May 15, 2020 Procurement Lawyer

Offset Programs in the Gulf Cooperation Council for the Arab States of the Gulf: Licensing and Taxation Issues

by Dr. Constantin Frank-Fahle & Thomas Vanhee

Dr. Constantin Frank-Fahle, LL.M., is managing partner at Germela Law LLP, Abu Dhabi, United Arab Emirates. Thomas Vanhee is managing partner at Aurifer Middle East Tax Consultancy, Dubai, United Arab Emirates.

The Gulf Cooperation Council (GCC) countries are traditionally vastly investing in the defense sector. It is expected that annual investments will reach approximately $100 billion by 2019. According to the Stockholm International Peace Research Institute (SIPRI), the Kingdom of Saudi Arabia (KSA) budgets $67.6 billion, and the United Arab Emirates (UAE) budgets $16.4 billion for defense investments according to a government announcement.1

The GCC countries typically import defense equipment and adjacent services from abroad. In order to compensate trade imbalances, offset programs typically require the defense contractor to make an investment in the importing country.

Offset programs are based on the notion that foreigndefense contractors should make a compensation (offset) for the delivery of defense goods. The offset is effectively a counter-trade form required in order to conclude the export agreement. In other words, whenever countries with offset programs spend a large amount acquiring defense equipment from foreign defense contractors, they require the foreign defense contractor to enter into offset agreements that allow the importing country to obtain economic benefits in exchange for its expenditures.

In the GCC, KSA, the UAE, Kuwait, and Oman have implemented offset programs. Qatar and Bahrain have not officially announced any program. However, in the authors’ experience, Qatar has concluded offset agreements on a case by case basis. See Table 1.

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