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Getting your money back from the UAE tax authority

Getting your money back from the UAE tax authority

The UAE has been considered a tax haven for many individuals and businesses, particularly due to its favourable tax regime. Aside from imposing no tax on personal income and personal assets, it only applies a 5% VAT on goods and services, and as low as 9% corporate tax—one of the lowest rates across the world! This is the reason why numerous entrepreneurs, the wealthy or high net worth individuals are drawn to this country. The government is keen to make doing business and living or retiring here as favourable as possible.


In addition, the government also allows easier ways to get VAT refunds for various types of entities, individuals, and organizations—giving them financial relief and attracting them further to invest in and set up a home in the country.


But how exactly do their VAT schemes usually work? We have laid out for you the different types of VAT refunds that exist in the UAE to help you understand how these regimes work.


VAT Refund for Taxable Persons in the UAE

It is obligatory for taxable persons—whether a business, sole trader, or a professional carrying out any economic activity in the country—to file returns at the end of each tax period. Aside from being compliant to the laws and regulations, this also allows them to apply for VAT refund whenever they have a VAT credit. This is provided that the input tax is greater than output tax on a VAT return.

Procedures

According to the Federal Tax Authority, here are the steps to claim for VAT Refund:

  • Login to the FTA e-Services Portal
  • Initiate the form: go to the ‘VAT Tab‘ and then go to ‘VAT Refunds’ tab. Click on
  • ‘VAT Refund Request’ to access the form
  • Fill in details in your Refund Form. Ensure that the information is correct.
  • Click ‘Submit’ button. Once your claim is approved, the amount will be returned within 5 business days.
  • Confirm your balance after the approval

VAT Refund for Business Visitors

This specific Refund Scheme helps business visitors make a claim for refund of VAT settled on the products or services purchased in or from the UAE. The period of each refund claim is 12 months (hence at the earliest after the end of each year). The minimum amount of each refund claim to be submitted will AED 2,000.

Criteria for VAT Refund

  • They have no place of establishment in the UAE
  • They are not a taxable person in the UAE
  • They are registered as an establishment in the jurisdiction where it is established
  • They are from a country that provides refunds of VAT to UAE entities in similar
  • circumstances (reciprocity!)

Requirements

  • A hard copy, original tax compliance certificate in Arabic or English, attested by the UAE embassy in the country of registration
  • Tax invoices
  • A self-declaration in Arabic or English if the applicant undertakes exempt/non-business activities at home
  • Passport copy of Authorized Signatory
  • Proof of Authority of the Authorized Signatory

VAT refund for Tourists

Even the tourists and visitors can enjoy the UAE’s favorable tax refund scheme. These individuals can get VAT refund for their travel purchases in the UAE, through a special device placed at their departure port (airports, seaports, or border ports). They just need to submit the required documents and they can recover VAT from 4,000 participating retail outlets across the UAE.

Criteria for VAT refund

According to the Federal Tax Authority, for a tourist to claim VAT refund on purchases he made in the UAE, he must fulfill certain conditions:

  • Goods must be purchased from a retailer who is participating in the ‘Tax Refund for Tourists Scheme’
  • Goods are not excluded from the Refund Scheme of the Federal Tax Authority
  • He must have the explicit intention to leave the UAE in 90 days from the date of supply, along with the purchased supplies
  • He must export the purchased goods out of the UAE within three months from the date of supply
  • The process of purchase and export of goods must be carried out according to the requirements and procedures determined by Federal Tax Authority.

Requirements

  • Tax-free tags
  • Relevant tax invoices.
  • Boarding pass for air or sea departures
  • Original valid passport or national ID card

VAT Refund for Exhibitions and Conferences

With the aim of enhancing the country’s status as a hub for Meetings, Incentives, Conferences & Exhibitions (MICE), the UAE has allowed businesses or suppliers involved in the industry of exhibitions and conferences to also claim for refund of the VAT charged to their global customers. The scheme is made to guarantee ease of doing business, and to take the burden of tax costs from international customers.

Criteria

  • The Supplier grants either the right to attend or occupy space
  • The Supplier is VAT Registered and has a place of residence in the UAE
  • If Supplier is from overseas, they must provide proof of establishment in an overseas jurisdiction.
  • The Recipient does not have a place of Establishment or Fixed Establishment in the UAE
  • The Recipient is not VAT registered in UAE
  • The Recipient presents written declaration that it has not paid the amount of VAT to the Supplier

VAT Refund for UAE Nationals on New Residences

To provide UAE Nationals monetary relief from building a new residence in the UAE, the government has introduced a refund scheme on VAT incurred on their construction costs.

Criteria

  • Natural person who is a UAE National
  • Must have supporting documentation such as family book
  • Expenses must be related exclusively to the applicant’s new residential construction.

Requirements

  • Copy of Family Book.
  • Copy of Emirates ID.
  • Document to prove building is occupied (e.g., water and electricity delivery bill).
  • Construction contract and completion certificate
  • Refund Form sent to the FTA within 12 months from building’s date of completion

VAT Refund on Charities in the UAE

This VAT refund scheme, amended according to the Capital Assets Scheme, allows certain charities to recover all input tax they paid on their services and supplies. These organizations often create a blend of supplies of products and services where VAT law differ, so if such goods are supplied for a charge, FTA shall deem it as a business activity.

However, tax paid for goods used for making exempt supplies (products or services where the supplier is prohibited from charging VAT), are excluded from this recovery.

Criteria

  • The Charity is on the list of the UAE’s designated Charity
  • The Charity is considered a taxable person
  • The costs related to the activity are liable to VAT
  • Relevant goods or services were not received free of charge
  • For donation concerns, charities must comply with the guidelines issued by the UAE Central bank on Anti-Money laundering and combating the Financing of Terrorism and Illegal organizations

VAT Refund for Mosque construction and operation

The Federal Tax Authority (FTA) in October launched an easier mechanism for the refund of VAT incurred on building and operating mosques. The mechanism includes refunding VAT incurred on mosques on FTA’s e-Services portal, which was formed as a result of the Cabinet Decision No. (82) of 2022 in a bid to offer financial help to mosques—considered the most important place of worship for the progressive Arab nation.

Criteria for VAT refund

  • Complete payment of input tax on services and products connected to the construction of the mosque
  • Proof that competent authorities approved the construction
  • Mosque Operation Commencement Certificate
  • Meeting any of the following conditions:
  • The Mosque has been handed over or is intended to be handed over by the Donor to any other Person for whom the Competent Authority has approved the handover of the Mosque to, including the Competent Authority itself, unless the handover is a Taxable Supply
  • The Mosque is operated by the Donor as per the approval obtained from the Competent Authority.

Requirements

  • Emirates ID or passport
  • Mosque Operation Commencement Certificate copy
  • Bank account confirmation letter/certificate
  • Schedule of expenses incurred for operating the mosque
  • Copy of the five highest value tax invoices.
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VAT Refunds in the GCC and EU

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10 things to know about UAE CIT

10 things to know about UAE CIT

The UAE Corporate Income Tax has been introduced recently, and even though the law will be effective starting June 2023, it is crucial to get familiar with it and be ready for its implementation on time.

The new law will bring many changes and will significantly impact all companies. Many still need help understanding how CIT affects their businesses, and what steps to take to ensure compliance. We listed the top 10 things about CIT that everyone should know right now.

See our previous analysis here:

UAE Publishes Corporate Income Tax Law

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UAE Publishes Corporate Income Tax Law

UAE Publishes Corporate Income Tax Law

After the announcement of the introduction of Corporate Income Tax (CIT) and the Frequently Asked Questions (FAQs) on 31 January 2022, and the release of the Public Consultation Document in April 2022, the Corporate Income Tax (CIT) Law has finally been published today (9 December 2022). The UAE CIT Law is Federal Decree-Law No. 47 of 2022 issued on 3 October 2022, and is effective 15 days after its publication in the Official Gazette. The UAE CIT Law was published on 10 October 2022 in issue #737 of the UAE Official Gazette. The CIT law is applicable on business profits effective for financial years starting on or after 1 June 2023.

The CIT regime has been implemented by the UAE in view of achieving the following objectives:

  • Cementing the UAE’s position as a world-leading hub for business and investment;
  • Meeting international standards for tax transparency and preventing harmful tax practices; and
  • Accelerating the UAE’s development and transformation to achieve its strategic objectives.

We include hereafter the main features of the new regime, as announced by the Ministry of Finance (“MoF”) and the Federal Tax Authority (“FTA”). 

Aurifer will conduct a webinar on 14 December 2022 at 2 pm UAE time. Interested participants can register here.

The text of the UAE Corporate Tax Law (UAE CIT Law), can be found here, and the FAQ’s here.

 

Scope

CIT will apply on the adjusted worldwide accounting net profits of the business. The UAE CIT regime introduces two different rates:

  • A 0% tax rate will apply for taxable profits up to an amount to be specified in a Cabinet Decision, although the FAQ’s refer to a threshold of AED 375,000.
  • The standard statutory tax rate will be 9 per cent. Because of the low tax rate, the UAE will continue to be highly competitive at a global level.

There is currently no mention in Article 3 of the 15% global minimum tax rate applicable for MNEs that fall within the scope of ‘Pillar Two’ of the OECD Base Erosion and Profit Shifting project. Specifically, this would apply to MNEs that have consolidated global revenues in excess of EUR 750m (c. AED 3.15 billion), in any two of the previous four years. The FAQs still refer to the possibility of adoption in the UAE of these rules.

Individuals are subject to corporate tax insofar as they engage in business activity. The definition of business is inspired by the VAT definition, and is therefore broad. A Cabinet Decision will be published in regard to the application of CIT to natural persons.

There is a carve-out regime for businesses established within UAE free zones that (1) maintain adequate substance, and (2) earn qualifying income. What constitutes qualifying income, will be determined in a Cabinet Decision. Presumably, this is a reference to the requirement not to conduct business with mainland UAE, as previously outlined in the Public Consultation Document. It is confirmed as well that Free Zone businesses can voluntarily elect to be subject to Corporate Income Tax at the rate of 9 per cent.

There will be a 0% withholding tax on categories of State Sourced Income derived by a Non-Resident.  This means that foreign investors who do not carry on business in the UAE will in principle not be subject to tax in the UAE.

For foreign entities, they could be considered a resident in the UAE if they are managed and controlled in the UAE. For foreign entities not considered resident in the UAE, but who may have a Permanent Establishment in the UAE, the Permanent Establishment definitions encompass definitions of a fixed PE and an agency PE. We expect further details about the PEs in a Ministerial Decision. For the financial sector, the Investment Manager Exemption from the Public Consultation Document is retained in the UAE CIT Law. Specific rules apply for Partnerships, which could be transparent, and Family Foundations can also apply for tax transparency.

Government entities and government-controlled entities will be exempt from the UAE CIT Law, as will qualifying public benefit entities and qualifying investment funds. Extractive businesses (upstream oil & gas businesses) will also be exempt, to the extent they earn income from the extractive business. In principle, banking operations will be subject to CIT (unless the institution is in a Free Zone and qualifies for the 0% rate). 

 

Date of implementation 

Article 69 of the UAE CIT Law provides that the Law will apply to Tax Periods starting on or after 1 June 2023. 

Businesses with a financial year starting 1 January will be subject to CIT as from 1 January 2024.

 

Deductible expenses

Expenses incurred wholly and exclusively for business purposes, and which are not to be capitalized, are deductible immediately. Deductions are not allowed for expenditures incurred to obtain exempt income. When there is a mixed purpose, the deduction is only partially allowed. Interest expenses are deductible subject to a cap of 30% of the EBITDA. So-called financial assistance rules are in place, which prevents businesses from obtaining financing to pay out dividends or profit distributions. Entertainment expenses are capped at 50% deductibility.

Non-deductible expenses include donations made to a non Qualifying Public Benefit Entity, fines, bribes and dividends. Importantly as well, amounts withdrawn from the Business by a natural person who is a taxable person are not deductible.

 

Exempt income and relief

The following categories of income will be exempt from CIT (article 22 UAE CIT Law):

  • Capital Gains, Dividends and other profit distributions from a Resident Person
  • Capital Gains, Dividends and other profit distributions from a Qualifying shareholding in a foreign legal person, subject to a holding period of 12 months, minimum participation of 5%, at a minimum subject to 9% CIT in the country of source
  • Income from a Foreign PE, subject to conditions and an election to apply the exemption (rather than a credit)
  • Income derived by a non-resident Person derived from operating aircraft or ships in international transportation

The following transactions are subject to specific relief, i.e. effectively a deferral of taxes:

  • Qualifying intragroup transactions and restructurings – entities will qualify if they have 75% common ownership
  • Business restructuring relief – subject to certain conditions.

Transfer pricing 

Article 34 of the UAE CIT Law confirms the requirement for related party transactions to be conducted in accordance with the arm’s length principle. Furthermore, it outlines the five traditional OECD transfer pricing methods as being appropriate to support the arm’s length nature of related party arrangements, while allowing the use of other methods where required. 

Additionally, Article 34 outlines that in the event of an adjustment imposed by a foreign tax authority which impacts a UAE entity, an application must be made to the FTA for a corresponding adjustment to provide the UAE company with relief from double taxation. Any corresponding adjustments related to domestic transactions does not require such an application.

Article 55 covers transfer pricing documentation requirements. UAE businesses will need to comply with the transfer pricing rules and documentation requirements set with reference to the OECD Transfer Pricing Guidelines. This means three tier reporting, i.e., master file, local file and country-by-country reporting. There is also a reference to a controlled transactions disclosure form, details of which remain outstanding. Additionally, it is noted that no materiality thresholds have been provided. Separate legislation will be issued later.

Advanced pricing arrangements will be available as well, through the regular clarification process already in place.

While not necessarily transfer pricing, the UAE has implemented provisions requiring payments and benefits made to connected persons to be at market value, for those amounts to be tax deductible. For the application of this principle, the same principles are applied as in article 34 of the UAE CIT Law, which refers to a transfer pricing methodology.

 

Administration and enforcement 

  • The MoF seems to remain the competent authority for the purposes of multi-lateral / bilateral agreements and the international exchange of information.
  • The FTA will be responsible for the administration, collection and enforcement of the new corporate income tax regime. Penalties and fines are determined by the Tax Procedures Law.
  • Businesses will need to obtain a Tax Registration Number with the FTA.

Businesses that are subject to UAE CIT will be required to file a CIT return electronically for each financial period within 9 months of the end of the Financial Period. A financial period is generally any 12-month financial period year. Free Zone businesses subject to 0% CIT are also required to file a CIT return. 

 

Other considerations

  • Foreign tax will be allowed to be credited against UAE corporate tax payable. The mechanism of the application is as in the Public Consultation Document. Businesses can claim the lower of the corporate tax due, or the amount of withholding tax effectively deducted. There will be no carry forward. There are no credits for taxes paid to the individual Emirate.
  • Fiscal consolidation or Tax Group: UAE companies will be able to form a “fiscal unity” or Tax Group for UAE CIT purposes. The most important condition for a Tax Group to comply with is the (in)direct shareholding requirement of 95%. Free zone entities subject to 0% cannot enter into a Tax Group. In addition, the parent (which can be intermediate) needs to be a UAE company.
  • Losses can be carried forward up to 75% of the Taxable Income (article 37 of the UAE CIT Law).
  • Losses can be transferred between members of the same group of companies, provided the entities are 75% direct or indirectly commonly held. Losses cannot be transferred from exempt persons or free zone entities. The loss offset is also subject to the 75% cap, as for businesses rolling forward losses.
  • Tax deductible losses can be lost when there is a change of control (50% or more) except if the new owner conducts the same or a similar business. The conditions for this have now been defined.
  • Extensive UAE sourcing rules are applicable, which may be of great relevance for the Free zone businesses.
  • The UAE implements a General Anti-Abuse rule, or “GAAR”, which is inspired by the Principal Purpose Test found in the MLI. The GAAR applies to situations where one of the main purposes of a Transaction is to obtain a Corporate Tax Advantage not consistent with the intention or purpose of the UAE CIT Law. The FTA will counteract or adjust the transaction. The GAAR applies for transactions or arrangements entered into on or after the date the UAE CIT Law is published in the Official Gazette. The UAE CIT Law was published in the UAE Official Gazette of 10 October 2022 in issue #737.

Our initial thoughts

The introduction of CIT is a direct result of OECD’s ‘Pillar Two’ which is part of the Base Erosion and Profit Shifting (“BEPS”) project.

With a headline rate of 9% on taxable income and small business relief, the UAE is striking the right balance.

Interestingly as well is that with the implementation of CIT, the UAE also introduced mandatory transfer pricing regulations.

The rules are very much in line with the Public Consultation Document published earlier this year. Much of the detail is deferred to Cabinet and Tax Authority Decisions, and there’s surely a great deal of guidance to be expected. 

Aurifer will conduct a webinar on 14 December 2022 at 2 pm UAE time. Interested participants can register here. In the meantime, feel free to reach out to your regular Aurifer contact for more detail. 

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Income Tax, VAT and Excise Tax and Tax Procedures Updates in the UAE – A Breakdown

Income Tax, VAT and Excise Tax and Tax Procedures Updates in the UAE – A Breakdown

We are still awaiting the release of the Corporate Income Tax Law (CIT Law) in the United Arab Emirates (UAE). Meanwhile, there have been a slew of updates and amendments in the months of October and November 2022 in the UAE on the fronts of Income Tax, Value Added Tax (VAT) and Excise Tax. We try and cover the main amendments below.

 

  1. UAE’s new criteria for tax residency:

The UAE issued Cabinet Decision No. 85 of 2022 dated 2 September 2022 (Decision), laying down the criteria for being considered as a tax resident for legal and natural persons. This is the first time that the UAE has formalized tax residency criteria at the Federal level.

The Decision is applicable from 1 March 2023. A legal person is considered a tax resident in the State if any of the following are met:

  • It has been established, formed, or recognized in accordance with the laws and regulations enforced in the UAE, and which does not include branch of a foreign legal entity;
  • It is considered a tax resident under the applicable tax law in the UAE.

It is interesting to note that though this provision does not explicitly refer to the situation where a legal person is ‘effectively managed’ for tax residency purposes, as provided in the Public Consultation Document (PCD) in Paragraph 4.4.

Further, an individual is considered a tax resident in the UAE, if any one of the following are met:

  • His primary place of residence and the center of his economic and personal relations are in the UAE or meets certain criteria and conditions that are determined by the Minister of Finance (MoF),
  • He has been physically present in the UAE for a period of 183 days or more, during a period of 12 consecutive months,
  • He:
    • has been physically present in the UAE for a period of 90 days or more, during a period of 12 consecutive months, and,
    • holds,
      • either the nationality of the UAE,
      • (or) a valid residence permit in the UAE,
      • (or) the nationality of any other Gulf Cooperation Council (GCC) country, and
    • either has a permanent place of residence in the UAE, or a job or business in the UAE.

Given the supremacy of International Law, if any Double Tax Treaty (DTT) specifies any conditions for determining a person’s tax residency, the provisions of that DTT shall apply.

 

  1. Amendments to UAE Excise Tax Law

The FTA also published amendments to the Federal Decree-Law No. 17 of 2017 (Decree-Law) on Excise Tax, effective from 14 October 2022. A summary of the amendments is as follows:

  • An exception is now foreseen from the requirement to register for Excise Tax for the following activities, if not regularly conducted by a Person:
    • Import of Excise Goods,
    • Release of Excise Goods from a Designated Zone.
  • To avail the above exception, the Person is required to inform the FTA of any changes that would subject such person to the registration requirements. 
  • Any Person importing goods for other purposes than conducting business, is also not required to register for excise tax purposes.
  • The benefit of not having to register is without prejudice to the following:
    • The obligation of payment of Due Tax on such import. Persons availing the benefit therefore still to settle the Due Tax when importing the Excise Goods. 
    • The obligation to settle any Due Tax or Administrative Penalty in accordance with the Decree-Law or any other law. 
  • Any amount received by such Person purporting as Excise Tax, or any invoice issued in relation to Excise Tax, is deemed to be Excise Tax due to the FTA and needs to be settled accordingly. This provision is mainly targeted towards taxpayers unduly “charging” excise tax, and therefore profiteering. The practice of mentioning excise tax on an invoice happened sometimes, even though excise tax is not actually chargeable to the customer.
  • Generally, the FTA cannot conduct a Tax Audit or issue a Tax Assessment after the expiry of 5 years from the end of the relevant Tax Period. However, there are now important exceptions to this provision, as below:
    • If the Person is notified of the commencement of the Tax Audit or Tax assessment before the expiry of the 5-year period, provided that the Tax Audit is completed or the Tax Assessment is issued within 4 years from the date of notification of the Tax Audit. 
    • If the Tax Audit or Tax Assessment relates to a Voluntary Disclosure (VD) submitted in the 5th year from the end of the tax period, provided that the Tax Audit is completed or the Tax Assessment is issued within 1 year from submission of the VD). 
    • In cases of Tax Evasion, where the Tax Audit may be conducted or the Tax Assessment may be issued within 15 years from when the Tax Evasion occurred.
    • In cases of failure to register, where the Tax Audit may be conducted or the Tax Assessment may be issued within 15 years from the date on which the Person should have registered.

Where any of the reasons stipulated in the Civil Transactions Law (Federal Law No. 5 of 1985) (Civil Transactions Law), or any other law replacing the Civil Transactions Law occur, the abovementioned Statute of Limitation is to be interrupted (i.e., kept in abeyance).

 

  1. Amendments to UAE VAT Law

 The FTA also published amendments to the Federal Decree-Law No. 18 of 2022 (VAT Law Amendments) where certain Provisions of Federal Decree-Law No. (8) of 2017 on Value Added Tax (VAT Law) were amended. The VAT Law Amendments are effective as from 1 January 2023.

A summary of some of the important VAT Law Amendments is as follows:

  • In Article 26(1), which provides for the determination of date of supply in special cases, ‘the date on which one yearhas passed from the date on which goods or services are provided’ has been added as one of the events to determine the date of supply. This means that, apart from the other factors that determine the date of supply, if one year has passed from the date on which the goods or services are provided, Article 26(1) triggers.

According to the Public Clarification issued by the FTA (VATP030), this means that the place of supply of goods supplied under any contract that includes periodic payments or consecutive invoices, shall be the UAE at any time under the execution of the contract.

  • In Article 30(8), which determines the place of supply of services for transportation services, the amendment now includes ‘transportation related services’ within its ambit. This means that the place of supply for ‘transportation related services’ shall also be where the transportation starts.
  • Article 33 was amended and made the words Principal and Agent trade places. According to the Public Clarification issued by the FTA (VATP030), this means that where the activities in the UAE of the agent have as a result that the principal has a place of residence, the principal will be regarded like a regular resident taxpayer, and therefore be subject to the normal Mandatory Registration Thresholds.

The residency criteria for foreign principals is inspired by the legislation covering direct taxes on PEs but includes the holding of stock, which is normally an exclusion under the PE definition in article 5 of the OECD Model Tax Convention. The inclusion of these provisions is not common for VAT purposes.

  • In Article 36, which contains rules for valuation of supplies for related party transactions, the provision now overrides Article 37 (which determines the valuation of deemed supplies). This means that the value of deemed supplies between related parties shall also be the market value, if the following conditions are met:
  • The value of such deemed supplies between related parties is less than the market value,
  • The deemed supply is a taxable supply, and the recipient of goods or services does not have the right to recover the full tax that would have been charged to such supply as Input Tax.

The term “market value” is not an explicit reference to transfer pricing legislation.

Prior to this amendment, the valuation of deemed supplies, based on the total cost incurred by the Taxable Personto make such deemed supplies, was not overridden by Article 36, and hence there was no explicit bar from being applicable to related party transactions.

  • Intended to be of clarificatory nature, in article 45 additional situations are added where the zero rate applies on imports of certain goods.
  • Under Article 48, dealing with the reverse charge mechanism, Paragraph 3 now includes the term ‘pure hydrocarbons’, rather than ‘hydrocarbons’. The term ‘pure hydrocarbons’ has been defined in Article 1 to mean, ‘Any kind of different pure combination of a chemical equation made only of hydrogen and carbon (CxHy).’ This would. for example, exclude hydrocarbons with bonded compounds or impurities of sulphur or nitrogen, such as lubricants and bitumen.
  • Under Article 55, which deals with the recovery of Input Tax, conditions for documentary evidence for claiming input tax on imports have been provided as follows: (i) where goods are imported, the invoices and import documents must be made available, (ii) where services are imported, the invoices pursuant to such import must be made available.
  • Under Article 61, which deals with instances and conditions for output tax adjustments, the amendment now provides that the output tax shall be adjusted after the date of supply, even where the tax treatment was applied incorrectly. This is an important amendment, as this situation was not clear before and is helpful for businesses wanting to correct errors.
  • Under Article 62(2), which deals with the mechanism for output tax adjustment, the amendment provides that a credit note must be issued within 14 days from the date on which any of the provisions of Art. 61(1) occurrs.
  • Under Article 65(4), which provides that where a taxable person issues a tax invoice displaying VAT on the invoice or receiving any amount as VAT, such person will have to pay VAT to the Federal Tax Authority (FTA) on such amount.This provision is usually intended to be an anti-fraud provision and contains the legal basis for the FTA to claim VAT from taxable persons who incorrectly claimed it from customers.
  • Under Article 67, normally an invoice must be issued within 14 days from the date of supply. A clause has been added to provide that the Executive Regulation shall determine cases where the tax invoice must be provided in a different period.
  • Under Article 74, the amendment provides a clarification providing that if no application for recovery of the excess tax is made after the setoff is effected, the excess recoverable tax shall be carried forward to the subsequent tax months.This amendment is a mere formalization of the practice already in place.
  • A new article has been inserted in Article 79 bis on the statute of limitations. This provision is similar to the recent amendments made to the Excise Tax law on the statute of limitation, covered above.
  1. Amendments to VAT Executive Regulations

The FTA also published amendments to the Executive Regulations to the Value Added Tax VAT Law (VAT Executive Regulations Amendments), by way of Cabinet Decision No. 99 of 2022. The VAT Executive Regulations Amendments are effective as from 1 January 2023.

The major changes in the VAT Executive Regulations Amendments are:

  • In Article 3, a new provision is added, which states that functions performed by a natural person who is a member of a board of directors in any government entity or private sector entity, shall not be considered a supply of services. This means that no VAT is due on the income received by the natural person in his capacity as a board member. This not the case when the income is received by a legal person.
  • In Article 72, a provision has been added which states that where the value of taxable supplies made by a taxable person through electronic commerce exceeds AED 100,000,000 (the equivalent of approximately 27,2 M USD) during the calendar year, such taxable person must keep records of the transaction, to prove the Emirate in which the supply is received. The timeframe for such record keeping is as follows:
  • (From the first tax period that begins on or after 1 July 2023) – 18 months, where the Threshold is met, for the calendar year ending 31 December 2022.
  • (From the first Tax period of the calendar year that begins after the date of which the Threshold is met) – 2 years commencing from the tax period.

The record keeping provisions will likely go hand in hand with amended Emirate reporting requirements.

 

  1. Key takeaways, trends and final thoughts

By and large, the changes and the amendments have been issued in light of the Government’s intention to further improve the ease of doing business in the UAE and further the UAE’s reputation of an ideal jurisdiction for Multinational Enterprises (MNEs).

With the formalization of the tax residency criteria, the building blocks of the upcoming, and perhaps imminent, CIT regime have been laid down.

Certainly, one of the most significant amendments has been to the extension of the Statute of Limitation right before some of the claims become time barred. There is also a strong emphasis on measures to counter tax evasion.

Together with the relaxation of the penalties regime last year, and a more rewarding Voluntary Disclosure regime, the face of taxes has evolved since 2017. The new rules will be tested at the event of the five year anniversary of VAT and the implementation of Corporate Income Tax.  

 

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Scoring Tax Exemptions in Qatar

Scoring Tax Exemptions in Qatar

International sports bodies typically insist on obtaining widespread tax exemptions as a precondition to awarding the hosting rights to a bidder. This also applies for events organized by the Fédération Internationale de Football Association (FIFA). FIFA’s biggest event, the Football World Cup, will kick off later this month in Qatar.

Obtaining tax exemptions is such a sensitive topic for sports organizations that there have even been instances where the events have entirely moved to another country because a country was unable to grant the exemption. For example, the T20 Cricket World Cup was moved from India to the United Arab Emirates (UAE) and Oman last year because the Indian Government did not offer the exemptions in time.

In Qatar, even though Qatar has Free Zones, only the Qatar Financial Centre (QFC) issues its own tax framework. It applies next to the general tax framework applicable in the rest of the State of Qatar. We will be looking at these frameworks in this article.

Claiming Tax Exemptions (Substantive Aspects)

For mainland Qatar, Ministerial Decision No. 9 of 2022 (Ministerial Decision) issued earlier this year on 25 August 2022 = provides details on the exemptions available to different parties, based on Government Guarantee No. (3) dated 22 February 2010 (Government Guarantee) issued by the State of Qatar to FIFA.

The most comprehensive exemption benefits are provided to FIFA itself and its affiliates (whether residents or non-residents). They are totally exempt from any taxes.

Contractors are granted a limited exemption to the extent of all taxes on import, export or transfer of goods, services and rights related to the activities of the World Cup, if the goods are imported for their use by:

  • The Contractors themselves in Qatar,
  • The Contractors, with the possibility of re-exporting the goods,
  • The Contractors, with the possibility to donate to sports entities, charitable foundations etc.

Individuals employed or appointed by the following, are also exempt from individual taxes on payments, fringe benefits or amounts paid or received in relation to the World Cup, until 31 December 2023:

  • FIFA,
  • FIFA’s affiliates,
  • Continental or National Football Associations,
  • Event broadcasters,
  • Suppliers of goods,
  • Works contractors and
  • Service providers.

This exemption also covers Personal Income Taxes for those individuals who enter and exit Qatar between 60 days before the first match (21 September 2022) until 60 days after the final match (16 February 2023), as long as they do not permanently reside in Qatar. This exemption may be void of much effect, given the absence of Personal Income Tax in Qatar.

An Exemption from Excise tax is to be obtained by way of refund, by providing documents like purchase invoices and bank details.

 Claiming The Exemptions – Logistical Aspects

For exemptions granted by the General Tax Authority (GTA), there is no requirement to register with the GTA. Instead, FIFA (through the Supreme Committee for Delivery and Legacy (Supreme Committee)) prepared a list of exempted entities and individual, containing data such as the nature of contracted works, term and value of the contract, and the residency of the contracting party.

The Supreme Committee then provides the GTA the relevant documentation (Articles of Associations of companies, addresses of individuals etc.) in regard to the organisation or individuals for whom the Tax Exemption is applied.

For claiming customs duty exemptions with the General Authority of Customs (GAC), (and unlike the procedure with the GTA), the claimants need to register with the GAC.

Here too, FIFA approves the list for the Supreme Committee to provide to the GAC to entitle those entities to exemptions from customs duties and fees.  Based on this list, the GAC provides the listed entities amongst others with facilities in regard to electronic customs clearance.

In this regard, the GAC also earlier this year launched a ‘Sports Events Management System’ to facilitate customs procedures during sporting events, including the World Cup. This system provides electronic services for the clearance of goods, including easy registrations, accelerated customs procedures, and the inclusion of a special unit to facilitate approvals for incoming shipments. 

There may be some interesting questions on the applicability of the Ministerial Decision, including:

  • To what extent are the activities ‘directly or indirectly’ related to the activities of the World Cup? For example, does it include online betting platforms involved in placing bets on the matches? Would it include businesses that are involved in ancillary aspects to the World Cup such as general tourism consequent to the World Cup?
  • Would match fee or advertisement / sponsorship / award income earned by the footballers in relation to the World Cup also be covered under the Ministerial Decision?
  • Where an event broadcaster obtains substantial advertisement income from brand sponsors during the broadcast of the match or match related activities, is such income also exempt from taxes?

QFC – Tax Exemption Regime for the World Cup 

The QFC in its Concessionary Statement of Practice (Statement) explicitly provides that a QFC entity which is a:

  • FIFA subsidiary – is exempt from Corporation tax and any other charge, levy, penalty or interest related thereto;
  • FIFA Host Broadcaster or a Local Organizing Committee (LoC) Entity – is exempt from Tax ‘in relation to taxable profits that are derived from activities carried on for the purposes of the World Cup’.

The major conditions for such QFC entities to claim the exemption are as follows:

  • Such QFC entities have genuine economic substance in Qatar,
  • The QFC entity operates in terms of the license and upon authorization of the Qatar Financial Centre Regulatory Authority (QFCRA),
  • An Advanced Ruling has been applied for by the QFC entity and granted by the QFC, confirming the exempt status of such QFC entity,
  • The QFC entity is included in the list provided by FIFA to the QFC Tax Department,
  • The sole or main purpose of such QFC entity is not avoidance of tax,
  • The QFC Tax Department is satisfied that granting the exemption is not in breach of international tax principles set out in the BEPS Project minimum standards.

The potential activities that can be developed in the QFC are limited, and therefore not all types of businesses can set up in the QFC.

No VAT – No VAT Exemption

Even though Qatar is a part of the GCC VAT Agreement and committed to implement VAT in the same vein as its neighboring countries of the UAE, Kingdom of Saudi Arabia (KSA), Bahrain and Oman have done, it has not yet enacted any legislation.

Therefore, there is currently no need for a VAT exemption for the World Cup. Who knows, VAT may be introduced shortly after the organization of the World Cup?

Exemptions Worth the Trouble?

Granting tax exemptions for international sporting events are sometimes controversial. The public in some hosting countries do not always believe they receive a return on investments from the event. While Qatar has spent substantial amounts of money on the construction of infrastructure, the effect of the tax exemptions is rather limited, and at least for Qatar, it seems to have been worth the investment. In any case, the exemptions are a precondition, without which a country cannot bid. After the UAE had hosted the FIFA Club World Cup a number of times, Saudi Arabia will now be looking at hosting the Asian Winter Games in 2029. Those countries have given similar tax concessions to the international organizations managing the events.

For future possible events in the UAE, it will also be interesting to see how the sporting organizations and the tax authorities will deal with the Corporate Income Tax (CIT) which is to be introduced in the UAE in June 2023. The relationship may be anything between an unbridled and full-fledged exemption (if the UAE is willing to do so), or it may lead to rather interesting tax claims (like the Formula 1 case on Permanent Establishment (PE) in India a few years ago, which was decided by the courts in the tax authority’s favor). Time alone can tell.

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Almost 5 years down the line for VAT in the GCC – what’s next?

Almost 5 years down the line for VAT in the GCC – what’s next?

Almost 5 years down the line for VAT in the GCC  – what’s next?

As we approach 31 December 2022, the UAE and KSA will be celebrating 5 years of applying VAT. A rollercoaster ride for many in the region, authorities, advisers and in house tax managers.

We wrote in 2017 about the challenges of drafting VAT legislation in the GCC before its implementation (https://aurifer.tax/news/the-challenges-of-drafting-tax-legislation-and-implementing-a-vat-in-the-gcc/?lid=482&p=21).

We pondered whether the GCC was potentially going to be far ahead of other jurisdictions because of the Electronic Services System (“ESS”) the GCC VAT Agreement was going to implement, foreseen in article 71 of the Agreement (https://aurifer.tax/news/future-of-vat-in-the-eu/?lid=482&p=22). The GCC however never implemented the ESS. It is therefore missing an important instrument to integrate all GCC members under a single comprehensive regional VAT framework.

After almost 5 years, it’s worth taking a step back and looking at what occurred.

6 countries to implement, only 4 did

The GCC consists of six countries, Saudi Arabia, the UAE, Bahrain, Oman, Kuwait and Qatar. All countries were supposed to introduce VAT in a short span of time. The UAE and KSA did so on 1 January 2018, Bahrain on 1 January 2019, and Oman on 16 April 2021. For Qatar, rumours ebb and flow on an implementation of VAT after the World Cup, but officials are tight lipped. In terms of Kuwait, a new government is not likely to put this on the table – at least, in the near future.

The intention to implement almost simultaneously was taken with the idea of avoiding arbitrage – considering the geographical proximity between the states – and potential issues with fraud.

5% was supposed to be the rate

All 4 countries kicked off with 5% VAT, as it is foreseen in the GCC VAT Agreement as well (article 25). Saudi Arabia was the first one to hike the rate to 15% on 1 July 2020. Bahrain increased to 10% on 1 January 2022.

The increases were implemented for the same reason, as the tax was implemented for in the first place, i.e. fiscal stability. The implementation came off the back of a protracted period of running deficits for many Gulf countries. There is currently a bounce back, but how long it will take is unclear, and therefore hard to predict whether it will impact fiscal policy in the short run.

Saudi Arabia, by way of its Finance Minister, had already stated in 2021 that it would consider revising the VAT rate downwards after the pandemic. If it will happen, it will happen soon.

It’s safe to say the other GCC countries could still revise the rate upwards or downwards, depending on their specific fiscal situation.

Interestingly, the increase of the VAT rate to 15% also spawned a new tax in KSA, the Real Estate Transfer Tax (“RETT”). This new tax in KSA aimed to solve the issue of unregistered sellers, and reduce the taxes on real estate sales. Since its introduction, the RETT legislation has been amended multiple times.

The GCC countries were supposed to have numerical VAT numbers, Oman didn’t follow

In the framework of the GCC, the idea was floated to have numbers as VAT numbers. Hence, the UAE has a 1 before the number, Bahrain a 2 and Saudi a 3. Oman however choose letters and put “OM” before the number.

In the EU, VAT numbers are also composed of letters and numbers. Two letters make up the first two symbols of the VAT number and refer to a country, e.g. “LU” refers to Luxembourg (see https://taxation-customs.ec.europa.eu/vat-identification-numbers_en).

Zero rates for services are perceived a complication

5 years in, the application to zero-rate VAT on exported services, i.e., services provided to recipients outside of the GCC, remains complicated for businesses to apply and inconsistent between the GCC member states.

Although the GCC VAT Agreement for place of supply purposes looks like the EU VAT directive, from the outset, each GCC member state chose different approaches towards the place of supply of services.

B2B services were not simply located in the country of the recipient, as they are in the EU since 2010, and as is recommended by the OECD in its VAT/GST Guidelines on B2B services.

Based on an interpretation of article 34(1)(c) of the GCC VAT Agreement as laying down the rule, and including a benefit test, GCC countries have embarked on a conservative and selective interpretation of the zero rate on supplies made from a GCC country to abroad.

That conservative interpretation is not necessarily mirrored when those services are received, as there is no benefit test required there.

The rule is therefore applied unequal, and as shown by both the UAE and KSA, they felt the rule required amendments to the provision itself (https://www.linkedin.com/pulse/uae-considerably-restricts-application-vat-zero-rate-services-vanhee/). Those amendments, and ensuing clarifications have not necessarily led to more clarity.

Unfortunately, Bahrain and Oman went down the same road. A too conservative view of zero rates, can put a strain on foreign investments, as it is not easy to obtain refunds for foreign businesses (as amongst others the Saudi example shows).

As a matter of fact, disputes are common among businesses in the GCC over the VAT treatment of cross-border services due to the difference in the domestic legislation between the GCC member states and in the absence of the ESS.

Divergent policy options

The GCC VAT Framework Agreement allowed for broad policy options in the education sector, health sector, real estate sector and local transport sector. In addition, for the oil & gas sector zero rates were allowed to be implemented as well, and the financial sector could benefit from a deviating regime as well. Depending on the individual requirements and policies, the GCC Member States have implemented substantially different regimes.

None of the GCC countries so far have amended those policies in the aforementioned sectors. The UAE did move from a system where the B2B sales of diamonds was taxed, to a system where it is subject to a reverse charge as from 1 June 2018.

Tax Authority approaches

So far, in the region ZATCA has shown the most grit in terms of audits, and has lengths ahead of the other countries in terms of tax audits and disputes. KSA also had the best equipped tax authority in 2018 when VAT was introduced, although it did have to go through an organizational revamp. The UAE comes second, which is remarkable for a tax authority which only kicked off in 2017. It has been very much a rules and process based organization, which has a lot of positive effects, such as tax payers feeling treated in the same way. UAE auditors now often also give the opportunity to tax payers to voluntarily disclose their liabilities before closing the audit, which is a novely approach in the region.

The Bahraini and Omani tax authority, have been taking a more relaxed approach towards audits and disputes.

Having said the above, it’s all not all ‘sticks’ with the tax authorities. We have also observed in this 5 years, how the tax authorities, especially in KSA and the UAE, played a their role to alleviate tax from being a burden to businesses and encouraging tax compliance – a fairly new culture of this scale. The amnesty programmes, first introduced by the KSA in 2020 and again, recently paved the way on encouraging tax compliance for businesses. The UAE also introduced their amnesty programme this year with the same intention. Perhaps, this could be a temporary solution to gear the economy back on track post pandemic. On whether it will be the norm, is yet to be seen in the next coming years.

What the future will bring

An old-fashioned system was put in place, yet one that has proven its use in revenue collection. It also worked, given the substantial revenues gained from VAT.

The GCC did not opted to immediately adopt more modern, electronic systems as these exist elsewhere (e.g. since a long time in Brazil, but also China).  

However, it was identified that E-invoicing was the way to go in the medium run. This is again trodding down a proven path. As often in the GCC, the UAE and KSA show the way. KSA has made E-invoicing mandatory. The UAE and Bahrain have already suggested they will do the same very soon.

No GCC countries have yet announced they will adopt real-time reporting. KSA may be the closest to a potential adoption, given that once phase 2 enters into force in 2023, ZATCA, the KSA tax authority will have access to substantial transactional data. It will allow it to pre-fill the VAT return, and potentially even in real time calculate the VAT.

We’ll see what the future will bring, and for sure in another five years matters will have evolved again drastically, given the pace of changes in the region.

Safe to say that the next 5 years will be equally exciting.

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How anti-avoidance provisions can curtail the application of Double Tax Treaties, including in the UAE?

How anti-avoidance provisions can curtail the application of Double Tax Treaties, including in the UAE?

The Ministry of Finance (MoF) of the United Arab Emirates (UAE) recently announced that the draft Corporate Tax (CT) law is going to be released soon, and likely within the month of September. This is impactful news for businesses in the UAE. Many businesses are already in the process of taking steps to plan their affairs in such a way that their operations are tax compliant and tax optimized at the same time.

The UAE’s international position will change after the implementation of corporate tax. Some jurisdictions may no longer view the UAE as a tax haven (although the Free Zone businesses may still benefit from a 0% rate). Other tax authorities may therefore change their perspective on the UAE and be more inclined to grant the benefits under the double tax treaties.

Businesses on the other hand, will no longer view the UAE as a conduit jurisdiction with an extensive treaty network, through which they can avail tax treaty benefits. While the 9% headline rate is still comparatively low, the implementation of CT may also discourage taxpayers seeking out the UAE solely for tax purposes.

A recurring point of dispute between the tax authority and businesses in almost every country having a CT regime has been drawing the line between tax planning, tax avoidance and tax evasion. Once the UAE CT regime settles, the Federal Tax Authority (FTA) of the UAE may indeed pay more attention towards countering tax avoidance and tax evasion arrangements or transactions.

In this article, we will revisit the evergreen discussion of tax planning, tax avoidance and tax evasion, with an emphasis on the Gulf Cooperation Council (GCC). To begin, let us examine the meaning of the terms tax avoidance and tax evasion and the differences between the two terms.

Tax avoidance has traditionally been considered as lawful. It can be described as planning for the purposes of minimizing the tax burden within the legal framework. Tax evasion on the other hand is considered unlawful, and often requires an intentional and a potential fraudulent element.

In the GCC, tax authorities resort rather quickly to suggesting a taxpayer has committed tax evasion, even when the situation concerns simple non-compliance.

While not considered unlawful, tax avoidance has been considered harmful. This is why countries around the world, including the GCC Member States, are implementing domestic rules to counter aggressive or harmful tax planning in line with international standards.

The OECD tried to address this point by way of the ‘Main Purpose Test’ (MPT). The MPT was included in the OECD’s Model Tax Convention in its 2003 version. We are paraphrasing, but the principle stated that benefits under a double tax treaty should not be granted where the main purpose of setting up a structure was for tax purposes as the tax benefits resulting from that structure would go counter the object and purpose of those treaties.

Another common mechanism proposed in tax treaties to avoid the improper use of tax treaties, is the ‘Beneficial Ownership’ (BO) requirement. It mainly applies to passive income (e.g., dividends, interests, and royalties). The BO concept provides that where an item of income is paid to a resident of a Contracting State acting in the capacity of an agent or a nominee, it would be inconsistent with the object and purpose of the source state to grant an exemption or relief, merely because the direct recipient is a resident of the other Contracting State. In such a case, the direct recipient, on account of being merely an agent, nominee, conduit, fiduciary, or administrator, would not be able to obtain the benefits of the treaty. This is especially evident if such recipient is legally or contractually bound to pass on the payment received to another person. BO disputes often end up before the courts, because the burden of proof for the taxpayer is not easily met. 

The 2008 Financial Crisis put the discussion on tax avoidance and aggressive tax planning firmly on governments’ agenda. Following the Financial Crisis, public opinion shifted towards ensuring that big corporations pay their fair share of taxes and pressured countries to implement rules to discourage such behaviors.

As a result, the OECD established what is known as the ‘Inclusive Framework’ (IF), which was open to both OECD and non-OECD members (currently at 141 members) to engage in discussions and create rules for countering Base Erosion and Profit Shifting (BEPS). It is formally known as the OECD/G20 BEPS Project (BEPS Project 1.0) which identified 15 Action Points in 2015.

Out of the 15 Action Points, one of the most important action plans was BEPS Action 6 – Prevention of Tax Treaty Abuse, which also formed one of the four minimum standards. BEPS Action 6 addresses treaty shopping activities that would be viewed as avoidance.

BEPS Action 6 requires IF members, amongst others, to include an express statement in their treaties that their common intention is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty shopping arrangements.

Anti-avoidance rules aim amongst others to avoid conduit arrangements. For example, State A has a domestic withholding tax rate for dividends of 25%. State A and State B have negotiated a tax treaty where the source withholding tax rate for dividends is reduced to 5%. A resident in State B receives dividends from State A and claims the reduced treaty rate of 5% source withholding.

However, the resident in State B has an obligation to redistribute the dividend income to a resident in State C. State A and State C do not have a tax treaty in place. It can be observed that there is no BO in State B due to its obligation to pass the payment onto another party. Clearly, such payment is not made for the benefit of any resident in State B nor for enhancing economic cooperation between States A and B. Instead, the benefit would be received by the resident of a third State (i.e., State C). This clearly shows that the treaty has been misused or abused by the resident of State B, against the intention, object, and purpose of the treaty between States A and B.  

To combat misuse of the treaty like the case described above, BEPS Action 6 seeks IF members to implement a ‘minimum standard’ in all its treaties. The minimum standard can be either of the following:

  1. The combined approach of a Limitation of Benefits (LOB) and a Principal Purpose Test (PPT) rule,
  2. The PPT rule alone, or
  3. The LOB rule supplemented by a mechanism that would deal with conduit financing arrangements not already dealt with in tax treaties.

As a consequence, many IF members’ tax treaties have been updated to include, at least, a PPT rule. This is done by way of signing and ratifying the Multilateral Instrument (MLI) as it allows IF members to update multiple bilateral tax treaties simultaneously. The PPT rule looks a lot like the MPT. True to its name, if one of the principal purposes of an arrangement is to obtain a benefit, the PPT rule may be triggered. This clear intention has also been expressed in the wordings of the preamble incorporated in the OECD Model Tax Convention 2017.

Due to the lack of case law, the impact of the PPT rule is rather uncertain for now and the interpretation of the PPT rule may vary across jurisdictions. It may be possible that the cases that were successfully tested before the courts of law earlier may not survive the PPT rule if they were to be presented before the courts today, provided that the PPT rule was applicable at the time of the transaction or arrangement.

What is certain is that taxpayers ought to be very careful in tax planning so that the structures do not fall foul of the PPT rule. When deciding on the country to make an investment in or the structure of a transaction or arrangement, taxpayers ought to clearly record the non-tax reasons (main/principal purposes) for selecting a certain jurisdiction over another. Evidence can be maintained through internal emails, memos, and minutes outlining the reasons for selecting a country. For example:

  • A country is preferred due to a favourable corporate law regime.
  • A country is preferred due to the presence of multilingual or highly qualified employees.
  • A country is preferred as it is politically and socially stable.
  • A country is preferred as it has a strong banking infrastructure where it is easy to obtain credit.

Despite the above safeguards, if the tax authority does reasonably conclude that one of the principal purposes of invoking the treaty was to obtain a tax benefit, the taxpayer ought to ensure that it can establish (i.e., prove) that the benefit obtained was indeed within the object and purpose of the tax treaty.

Finally, as mentioned before, public opinion against tax avoidance is stronger than ever. The relevance of the PPT to future transactions cannot be overstated. Arrangements that may have been successfully litigated before the courts of law until a few years ago, may not be as successful from now on. Therefore, taxpayers may find advance rulings to be attractive as it is important to avoid future issues.

It will be interesting to see how the UAE and the other GCC countries will approach such abusive arrangements and its possible disputes. In the meantime, it is apparent that either through the MLI or through bilateral double tax treaties, the PPT continues to be important. It is vital to consider such anti-avoidance provisions now in order to create future proof structures.

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UAE Free Zones – How Tax Exempt Are They?

UAE Free Zones – How Tax Exempt Are They?

Freezone benefits under the CIT law and the Designated Zone benefits under the VAT law in the UAE. How to do they compare and how will they impact your business?

With the Corporate Income Tax (CIT) regime planned to be introduced in the United Arab Emirates (UAE) next year (2023), many businesses are examining the impact of the reforms on their existing business structures. 

Free Zones have played a large part in the economic development of the UAE, attracting foreign businesses with relaxed requirements and tax benefits. The tax regime applicable to Free Zone businesses has evolved greatly in the last years, with the introduction of VAT in 2018 and CIT planned to be introduced in 2023 respectively.

What is the applicable regime? We provide you with a recap in this article.

Highlights of the proposed UAE CIT system

The CIT system will be implemented with effect from June 2023. The headline rate will be 9% for taxable income earned in an year exceeding AED 375,000 (slightly above $100,000). This is globally a very competitive rate, and even within the Gulf states, it is the lowest among states that have a CIT regime. 

The Public Consultation Document issued by the Ministry of Finance states that the CIT regime will apply to the following persons

  • UAE companies and other legal persons incorporated in the UAE.
  • Foreign legal entities that have a Permanent Establishment (PE) in the UAE. 
  • Individuals (natural persons) engaged in a business or a commercial activity in the UAE. 

The calculation of taxable income would be aligned with the international accounting standards. Like most tax systems, the taxpayer would be able to deduct most expenses that are incurred in the process of generating revenue, subject to expense deduction limitations. Likewise, losses can also be generally carried forward from one year to the next and setoff against future profits. 

UAE resident companies will generally be subject to CIT on their worldwide income, including capital gains. There are certain exceptions to this rule. 

To retain and further develop the UAE’s status as an international financial and regional hub, the UAE has proposed many reliefs intending to reduce the effective tax rate or simplify matters administratively for businesses.

Amongst others, it has envisaged adopting a so-called ‘participation exemption’ which is relatively common. Here, a UAE Corporate shareholder would generally be exempt from CIT on dividends received and capital gains earned from the sale of shares of a subsidiary company, subject to fulfillment of both of the following two conditions:

  • The UAE Corporate shareholder owns at least 5% of the shares in the subsidiary company.
  • The (foreign) subsidiary is subject to CIT at least 9%. 

Finally, we come to grouping options available under the proposed regime. Such grouping may reduce the effective tax rate of a group containing several businesses. The objectives of providing the grouping facility are:

  • To allow one group member’s loss to be setoff against another group member’s profits.  
  • To treat the whole tax group as a single taxable person, with the parent company responsible for the administration and payment of CIT on behalf of the tax group. 
  • To ignore the transactions between the members of the tax group. 

A UAE resident group of companies can elect to form a tax group if the parent company holds at least 95% of the share capital and voting rights of the subsidiaries. 

Where the parent company does not meet the 95% criteria and instead holds 75% of the ownership of the subsidiaries, it can still seek to transfer losses from a loss-making group company to a profit-making group company, as long as both the following conditions are met:

  • The company transferring losses is neither exempt nor benefits from the 0% Free Zone regime. 
  • The total tax loss offset ought not to exceed 75% of the taxable income of the company receiving the tax losses for the relevant period. 

In addition to the above-mentioned facilities, the proposed UAE CT regime will also allow for an exemption or deferral of CT in respect of the transfer of assets or liabilities between members of a group, to avoid triggering an unnecessary tax charge when businesses reorganize themselves. The CT regime would also allow some corporate reorganization transactions (e.g., mergers) to be undertaken on a tax-neutral basis.  

What about the Free Zone tax exemption and Corporate Income Tax?

Companies and branches that are registered in a Free Zone (Free Zone Persons) are within the scope of the CIT regime and subject to filing requirements. 

The UAE Government has committed, however, that the tax exemptions will continue to apply to Free Zone Persons provided they (i) maintain adequate substance, (ii) comply with all other regulatory requirements, and (iii) income is earned from transactions with businesses located outside the UAE, or from trading businesses located in the (same or any other) Free Zone.

The complications start when Free Zone businesses interact with businesses located in Mainland UAE (Mainland Persons). Let’s consider a few scenarios here:

  • A Free Zone business (that does not have a branch in the Mainland) transacting with a Mainland business: 

– If the income is passive (like interest, royalties, dividends, and capital gains from owning shares in Mainland Persons) – 0% CIT.

  • A Free Zone business (that has a branch in the mainland): 

– Taxed on the Mainland Sourced income. 

– Not taxed on its other income. 

  • A Free Zone business transacting with a (group company) Mainland business: 

– 0% CIT, but 

– Payments made by the Mainland business to its group company in Free Zone will not be deductible. 

  • A Free Zone business located in a Designated Zone for VAT purposes earning income from the sale of goods to a Mainland business: 

– 0% CIT, if 

– The Free Zone business is the importer of record of those goods. 

  • A Free Zone business earning income by transacting with a Mainland Person (not covered in any of the above four scenarios): 

– Such Free Zone Person will have its 0% CIT privilege disqualified for all of its Income

Fair to say, that there are a number of complexities involving Free Zones. 

UAE VAT 

VAT was introduced in the UAE on 1 January 2018 at a standard rate of 5% on the supply of goods and services. 

VAT is a broad-based consumption tax levied on almost all supplies of goods and services in the UAE, including deemed supplies, as well as the importation of goods into the UAE.

Like most VAT systems, VAT in the UAE avoids a cascading effect on tax (tax on tax) by allowing the Input tax to be subtracted from the output tax liability. Generally, Input tax can be recovered (subtracted from output tax) when goods or services are (intended to be) used for making taxable supplies in the UAE or supplies outside the UAE. 

The term ‘goods’ here refers to all types of physical property. Any supply that does not constitute a supply of goods, is a supply of services.   

The provisions relating to place of supply and valuation of supply are mostly in line with international standards. Some benefits are offered to supplies made in certain Free Zones (referred to as Designated Zones) discussed in the next headline. 

UAE VAT and Free Zones 

When the UAE Government introduced the concept of Free Zones, it did not envisage the requirement of a VAT system at that time. Accordingly, to ensure that the UAE continues to remain a competitive trading and investment destination even after the introduction of the VAT law, some relief is available for the sale of goods. For the supply of services, however, there are no exceptions made to the regular VAT system, except for the shipping of goods from a Designated Zone, if supplied by the same supplier of the goods.

Some businesses in some Free Zones benefit from an exception. These Zones are referred to as ‘Designated Zones’. The list of Designated Zones that are effective as of date is provided in Appendix 1. 

Designated Zones are defined as a specific fenced geographic area and has security measures and Customs controls in place to monitor entry and exit of individuals and movement of goods to and from the area

Designated Zones are treated as being outside the State for VAT purposes for certain supplies of goods. This means that a supply of goods within a Designated Zone is treated as made outside the UAE, and therefore, outside the scope of VAT in the UAE. 

Even though Designated Zones are considered to be outside the State, a sale from Mainland UAE to the Designated Zone is taxable at the standard rate of 5%.  

The situations involving a Designated Zone where VAT liability generally become due (treated to be imported into the UAE) are either of the following:

  • Goods are consumed within the Designated Zone.
  • Goods are rendered unaccounted for. 
  • Goods are taken out of a Designated Zone and into Mainland UAE (including Free Zones not considered as Designated Zones). 

In short, the VAT implications of transactions with entities in the Designated Zones can be summarized below: 

  • Domestic sale from the UAE to a Designated Zone – 5%.
  • Domestic sale from Designated Zones to the UAE Mainland – Import taxable at 5%.
  • Domestic sales from Designated Zones to Designated Zones – VAT is not applicable.
  • Domestic sales within the same Designated Zone – VAT is not applicable (except for retail sales).
  • Export from Designated Zones to GCC countries/non-GCC countries – VAT is not applicable (outside the scope of VAT).

APPENDIX 1

List of Designated Zones in the UAE

Abu Dhabi

  • Free Trade Zone of Khalifa Port
  • Abu Dhabi Airport Free Zone
  • Khalifa Industrial Zone
  • Al Ain International Airport Free Zone 
  • Al Butain International Airport Free Zone

Dubai

  • Jebel Ali Free Zone (North-South)
  • Dubai Cars and Automotive Zone (DUCAMZ)
  • DAFZA Industrial Park Free Zone – Al Qusais
  • Dubai Aviation City
  • Dubai Airport Free Zone
  • International Humanitarian City – Jebel Ali
  • Dubai CommerCity

Sharjah

  • Hamriyah Free Zone
  • Sharjah Airport International Free Zone

Umm Al Quwain

  • Umm Al Quwain Free Trade Zone in Ahmed Bin Rashid Port 
  • Umm Al Quwain Free Trade Zone on Sheikh Mohammed Bin Zayed Road

Ras Al Khaimah

  • Ras Al Khaimah Port Free Zone
  • RAK Maritime City Free Zone
  • Al Hamra Industrial Zone – Free Zone
  • Al Ghail Industrial Zone – Free Zone
  • Al Hulaila Industrial Zone – Free Zone

Fujairah

  • Fujairah Free Zone
  • FOIZ (Fujairah Oil Industry Zone)

Designated Zones – Ajman

  • Ajman Free Zone



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Taxation of Non-Fungible Tokens – Musings observations and interrogations.

Taxation of Non-Fungible Tokens – Musings observations and interrogations.

Taxation of Non-Fungible Tokens – Musings observations and interrogations.

Non-Fungible Tokens (“NFTs”) have been hot, although the market seems to be cooling down as of late. According to a recent Bloomberg article though, there are still monthly NFT sales for an approximate value of 1bn USD. As trade value reduces, The Bored Ape seems to be boring its potential customers now. With the drop in the value of cryptocurrencies this may also affect the value of NFT’s.

Different countries have taken different tax positions on income derived from their supply, and on supply of NFTs (and some countries are yet to take a position).

When an NFT is sold, it is a digital representation on the blockchain of an artistic work or other object (e.g. trading cards, images, music, gold bars, diamonds etc.). The NFT grants the purchaser certain rights of use, although a precise legal framework is lacking in many jurisdictions. It is said that the blockchain ensures a digital title deed or proof of digital ownership.

When transferring an NFT, the underlying asset is not transferred. The NFT is a unique, non-interchangeable item. By way of an example, an NFT could be a digital representation of a painting featuring a monkey, but not the painting featuring a monkey itself.

In this article, we discuss the (possible) treatment of NFTs in different jurisdictions and the potential application of existing VAT and Corporate Income Tax (“CIT / CT”) laws on NFTs. Our article builds on an earlier analysis of the VAT treatment for cryptocurrencies, which you can find here).

VAT – between electronic services and regular taxable services.

As far as NFTs are concerned, the fact that these are usually paid with cryptocurrencies is not relevant. A sale of an NFT will raise the same questions on whether it is taxable, regardless of the mode of payment, whether the payment is made in regular (fiat) currency, crypto currency or in kind.

Currently, the most debated question is whether the sale of an NFT is subject to VAT or not? To answer this question, we examine the positions taken by some countries.

Firstly, it is important to note that NFTs are treated as services for VAT purposes under EU VAT law, as they do not constitute a supply of tangible assets.

In Spain, the Tax Authority (Dirección General de Tributos, the “STA”) issued an interesting ruling (V0482-22 of March 10, 2022). Fernando Matesanz discusses in his article the scenario of a natural person transforming photographs to produce unique pieces using photoshop-transformed illustrations. He then auctioned them on the internet through digital platforms that were not authorised to provide the real identity of the buyers (nicknames were adopted).

The STA held that the sale of an NFT is a supply of service, more specifically an Electronically Supplied Service (“ESS”), based on the fulfillment of the following tests: (i) automated and require minimal human intervention and (ii) are not feasible without information technology.

One major concern raised by many Spanish suppliers of NFT’s was that the identity of the acquirers was not disclosed to the supplier, given the nature of the transaction on the blockchain. Therefore, the difficulty was that the seller would not have been certain if Spanish VAT ought to be accounted for or not. If the buyer of the NFT would be abroad, no Spanish VAT would apply.

In our view, the qualification by the STA as an ESS is at least debatable. One school of thought can be that there is nothing automated about a digital representation of a(n artistic) work. It is a mere representation of an underlying asset. An NFT is a far cry from the traditional electronically supplied services, such as streamed music or movies. The ESS definition also does not refer to the requirement, or absence thereof, of a legal entitlement to an underlying asset.

At the same time, another school of thought can also exist, especially considering the facts of the Ruling, that while the act of using the photoshop software certainly requires human intervention and skills, the overarching representation (being the subject matter of the sale in question) which is generated via the blockchain itself does not require any human intervention. This latter view is supported by a Spanish tax expert, Rubén Bashandeh.

Fernando Martesanz’ article equally highlights the issues in determining the location of the supplier. Additionally, it flags the issues around the interpretation of the Use and Enjoyment rule which may localize the service in Spain, even if the regular place of supply rules determines these services outside the EU.

The UAE mandates the Use and Enjoyment rule (special place of supply rule), as a base rule for ESS and not as an exception to the normal rule to avoid double or non-taxation. It locates the service in the jurisdiction where services are used and enjoyed. The practical issues with this type of identification are well known.

Even if somehow, it can be established that the purchaser, say in the UAE, can be verified to have used and enjoyed the NFT in the UAE itself, or if a UAE supplier would adopt a conservative position on the matter, then the UAE would certainly be considered an attractive jurisdiction, given that the VAT rate is only 5% as compared to as high as 27% in some European countries or other jurisdictions.

A view similar to the Spanish Ruling was shared by the Belgian Minister of Finance, who recently stated in Parliament that he considers such a sale of an NFT akin to any other sale and therefore, in the view of the Finance Minister, an ESS.

In Switzerland too, as per the opinion of Cyrill Diefenbacher and Ollin Söllnerm in their article, the sale of NFTs would also qualify as ESS as Swiss VAT law is relatively aligned with the EU VAT laws. The authors also rightfully refer to the VAT exemption for creators of artwork which may apply, and which are common across multiple jurisdictions (but not the GCC).

The experiences that the UAE, or the broader Gulf Cooperation Council (“GCC”), can borrow from Europe are rather limited. NFT’s also do not seem to be as relevant in the other GCC countries.

Given their continued importance, other jurisdictions are bound to take position on the matter. With the VAT systems in the UAE and GCC being relatively new, an opportunity presents itself to align the tax framework with technological developments.

 

Income Tax – speculative income or regular income?

In the GCC countries, the sale of NFTs by a private person would not be subject to any form of taxation, given the absence of personal income tax. If the sale is made by a corporate (or an establishment), this may be different.

NFTs are taxed and regarded as property in most countries. There exists a distinction between (i) a taxpayer who creates NFTs and (ii) merely purchases or sells NFTs. The creation does not usually trigger any income tax. However, once the NFT is sold or otherwise transferred, the gain from the sale or transfer may be subject to tax.

In Switzerland, the tax treatment of NFTs depends on whether NFTs are considered private assets (not subject to tax) or business assets (subject to income tax). According to the Swiss definition of business asset, any individual participating in a “self-employed activity” and making a profit would be subject to income tax on the purchase and sale of NFTs. The same above cited article states that the key criteria to consider in establishing such an activity would be the transaction volume and potential use of debt to finance the transaction.

In our view, the above criteria would hardly apply to the UAE because the trigger of CIT in the UAE will be based on whether the individual is (required to) have a license or a permit to conduct the trade in the UAE.

With the UAE bringing in business tax (perhaps a more appropriate word for a corporate tax that taxes individuals), that legislative framework needs to be considered too. There is no difference made between speculative income and regular income, although the UAE does distinguish between passive and active income, stating its intention to tax only active income of natural persons.

In the US, the Internal Revenue Service (“IRS”) guidance on taxation of digital assets is sparse. Yet some authors referred to below have opined on how the taxability of NFTs would be played out. Section 197 of the Internal Revenue Code potentially allows taxpayers to amortize their adjusted basis in their NFTs over 15 years, as NFTs are considered intangible assets. However, this section can only apply to taxpayers other than creators. In the opinion of these authors, ”Amortization deductions would be allowed, and any potential losses such deductions generate would also be allowed as long as the taxpayer meets all of the loss limitation rules.” It remains to be seen what tax payers will actually hold NFT’s for 15 years.

In the US, a dealer (one who buys and sells NFTs as a business) seems to be taxed on the sale of NFTs as ordinary income. Both dealers and creators could deduct business expenses relating to the sale of the NFTs (this includes the cost of the acquisition of the NFTs) and where the sale amounts to a loss, US regulations would allow for a deduction against other ordinary income for the dealers (see here). Lastly, regarding depreciation, it seems that NFTs would not be subject to depreciation due to the fact that their useful life is hardly determinable.

In India, the tax law was recently amended to introduce a charging section for income earned from Virtual Digital Assets (“VDA”) (which includes NFTs). It is a separate provision separate from provisions on business profits or capital gains. Given the intention of the Government of the UAE to have a relatively simple and business friendly tax system, it is unlikely that the UAE would follow the Indian route. The separate charge is heavily criticized as detrimental for the NFT trade in India.

In Denmark, the Tax Assessment Council in Denmark (Skatterådet – the highest administrative tax assessment authority), has taken the position that the gains derived from the sale of NFTs would be considered ‘business income’, at least in the particular case at hand.

In this case, a software engineer earned substantially higher income than his salary by selling NFTs (crypto art). The Tax Council in Denmark held that given his intention and professional abilities, the activity is more appropriately considered to be business income.

We can imagine that if a similar scenario would be considered in the UAE, a similar outcome would ensue, despite the fact that the revenue would be earned by an unlicensed person. A one-off gain on account of sale of an NFT may receive a different treatment though.

VARA – Virtual Asset Regulatory Authority.

Government entities and regulatory authorities have also jumped on the NFT bandwagon. In March 2022, the Emirate of Dubai enacted the first legislation relating to virtual assets (Law No. 4 of 2022 on the Regulation of Virtual Assets) creating a new regulatory authority, i.e., Virtual Asset Regulatory Authority (“VARA”) which would provide the legal framework for regulating the trading of virtual assets such as cryptocurrencies and NFTs.

The creation of VARA marks an important step in the Emirate’s journey in becoming the leading hub for Virtual Assets. However, this first step toward virtual asset regulation in the UAE has not yet addressed taxation issues. As for tax purposes, the recent law does not provide clear information on the taxation of such assets but simply states that a person engaging in “services related to offering, and trading in, Virtual Tokens” will require a permit from VARA (Art 16 (a) 7).

Uncertain Space – Uncertain Times!

In conclusion, we will have to wait and see the position that the Government of the UAE, and insofar as relevant, the other GCC governments will take on the VAT and CIT implications of NFTs.

As discussed above, each scenario would require a case-by-case analysis and there is no straitjacket formula available on the CIT issues. As for VAT, it seems considering NFT’s as services is a sensible approach.

We will need to keep a close eye on other countries’ positions and determine the position that fits most appropriately within the tax system of the UAE, and the GCC. Uncertain and equally exciting times are ahead of us.