaceutical companies commonly rely on a network of third-party distributors. Pharmaceutical companies try to exert some level of control/supervision over the distributor (e.g. through the assignment of staff). From a tax perspective, such control and dependencies can be harmful and potentially trigger a local tax exposure for the foreign supplier. Some of the structures and distribution relationships had been put in place many years ago and may not have kept pace with international tax developments that are now gaining significant traction within the region as well.5

A common approach adopted by pharmaceutical companies to provide on-ground support is to maintain representative/scientific offices in the destination markets. Strictly speaking, the business scope of such structures is typically confined to promotional activities only. On this basis such structures are generally exempt from income tax. In reality and over time, however, the operations of such establishments have been (unintentionally) expanded and may have crossed the line potentially triggering an income tax exposure by creating a taxable presence. In an ever-changing tax environment locally as well as globally, it is likely that some of the structures will be subject to regulatory scrutiny.


The trend of removing some of the barriers, especially in terms of investment restrictions, will give the pharmaceutical companies the opportunity to further expand in the region and reorganize some of the local operations and get a better grip over some of the potential tax challenges. With the further implementation of taxes and tax developments in the region, foreign pharmaceutical companies are advised to develop a tax strategy for the region and review their current operating models to identify areas of potential tax risk.

by Jan Roderick Van Abbe, Senior Manager, Tax, Deloitte Middle East



  1. There are two models which are commonly used: Toll manufacturing and contract manufacturing. While they are similar, there are some subtle differences. One key distinction between the two manufacturing models relates to the ownership of the goods. Under the toll manufacturing model, the principal contractually holds title to the goods.
  2. Similar considerations may apply to consignment arrangements.
  3. Under KSA domestic tax legislation for example, holding stock in KSA by a non-resident company constitutes a permanent establishment which would trigger a corporate tax filing obligation. Availing protection from taxation under double taxation agreements may be challenging in some of the Middle Eastern countries.
  4. We note that qualifying medical supplies may not be subject to import duties and VAT. In the UAE, as per the Cabinet Decision No. 56 on Medications and Medical Equipment, the supply of all medications and medical equipment registered with the Ministry of Health and Prevention shall be subject to VAT at a zero-rate.
  5. The UAE has joined the OECD Inclusive Framework on Base Erosion and Profit Shifting on 16 May, 2018.


Tax, this is pharma
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