Category: UAE Tax

Updates on UAE CT Registration

Post author By Thomas Vanhee
Post date February 2, 2023
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Updates on UAE CT Registration

Here are some updates on the Corporate Income Tax registration procedures in the United Arab Emirates’ (UAE):

· Pre-registration for CT for certain categories of companies operating in the UAE has begun. This early registration phase is available until May 2023, after which the UAE’s Federal Tax Authority (FTA) opens the process for other businesses.

· The FTA released ‘Corporate Tax Registration User Manual’ (Version 1.0.0.0) (Manual). This Manual explains the procedure to navigate through the EmaraTax portal and submit the CT Registration application. For being eligible for registration, the applicant must be either a natural person (such as an individual), or a legal person (such as a Public Joint Stock company). The Manual provides the steps involved for filing the application and displays detailed screenshots at every step of the application process.

The FTA’s Press Release covering the update on CT pre-registration is available at https://lnkd.in/g2cjMhhk.

Aurifer released a newsletter summarizing all the facets of the UAE CT Law last month, which is available here. Aurifer also conducted a webinar on the CT Law last month, which is available at https://lnkd.in/dQCM8gMg.

UAE Tax

UAE Tax Residency Criteria

Post author By Thomas Vanhee
Post date February 1, 2023
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UAE Tax Residency Criteria

The Federal Tax Authority (FTA) issued Cabinet Decision No. 85 of 2022 (dated 2 September 2022), setting new criteria for determining tax residency for juridical and natural persons, and this decision will be effective from 1 March 2023.

The below takes note of everything you need to know about determining a natural person’s tax residency.

In addition, the document with all amendments is now available on the website of FTA.

For English: https://bit.ly/3RlfgXz

For Arabic: https://bit.ly/3JtxvrZ

Get in touch with our team of experts if you need help understanding these criteria!

UAE Tax

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

Post author By Thomas Vanhee
Post date September 2, 2022
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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:

The combined approach of a Limitation of Benefits (LOB) and a Principal Purpose Test (PPT) rule,
The PPT rule alone, or
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.

UAE Tax

The UAE Crypto Central – also for tax purposes?

Post author By Thomas Vanhee
Post date January 3, 2022
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The UAE Crypto Central – also for tax purposes?

The UAE is aspiring to become a leader in the cryptocurrency business in the region and it is aiming to attract more than 1,000 cryptocurrency businesses in 2022. To position itself against the regional and global competition, it has recently developed an advanced regulatory framework. Both central, on-shore authorities such as the Central Bank of UAE (“CB”) and Securities and Commodities Authority (“SCA”), and some of the free-zones, such as DIFC, ADGM and the DMCC have enacted advanced legal frameworks, while DWTC has announced an important partnership with a Crypto Exchange. It is expected that DWTC will also implement a comprehensive regulatory framework.

While the regulatory environment is quite advanced for this part of the world, the tax framework in the UAE is still relatively immature. In light of the UAE VAT law, it will be interesting to see how the Federal Tax Authority will take position vis-a-vis different transactions involving cryptocurrencies, crypto assets, and related services (wallets, brokerage, decentralised finance). Furthermore, in light of the potential introduction of Corporate Income Tax in the UAE as a consequence of the Global BEPS 2.0 initiative, it would be interesting to see the position of the UAE authorities taken towards taxation of the crypto space.

The authors aim to answer some of these questions, from the viewpoint of different possible taxes. This article does not aim to be comprehensive, nor explain how blockchain works.

The article has a focus solely on the UAE’s tax and regulatory framework, as it constitutes at least the most ambitious jurisdiction in the region, intending to stimulate the development of a crypto sector in the UAE. Other jurisdictions, such as Bahrain, have also enabled exchanges to establish themselves there. Bahrain has a relatively comparable tax framework to the UAE. The other GCC countries are largely absent in the field.

We will not be covering the Emirate Banking Tax Decrees nor the General Tax Decrees in the Emirates, which constitute taxation on a local (i.e. Emirate) level.

The framework is fast paced and subject to fast evolution, as adoption spreads. It is also shaky, with Tesla accepting and then again denying cryptocurrencies as payment for its cars, and China cracking down on crypto.

Regulatory Context
The Regulatory Framework in the UAE which could impact crypto is determined on the one hand for mainland companies by the Securities and Commodities Authority (SCA) and the Central Bank (CB), and on the other hand by the Federal Financial Free Zone Authorities established in the Dubai International Financial Center, and the Abu Dhabi Global Markets.

In on-shore UAE, the CB and the SCA share responsibility for the regulatory oversight of the UAE’s financial and capital markets. This includes the non-financial free zones, such as the Dubai Multi Commodities Centre (DMCC) and Dubai World Trade Center (DWTC). On the other hand, financial free zones, i.e. ADGM and DIFC have provided their separate regulatory framework for the entities established within their jurisdictions.

From the on-shore side of regulation, the CB has regulated crypto assets and included digital tokens (such as digital currencies, utility tokens or asset-backed tokens) and any other virtual commodities,^[1] While the CB maintains that crypto-assets are not legal tender, the CB explicitly allows crypto-assets to be used as a stored value when purchasing other goods and services.

The SCA framework^[2] applies generally to SCA regulated “Financial Activities” in respect of crypto-assets in the UAE, which include promotion and marketing, issuance and distribution, advice, brokerage, custody and safekeeping, fundraising and operating an exchange of crypto assets.

The DIFC freezone regulates only “Investment Tokens” which are basically securities or derivatives based on the blockchain technology. This means that key cryptocurrencies, as well as stablecoins, will remain unregulated under the Investment Tokens regime.

The ADGM freezone issued the most advanced and comprehensive framework regulating the operation of crypto-asset businesses. It has regulated virtual assets (such as non-fiat virtual currencies), digital securities, fiat tokens (i.e. stablecoins), and derivatives and funds (i.e., derivatives over any digital assets and collective investment funds investing in digital assets) while other crypto assets remain unregulated. From a regulatory policy perspective, the FSRA treats virtual assets as commodities. Even though not all virtual assets are specified investments, any market operator, intermediary or custodian is required to be approved by ADGM as a financial service permission holder in relation to the applicable regulated activity.^[3]

One topic that has not been regulated both on-shore and in the free zones is the growing DeFi industry, which is becoming central to the blockchain and crypto space globally. There are no incentives for permissionless peer-to-peer systems and DeFi to develop. It remains to be seen whether this stance will change in the near future, and hence we will not analyse the tax consequences in the DeFi industry. A further area of uncertainty is the status of NFTs as they remain undefined.

DeFI, Investment Tokens (digital securities), and utility tokens asset based tokens are not further discussed in this article.

The VAT conundrum – Out of scope as money, or a service?

The mining, exchange or disposal of cryptocurrencies, as well as other transactions occurring in the crypto industry may have VAT consequences. Hence, the definition of the crypto-assets and related services is particularly important in determining their VAT treatment. VAT is a consumption tax with a wide scope, and therefore it is imaginable that some transactions may be subject to VAT.

In contrast with income taxation, where the accounting treatment is usually followed directly, with some adjustments, in the comparative VAT practice, cryptocurrencies are often treated as akin to fiat currencies in the VAT treatment of transactions involving their exchange or disposal.

Regulatory definitions and the framework can give some guidance when interpreting the potential VAT treatment of different types of crypto-assets and the related services. There is a relatively broad similarity among EU countries as to the VAT treatment for transactions involving cryptocurrencies. There is greater divergence among countries comparatively in the treatment of “related” or “back-office” services, such as custodial services, online wallet services and exchange services.

GCC and UAE VAT for Financial Services

The Gulf Cooperation Council’s VAT Agreement of 2016 was based on the EU VAT directive in a version after 2011 but before 2013. However, for the Financial Sector, it allowed significant leeway to implement local policies. Article 36 of the GCC VAT Agreement prescribes that financial services provided by licensed banks and financial institutions are exempt from VAT. It further allows that Member States apply fixed refund rates for financial institutions (with inspiration drawn from Singapore), and in its second paragraph allows full freedom to apply “any other tax treatment”.

In the Financial Services sector, the UAE and the Gulf Cooperation Council have deviated significantly from the European VAT directive, which do not grant the same liberty in terms of setting tax policy to its Member States.

When the UAE and KSA issued their laws in 2017, and with KSA being the first, they had prescribed a system where financial services where the provider makes money on the basis of a spread are VAT exempt (see here for our article on VAT exempt persons: https://www.aurifer.tax/news/special-tax-payers-in-the-gcc-exempt-taxable-persons/?lid=438), and where these are fee-based, they are taxed. Since then Bahrain in 2019, and Oman on 16 April 2021, have not deviated from their predecessors.

Far clearer than the VAT regimes applicable to financial services in Europe, given that the scope is narrower, it also entails more services are subject to VAT. This is a double edged sword, as the input recovery increases, but also the cost for customers that do not recover input VAT.

The VAT laws in the UAE and the GCC focus on more traditional banking services, and do not discuss the novelties which are the subject of this article. Neither do the laws in the rest of the world for that matter. That is not surprising, as the VAT laws are general set of rules, intended to apply widely on a large number of situations.

In the UAE, the UAE VAT law in article 46, 1 simply refers to financial services as being exempt from VAT and relies on the UAE VAT Executive Regulations. Article 42, 2 of the UAE VAT Executive Regulations then refers to “services connected to dealings in money (or its equivalent)”. The same article then goes on the list a number of services by way of illustration which would constitute such exempt financial services. None of these services listed link directly to cryptocurrencies.

The only principle to go by, is that the UAE’s FTA states that “the starting point for the UAE VAT treatment is that VAT should be charged on financial services where it is practicable to do so”. This is however not easy to implement, and may even seem at odds with the exemption for interest on loans, since it may be practicable to add VAT to interest.

Tax authorities are usually late to the game with this type of novelties, and therefore the GCC are no different. However, given that the UAE wants to position itself on the matter, it may be good if it considered a clear position. We have therefore analysed below a number of typical transactions involving crypto and their applicable VAT regime.

It is to be noted, that even in the carved out Federal Financial Free Zones, in terms of taxation, currently in the UAE, no exceptions apply to the general regime.

Starting with mining crypto

There is a relatively broad consensus among countries as to the VAT treatment for transactions involving the mining of virtual currencies. The mining of virtual currencies is their creation through mining activities. The person mining the currency therefore acquires assets in the process of mining.

There is no public position from the UAE’s Federal Tax Authority on the matter, but it may draw inspiration from research conducted by the OECD (OECD (2020), Taxing Virtual Currencies: An Overview Of Tax Treatments And Emerging Tax Policy Issues, OECD, Paris. www.oecd.org/tax/tax-policy/taxing-virtual-currencies-an-overview-of-tax-treatments-and-emerging- tax-policy issues.htm).

In that research, the OECD cites an EU VAT Committee report (an advisory body with no legal power; you can find the VAT Commitee’s Working Paper 854 on Bitcoin here), which found that mining activities should be out of scope of VAT.

This is largely attributed to the fact that there is no direct link between the remuneration of the mining and the activity itself.

The possible alternative qualification in the EU is that mining constitutes a service related to currency, and is therefore exempt from VAT.

Small jurisdictions which exempt the mining of cryptocurrencies domestically but allow it to be zero rated when dealing with foreign customers, could offer substantial advantages, since the zero rate would allow the sellers to recover the input VAT. This may be a potential tax policy option for the UAE or Bahrain.

As Bitcoin reaches its capped supply, and there will be no more mining, its economics will alter. The incentives for various members in its ecosystem, such as miners and traders, will change. For example, miners may rely less on block rewards and more on transaction fees to earn revenue and profits for their operations. Those transaction fees might be regarded as taxable financial services in the UAE.

If it is considered that mining is in scope of VAT, which we are not advocating, unless it would be VAT exempt, the multitude of actors may still see different VAT regimes applicable, since some of the smaller miners may not reach the mandatory registration threshold.

Holding crypto

The holding of cryptocurrency as such should be equated to holding on to an asset. From a VAT point of view, since it is a transaction tax and holding it involves no transaction, there should be no impact. That holds true as well even if the currency appreciates or depreciates in value.

Selling and buying crypto

The main discussion therefore evolves around whether the sale and purchase of a crypto currency is a service (and therefore constitutes a barter transaction), or should be considered as the equivalent of using and purchasing money.

In the EU, to exempt financial services from VAT, and also money services, the VAT directive states that the EU Member States shall exempt “transactions, including negotiation, concerning currency, bank notes and coins used as legal tender” (article 135, 1, e Recast EU VAT Directive 2006/112/EC).

The European Court of Justice (C-264/14, Hedqvist) had judged that the exchange of legal tender against bitcoin, a cryptocurrency, is a service, and an exempt one at that. Bitcoins are treated as akin to fiat currencies (i.e. traditional currencies).

While the definitions in the GCC are different, and while above we had discussed that the GCC Agreement allows for much more tax policy room than the EU VAT Directive, the guidance clearly points towards the concepts in the EU. The ECJ ruling therefore does not constitute a source of law, but is definitely an authority on the matter.

The ruling is potentially subject to challenges, and not all authors would agree with the position taken. The ECJ only ruled on bitcoins, however the reasoning can be applied to similar cryptocurrencies which function in the same way.

Especially the comparison with legal tender in terms of its functionality can be flawed, as not all cryptocurrencies are accepted for payment purposes.

When considering the sale of cryptocurrency as in scope of VAT and exempt, small jurisdictions which allow the trading of cryptocurrencies to be zero rated when dealing with foreign customers, could offer substantial advantages, since the zero rate would allow the sellers to recover the input VAT.

In the authors’ modest opinion, for the sale and purchase of crypto itself, it can be broadly considered as the equivalent of fiat currency for the purpose of VAT treatment, and therefore should be considered as out of scope of VAT.

Using crypto to acquire goods or services

Considering that the SVF Regulation of the Central Bank allows crypto-assets to be used as a stored value when purchasing other goods and services, it is an argument in favor that it could be regarded as an equivalent of using the fiat currencies, and therefore using it to acquire goods or services should not entail any VAT consequences, in the same way as one would use fiat currency to purchase a good or service.

The supply of goods and services, subject to VAT and remunerated by way of Bitcoin, for example, would for VAT purposes be treated in the same way as any other supply. VAT should therefore be levied on the value of the goods or services provided.

However, if UAE would consider that the buyer is rendering a service by paying with cryptocurrencies, the transaction will constitute a barter, and is therefore taxable because of the sale of the good or service, and is taxable on the value of the cryptocurrency handed over to the seller.

There are a number of technical complexities associated with such a barter, such as the valuation and the use of an exchange rate, but to avoid complexities it would be better to stay consistent with considering cryptocurrency like a traditional currency, considering that treating the use of crypto to acquire goods or services as bartering would lead to an awkward result.

Crypto brokerage and wallet providers

As for crypto intermediation services – services related to crypto exchange, brokerage, and wallet/custodial servicesproviders, the question is would it be qualified simply as services or would it fall under financial services.

As for the crypto exchanges and brokerages, even though the EU VAT Committee has taken a position that their services should be taxable, in practice EU countries (such as Germany, France and Italy) are exempting their services from VAT, following the ECJ decision in Heqvist. The same approach is taken in the UK where these services are exempt in line with the treatment of the financial services.

An argument to consider these services as financial services is that their activities are regulated by the SCA regulation and that they are specifically referred to as Financial activities in the Crypto Assets Regulations Explanatory Guide issued by the SCA.

However, given the GCC VAT specifics and the different structure of the fees charged to the customers, crypto exchanges might be exempt on the spreads/margins made while any flat fees/ fixed fees might be taxable, except if the customer is based abroad where such services would be zero rated with a possibility of a deduction. Finally as there are different types of traders and exchanges (centralized / decentralized, principal trading / brokerage trading) the analysis of their fees, agency arrangements and taxation should be further analysed and may be complex.

However, given the UAE’s goal to give a competitive advantage to the crypto businesses set up locally compared to other jurisdictions, it should be taken into account that VAT would be putting the consumers in UAE at a disadvantage compared to other consumers globally, who can buy and sell cryptocurrencies without VAT. Furthermore, it would harm the competitiveness of the local UAE based exchanges against the exchanges abroad.

Finally, the UAE should take into account that VAT exemption in other jurisdictions was also based on the fact that taxing each and every transaction would lead to disproportionate administrative burden given the volatility of crypto prices and the amount of trades and transactions concluded on a daily basis.

On the side of wallet / custodial services, there are different types of wallets and related services – the so called “hot” (software based) or “cold” (hardware based) wallets, or arranging for third party storage of private keys. Service providers might or might not charge a fee for the provision of such services, as these services might be provided standalone or related to other, main services (sale and purchase of cryptocurrency or trading services and similar). There are different approaches in taxing these fees comparatively, and some countries exempt those fees on the grounds that these services are closely linked to the main, exempt service or tax them as a separate – non financial service. In the UAE, the situation is much clearer and such wallet or custodial services are simply standard rates.

Other indirect taxes

While at first sight, there would be no other indirect taxes applicable, potentially real estate transfer taxes would come into sight with tokenisation of real estate – i.e. the asset backed tokens. Although set at a different level, and not a direct property right or a right in rem, anti-avoidance rules may trigger the application of transfer duties nonetheless.

Not subject to Personal Income Tax

Contrary to the discussions one may have in other jurisdictions as to the categorization of the gains of the sale of crypto for tax purposes, given the absence of personal income tax in the GCC, the discussion whether the gains constitute professional income, trading income, speculative income, income from capital or other taxable income, does not play.

However, one could imagine that tax authorities which have corporate tax systems may want to be tempted to consider the income as business income and tax it.

Equally so, for the same reason, the creation or mining of cryptocurrency would not lead to taxation under personal income tax in the UAE, or the wider GCC.

As a comparison, reportedly in the US, the creation of bitcoins through mining needs to be included at the fair market value of the virtual currency in gross income at the date of receipt. If the taxpayer is conducting a trade or a business, the taxpayer is considered self-employed.

The planned introduction of Personal Income Tax for high earners in Oman in 2023 may see the first discussions around the topic.

Transfer pricing complexity and potential CIT treatment.

The UAE only has a fairly light transfer pricing (“TP”) framework, with no requirements for master files or local files, and only the requirement for an Ultimate Parent Entity to file a Country by Country Report (Cabinet Resolution No. 44 of 2020).

This may very soon change, with the implementation of BEPS 2.0, which may entail significant changes to the UAE’s tax regime, where we can potentially expect some form of Corporate Tax together with a Transfer Pricing regime.

Even though the UAE has a fairly light transfer pricing framework, it is by nature a very international jurisdiction, and therefore it is common for UAE businesses to have voluntarily adopted a transfer pricing framework applicable to the UAE.

Two interesting aspects of TP of the crypto universe are the intercompany transactions done in crypto and the intercompany transactions of the international groups involved in the crypto industry.

Given that some of the large investment funds and other companies are now investing in crypto as an asset or a hedging mechanism against inflation, and that the cryptocurrencies could facilitate cross border payments, it is reasonable to expect that, as the cryptocurrency adoption increases, multinational corporate groups could hold cryptocurrencies and transfer them within the group in exchange for fiat currencies or other goods and services.

How would the TP methodology apply to such types of transactions? The First option is to perform the analysis at the level of profitability of the involved entities based on their functional analysis and the Group’s value chain. Conversely, pure cryptocurrency transactions that cannot be justified with profit based methods would need to rely on CUPs (Comparable Uncontrolled Prices) where accurate valuation of the crypto assets at the moment of a transaction would be a key issue.

Given the volatility of the cryptocurrency prices (excluding the stablecoins), the traditional benchmarking ranges might not be precise enough. Yet, in case of a high volume of transactions, tracking each and every transaction and comparing the prices at the date of the transaction would lead to a significant administrative burden in documenting the intercompany transactions. Furthermore, such prices could not be compared directly with the market prices as they would have to be discounted or increased for various intermediary fees, to reflect the arm’s length conditions. This will present a challenge for Transfer pricing practitioners and benchmarking software providers as well as an opportunity to potentially solve this matter with some new software benchmarking solutions and adjustments that could allow for accurate CUP benchmarking.

Cryptocurrency related businesses such as crypto exchanges, traders, brokerages, crypto advisors, custody (wallet) providers, marketing and other ancillary services providers, which will be still be in between different growth stages from a start up to a larger multinational would have a different set of TP issues on their side. We can expect to see a value chain that combines the elements of a technology/IT based business, commodity trading business and typical back office and marketing support businesses. The value chains would largely revolve around key technologies employed, company branding and distinctive products/services offerings as the key high value adding drivers. Following the usual TP methodology, the key would be ensuring that these functions are appropriately remunerated with higher margins and/or appropriate residual profits. Given that many crypto businesses would enter the UAE market, we can expect their regional HQs to be subject to scrutiny on their transfer pricing arrangements in other jurisdictions in the region given the rapidly evolving TP landscape in the Middle East as well as the BEPS 2.0 developments that are targeting the large international businesses based in low tax jurisdictions.

Finally, if UAE indeed takes a leap into CIT as a consequence of the BEPS 2.0, it is important to note that CIT typically follows the accounting treatment. IFRS IC has classified holding cryptocurrencies as intangible assets (rejecting the qualification of financial assets or cash), unless they are held for sale in the ordinary course of business, in which case cryptocurrencies would be treated as inventories. In case of a longer holding period, the gains / losses realised should be treated as capital gains while in cases of shorter holding periods and therefore purchases and sales at the level of inventory, the gains/losses should be taxed as ordinary business income. Valuation of these assets is another matter that should be sorted by the IFRS or the separate guidance of the corporate income tax law.

A few other novel topics come to mind such as Permanent Establishment risks for overseas traders, Withholding tax implications for technology and financially based cross border transactions, but we can only expect that tax implications will largely lag behind the industry developments. It is fair to say that much can and still will be said, and that further technological developments will challenge the tax framework.

Milos Krstic – Head of Tax at Rain, the first Middle East crypto brokerage

Thomas Vanhee – Tax Partner, Aurifer

^[1] UAE Central Bank, Stored Value Facilities (SVF) Regulation, available at https://centralbank.ae/sites/default/files/2020-11/Stored%20Value%20Facilities%20%28SVF%29%20Regulation%20AR%20%26%20EN.pdf

^[2] https://www.sca.gov.ae/en/regulations/regulations-listing.aspx#page=1

^[3] https://thelawreviews.co.uk/title/the-virtual-currency-regulation-review/united-arab-emirates

GCC Tax UAE Tax

Q1 and Q2 2021 Tax Update Webinar

Post author By Thomas Vanhee
Post date May 16, 2021
No Comments on Q1 and Q2 2021 Tax Update Webinar

Q1 and Q2 2021 Tax Update Webinar

Do not miss our webinar covering the first two quarters of 2021 from a GCC tax perspective.

Attend our webinar on 24 May and make sure you are up to date with every single tax development in the GCC.

Are you afraid you missed KSA’s First Free Zone? Not sure what to do with round 2 of ESR? That you missed the Clarifications in the UAE? Did you miss the Qatari TP updates?

We will cover all important 2021 updates across the GCC and across all taxes.

The webinar is a must attend for any in-house tax person.

Registration via the following link: https://us02web.zoom.us/webinar/register/WN_kcOGTdr0Sb-vLRxNKqhjSA

Seats are limited!

UAE Tax

UAE scales down penalty regime and encourages voluntary disclosures

Post author By Thomas Vanhee
Post date May 12, 2021
No Comments on UAE scales down penalty regime and encourages voluntary disclosures

UAE scales down penalty regime and encourages voluntary disclosures

Since the inception of VAT in the UAE in January 2018, the Federal Tax Authority (FTA) had put in place a strict penalty regime. It was much stricter than its neighbour Saudi Arabia, which implemented VAT at the same time. In terms of the types of penalties, it was not the harshest, since both Bahrain and Oman later imposed prison sentences for what are often considered administrative oversights.

The tax authorities were also very active from the start in 2018, mostly imposing automatic penalties, as our survey back then showed (https://aurifer.tax/news/vat-survey-shows-fta-is-very-active/?lid=482&p=14). However, the authorities also imposed their so-called 2-4-1 penalties for late payment, which were the most impactful. A business making a mistake and being audited would be subject to a fixed penalty of up to AED 5,000, but also a penalty of up to 356% of the unpaid tax. The predicted pushback in terms of litigation followed, as scores of tax payers challenged penalties, on whatever basis they could find. The litigation was potentially mainly in the interest of litigators.

The Federal Cabinet listened to the concerns of tax payers, and now decided to act and to reduce the penalties, but also propose a penalty amnesty for penalties applied under the old regime. Cabinet Decision No. 49 of 2021 amends provisions of the Cabinet Decision on Penalties (No. 40 of 2017) and enters into effect 60 days after the issuance, i.e. 28 June 2021.

In most circumstances, the new regime will be more beneficial. It should be noted as well, that there is still an FTA Decision to be expected to implement the changes.

Amnesty

First off the FTA would like to give all tax payers a clean slate. Tax payers having outstanding penalties under the old regime, i.e. imposed on 27 June 2021 or before, can benefit from a 70% waiver, provided they settle the penalties on or before 31 December 2021. This is surely to add substantial cash to the Federal budget.

What is currently not clear, and might be in the announced FTA Decision, is how to handle penalties against which tax payers have filed a reconsideration, have gone before the Tax Disputes Resolution Committee (“TDRC”), or have gone before the administrative courts. Insofar as we know, the FTA has not been open to negotiated settlements for these types of litigation, but perhaps this is an opportunity for tax payers and the FTA to agree on a settlement, even if they are already before court.

As a comparison, KSA until recently was offering a full waiver of all penalties for voluntary disclosures. The Cabinet has not opted for the same approach, though it offers a partial amnesty.

New penalty regime

What’s new in the new penalty regime then? A number of fixed penalties have been lowered (e.g. late registration, late deregistration, filing incorrect tax return, …). However, the paradigm shift came in the late payment penalties.

Where before, a tax payer was subject to the 2-4-1 penalties, i.e. 2% for paying one day late, 4% for paying a week late and 1% per day after one month, the monthly penalty is now only 4% (in addition to the 2% penalty which remains).

However, and this is probably the most fundamental change, in case of a voluntary disclosure or a tax assessment, the late payment penalty only starts to run as from 20 business days after the date of submission of the voluntary disclosure or receipt of the assessment. While this position was advocated before the UAE Federal Court of Cassation, the highest court had ruled that the FTA was correct in applying a penalty since the time of supply (UAE Court of Cassation 14 October 2020, Appeal No. 227 of 2020). The Federal Cabinet now decided that it is the right approach to start calculating late payment penalties after the submission of the voluntary disclosure, and not as of the initial supply.

In other words, under the new penalty regime, if the tax payer pays within 20 days, there is no late payment penalty due.

That does not mean he is completely off the hook as a proportional penalty is due ranging from 5 to 40% calculated on the difference between the tax calculated and the tax that should have been calculated. The range depends on the period elapsed between the error and the date on which the voluntary disclosure was submitted.

There is a substantial difference in the calculation of the penalty. Where the previously law had ambiguity around what constituted “payable tax”, the new regime is clear that any situation will be penalized where there is a difference between the tax calculated, and the tax that should have been calculated. Especially for tax payers in a constant refund position, this may constitute a higher penalty bill.

Comparison

In order to compare the effect of the amendments in the regime, let us have a look at a few examples.

Example 1 – Supply in January 2018

Company A in January 2018 made a supply which it had incorrectly zero rated. After reviewing its records, it came to the conclusion that it had not exported the goods from the UAE, but instead sold them on the local market. Company A comes to this conclusion on 15 June 2021. Company A has 20 days to file a Voluntary Disclosure.

Old regime New regime

Fixed Penalties AED 3,000.00 AED 1,000.00

Proportional penalties AED 750.00 AED 4,500.00

Late Payment Penalties AED 45,600.00 AED 0.00

Total AED 49,350.00 AED 5,500.00

It is clear that Company A has a real benefit in waiting for the new regime to be in force. However, as illustrated below, because of the dynamics triggered by the tax amnesty, depending on when the mistake is made, business may need to try and have the penalties imposed before or on 27 June 2021.

Example 2 – Supply in January 2021

Company B in April 2021 made a supply which it had incorrectly zero rated. After reviewing its records, it came to the conclusion that it had not exported the goods from the UAE, but instead sold them on the local market. Company B comes to this conclusion on 15 June 2021. Company B has 20 days to file a Voluntary Disclosure.

Old regime New regime

Fixed Penalties AED 3,000.00 AED 1,000.00

Proportional penalties AED 750.00 AED 750.00

Late Payment Penalties AED 900.00 AED 0.00

Total AED 4,650.00 AED 1,750.00

Waiver AED 3,255.00 N/A

Net AED 1,395.00 AED 1,750.00

Company B has an incentive to voluntary disclose the transaction before the new regime enters into force so that the penalties are imposed under the old regime.

Example 3 – Supply in January 2021

Company C in January 2021 made a supply which it had incorrectly zero rated. After reviewing its records, it came to the conclusion that it had not exported the goods from the UAE, but instead sold them on the local market. Company C comes to this conclusion on 15 June 2021. Company C has 20 days to file a Voluntary Disclosure.

It now faces the choice between making a voluntary disclosure under the old regime or under the new regime. The goods supplied had a value of AED 300,000 and the applicable VAT was AED 15,000. This is the first time Company C is subject to a penalty for submitting an incorrect tax return. Company C is in a constant refund position, and even after correcting the January 2021 supply, it remains in a refund position.

Old regime New regime

Fixed Penalties AED 3,000.00 AED 1,000.00

Proportional penalties AED 750.00 AED 750.00

Late Payment Penalties AED 0.00 AED 0.00

Total AED 3,750.00 AED 1,750.00

Waiver AED 2,625.00 N/A

Net AED 1,125.00 AED 1,750.00

Company C has an incentive to voluntary disclose the transaction before the new regime enters into force. Note that we have observed here that the FTA had not applied penalties under the old regime for these kinds of mistakes. However, we would have expected it to treat an over claimed amount in the same way as an underpaid amount.

Example 4 – Failure to register

Company D in January 2021 made supplies worth AED 400,000 but failed to register for VAT purposes. On 15 June 2021 it discovers it had to register for VAT purposes already back in January 2021.

Old regime New regime

Fixed Penalties AED 20,000.00 AED 10,000.00

Waiver AED 14,000.00 N/A

Net AED 6,000.00 AED 10,000.00

Company D has an incentive to make use of the old regime to register for VAT purposes, before the new regime enters into force.

Audit and enforcement

When we conducted our survey back in 2018, we saw a very active FTA. With the additional resources it has gained over the years, it has conducted a great number of additional audits. Especially refund audits have been very prevalent. More regular audits have happened as well, although these often focused on entertainment expenses and non-compliant invoices. In 2023, transactions conducted in 2018 will be statute barred, so we may see additional activity by the FTA to ensure compliance before that date.

Tax payers have consciously being disclosing non compliant transactions and reporting under the old regime, and were hit with penalties, which then often spilled over into litigation.

Once the liabilities are final, or the court case ruled, the file would eventually end up in enforcement. The advantage the FTA had in litigation is the application of the “pay and claim” principle. If the tax payer lost the case, the litigious amount was already paid.

In situations where there was no Tax Disputes Resolution Committee litigation, the liabilities sometimes remained outstanding (with no additional penalty being added), or for businesses in a refund position, the refund was compensated bit by bit by the penalty amount.

Since 2018, the FTA did take a number of steps to encourage compliance and try and move tax payers towards settling their liabilities.

It had for example suspended the application of the automatic reverse charge mechanism for businesses with a customs number and a VAT number which were linked. The only impact of this decision was negative cash flow.

In addition, in early 2021, the UAE appointed judicial officers which have the powers to seize assets. This was seen as a step up in terms of the enforcement in the UAE.

Conclusion

Rather than stepping up enforcement under its tax procedures law (see our article on the FTP law (https://www.aurifer.tax/news/the-uae-publishes-more-detail/?lid=482&p=19) and on the FTP law lacking director’s liability (https://www.aurifer.tax/news/dawn-of-a-new-tax-era–corporate-perspectives/?lid=482&p=14), the UAE has chosen to make it easier to correct mistakes.

It has taken a substantial turn with the newly implemented policy, which will surely have a very beneficial impact on the tax compliance climate in the UAE. While the penalties are still there as a deterrent, there is now a real motivation in most cases to voluntary disclose and to build a more horizontal and transparent relation with the FTA. The move is without doubt a benefit to businesses, in terms of reduced penalties applied for errors made, and a benefit to the FTA, in terms of increased compliance and perhaps additional revenues from this increased compliance and the amnesty.

UAE Tax

New UAE disclosure requirements: why consistency is important

Post author By Thomas Vanhee
Post date December 9, 2020
No Comments on New UAE disclosure requirements: why consistency is important

New UAE disclosure requirements: why consistency is important

1. Introduction

The United Arab Emirates (UAE) is a tax friendly country, imposing no personal income tax and no federal corporate income tax. Nevertheless, it has recently introduced a set of new tax driven disclosure requirements which have significantly increased the level of transparency for individuals and multinational groups with operations in the country.

This development mostly originates from the work delivered by the Organization for Economic Co-operation and Development (OECD) and G20 during the past few years on measures against Base Erosion and Profit Shifting (BEPS), more specifically Action 5 of the BEPS Action Plan introducing certain minimum standards that countries should implement to counter harmful tax practices and Action 13 introducing Country-by-Country Reporting (CbCR) to increase global tax transparency. The Financial Action Task Force (FATF) on the other hand has been the key driver behind the recent Ultimate Beneficial Owner disclosure rules.

This analysis will cover the main three components of the new UAE measures, namely:

1. CbCR – governed by Cabinet Resolution No 44 of 2020

2. Economic Substance Regulations (ESR) – governed by Cabinet Resolution No 57 of 2020 and Ministerial Decision No 100 of 2020

3. Ultimate Beneficial Owner (UBO) declaration – governed by Cabinet Decision No 58 of 2020

We will not be analysing Common Reporting Standards (CRS) and the Foreign Account Tax Compliance Act (FATCA), which are also disclosure regimes but which have been in place for longer.

This article comes at a time where the deadlines for compliance with these new disclosure requirements are fast approaching (i.e. filing of CbCR and ESR reports and resubmission of Notifications before 31 December 2020), while other compliance dates have already passed, such as for the submission of UBO data before or on 27 October 2020 and the initial submission of CbCR and ESR Notifications before 31 December 2019 and 30 June 2020 respectively.

Keeping this in mind, this publication aims to 1. provide the reader with an understanding of the new compliance requirements, 2. highlight the impact for individuals and multinational groups 3. illustrate some common pitfalls for those preparing and submitting CbCR, ESR and UBO reports and 4. explain why consistency in the information is of the essence.

2. New disclosure arrangements

2.1 CbCr

2.1.1. Context

In the Framework of the Base Erosion and Profit Shifting (BEPS) project of the OECD and the G20, countries agreed, amongst others, to implement BEPS action 13 in order to tackle the shortcomings of the international tax system.

This action prescribes that countries implement legislation requiring multinational enterprises (MNEs) to report annually and for each tax jurisdiction in which they do business certain relevant financial and qualitative information, which is subsequently exchanged with other countries. The data should allow tax administration and governments to assess MNEs’ Transfer Pricing risks and it could also provide a first indication whether MNEs are involved in BEPS behaviours.

2.1.2. Scope

The UAE’s legislation very much mirrors the common and internationally accepted standard imposed by the OECD which has by now been adopted by almost 100 countries globally. The CbCR disclosure requirement is applicable to UAE headquartered groups with operations in at least two different tax jurisdictions. The rules are only applicable if the consolidated revenues during the Financial Year preceding the Financial Year in scope is equal to or exceeds AED 3.15 billion.

Ultimate Parent Entities (UPEs) in the UAE of large MNEs will therefore have the obligation to file a CbCR to the Ministry of Finance (“MoF”). As of yet, the Federal Tax Authority is not involved in the CbCR process, even though it would also be competent according to its Establishment Law. There is no (longer a) requirement for notifications for UAE constituent entities for MNEs of which the UPE is located outside the UAE.

Whilst there is also a requirement for Transfer Pricing Master Files and Local File documentation as part of the OECD’s BEPS Action 13, the UAE has currently not introduced such a requirement. We do not expect the UAE to implement a requirement to file a Master File or Local File as long as it does not have Federal Corporate Income Tax. Furthermore, there is no requirement to file a Controlled Transactions Disclosure Form or similar document (KSA on the other hand has recently implemented such requirement). Since there is no requirement for CbCR filing by foreign headquartered MNEs in the UAE, there is also no need to monitor the implementation of exchange of information relations between countries .

2.1.3. Disclosures

In Table 1 of the CbCR , MNEs need to list financial information grouped on a country per country level regarding revenues (third-party and intercompany), profits (losses) before income tax, income tax paid, income tax accrued, stated capital, accumulated earnings, number of employees, and non-cash or cash-equivalent net tangible assets.

In addition to the above information, Table 2 of the CbCR asks for information about activities for each company of the MNE (e.g. Research & Development, Holding Intellectual Property, Procurement, Manufacturing, Sales, Marketing, Distribution, Administrative support services, third-party services, intercompany financing, financial services, insurance, holding, dormant or others). Additionally, the tax residency, address and Tax Identifications Numbers for each of the subsidiaries needs to be disclosed. Table 3 provides a free field for MNEs to provide additional information (such as source of data, reporting periods, foreign exchange rate used, strategic positions taken, etc.).

The CbCR needs to be filed by the end of 2020 for companies with a financial year matching Gregorian calendar years. The portal can be found here: https://www.mof.gov.ae/en/StrategicPartnerships/Pages/Country-by-Country-Reporting.aspx.

2.1.4. Impact

The importance of the first time submission to the Ministry of Finance of the CbCR for large multinational groups headquartered in the UAE cannot be underestimated.

This is because companies operating in the UAE so far had no strict requirement to disclose financial information about their own operations and/or that of affiliated companies to any regulatory authority in the country (except for publicly listed companies). For most of the privately owned large multinational businesses headquartered in the UAE, the CbCR requirement results in the first-time disclosure of such global scale (and sometimes considered sensitive) information to a regulatory body.

With the CbCR data, the Ministry of Finance (and foreign governments) will gain valuable insights, not only about the financial position of the aforementioned privately owned large multinational groups, but will also receive data about publicly listed companies which may not have been available in the public domain previously (e.g. headcount, taxes paid rather than tax provisions, functional profile of affiliates, etc.).

In line with the OECD’s intention, the Ministry of Finance has stated on its website (FAQ section) that the CbCR data will be used for 1. assessment of high-level transfer pricing risk, 2. assessment of other BEPS-related risks and 3. for economic and statistical analysis. This being said, it is yet to be observed how the Ministry (and potentially other governmental bodies) will analyze and/or use this wealth of information for decision-making. For example, neighboring countries with income tax regimes such as the Kingdom of Saudi Arabia and Oman may be interested in such information.

2.1.5. Common pitfalls

Although the CbCR may look seemingly straightforward to fill out, there is a range of errors which can be made. The OECD already listed a number of them[1]. The below section is listing (in a non-exhaustive manner) a few important considerations which we formulate and which should be kept in mind by those preparing and/or submitting a CbCR:

i. Sourcing of information

At the outset, one should be able to determine if a multinational group headquartered in the UAE exceeds the AED 3.15 billion global revenue threshold for filing of a CbCR. While we discuss below what exactly constitutes a multinational group and what should (not) be included under revenues in this calculation, many may face time-consuming and burdensome challenges in the data collection process. Importantly, revenues are an indicator of size, and size is an indicator of complexity.

Even though the CbCR Table 1 groups the financial information on a country-by-country level, the underlying workings usually require the information to be sourced for each legal entity separately. In this respect, some enterprises may have a single and all-encompassing source of information available to them that covers all companies in the group (e.g. consolidation and/or enterprise resourcing system), others will typically operate in an environment where information about the parent company and affiliates (such as stand-alone financial accounts, headcount data, functional profile, taxes paid, tax numbers for all legal entities, etc.) is available across different platforms and/or is managed by various teams at a global scale.

In such cases, it is important for those preparing a CbCR to consistently follow either a “top-down approach” (starting from consolidated information that is centrally available and filling in gaps by sourcing of information from other platforms and various teams) or a “bottom-up” approach (aggregation of data from all decentralized sources). In addition, a reconciliation of both approaches may be advised.

In all cases, it would be appropriate to standardize and document the approach that is consistently followed in a company specific process document and make mention of this approach in Table 3 of the CbCR.

ii. Defining a “Group of companies”

In line with the OECD standards, a Group is defined in the Cabinet Resolution as “A group of companies related through ownership or control, such that it either is required to prepare Consolidated Financial Statements for the purposes of preparing financial reports under the applicable accounting principles, or would be so required if the equity interests in any of the companies were traded on a public securities exchange”. This definition is primarily dependent on applicable accountings standards, such as the International Financial Reporting Standards (IFRS) for example.

Furthermore, in order to fall under the scope of the UAE CbCR requirements, a group of companies should be headquartered in the UAE, have operations in two or more countries (and exceed the AED 3.15 billion threshold as mentioned earlier). The UAE has limited the CbCR disclosure to UAE headquartered groups, whereas the previously repealed legislation also required Surrogate Parent Entities (“SPE”) for foreign headquartered MNEs to file the CbC report.

At first glance, the definition of “group of companies” may appear straight-forward. However, there are certain important considerations that should be kept in mind for CbCR purposes, such as:

· The CbCR preparation requires information to be collected at a legal entity / permanent establishment level (which may not always align with an enterprise-specific IT and/or corporate coding structure)

· There may be differences between the legal structure and accounting consolidation. For example, are there any legal entities that are in- or excluded from the accounting consolidation that should have been ex- or included if the group were publicly listed under IFRS 10 rules?

· Whilst legal entities may be legally owned by (a part in) the group, there could exist special arrangements following which “control” is with other parts of the group or even an outside party or vice versa (e.g. side agreements)

· For Joint Venture arrangements, the OECD has clarified earlier that an entity that is not required to be consolidated under applicable accounting rules (e.g. equity accounted companies), does not have to be considered for the CbCR.

As a final note on this subject, it is worth mentioning that the OECD mentioned in the public CbCR consultation paper of February 2020 that it is looking at a possible revision to the definition of a “group of companies” so that in the future one CbCR may need to be filed for different groups / accounting consolidations that are under common control (by an individual for example).

iii. Definition of “revenues”

For CbCR purposes, revenues are the “top-line” in the income statement which includes all trading income, gains, or other inflows shown in the financial statement prepared in accordance with the applicable accounting rules. This definition also includes extraordinary income and gains from investment activities (e.g. extraordinary or below the line income from services, royalties, interest on loans, premiums, net gain on sale of property, etc.).

A common pitfall is to include dividend income from subsidiaries for the calculation of the AED 3.15 billion threshold and/or for the reporting of revenues and profits before taxes in Table 1 of the CbCR. On the other hand, dividend income from associates, joint ventures, and investment securities should be included in revenues and profits before taxes.

Reversals (of provisions and impairments), foreign exchange conversion differences and other non-business income type of items should be excluded from revenues.

When amounts are reported on a net basis in the financial statements under applicable accounting rules (e.g. net interest income for financial institutions) this should be reported as net in the CbCR as well.

iv. Foreign exchange rate

Most UAE based large multinational groups that will have to file a CbCR will do so in the AED currency. Because the report contains financial information from companies abroad using a non-AED currency for financial reporting, it is important to consider what foreign exchange rate needs to be used for translation of such non-AED currency amounts into AED.

A common mistake made by preparers of the CbCR is to rely solely on the FX rate conversion system that is embedded in the consolidation or accounting software , which would typically use year-end exchange rate for balance sheet amounts and transaction dated exchange rate for P&L amounts. The guidance provided by the OECD clearly states however that for the CbCR preparation, foreign currency amounts should be translated to the single CbCR functional reporting currency using the internal average foreign exchange conversion rates for the financial year concerned for both balance sheet and PL amounts (see OECD Transfer Pricing Guidelines, version 2017, page 513).

v. Definition of tangible assets

This Column in Table 1 of the CbCR requires reporting of the sum of the net book values of tangible assets (accounting definition), including inventory, properties, plants, equipment, investment properties and development properties.

A common mistake made in the CbCR data reporting is that cash or cash equivalents, intangible assets and/ or financial assets are included.

vi. XML conversion

Filing of the CbCR on the MoF portal is required in XML format in accordance with the OECD reporting schema. The UAE requires the filing to be made in Schema version 2.0, which may be challenging because the OECD only expects countries to adopt the Schema 2.0 standard as from February 2021 (most countries have adopted the 1.0 Schema thus far). Many software providers are not yet ready to offer the Schema 2.0 solution and the guidance notes released by the OECD for XML conversions to be done by MNEs are limited.

Most preparers of the CbCR will use standard functionalities of Excel to collect and aggregate the data. The process of conversion of this Excel data into XML format can be complicated and time-consuming for those unfamiliar with XML technology. Therefore, companies should start thinking about creating this capability in-house or using external service providers, some of which have developed easy to use applications for CbCR XML generation.

2.2. ESR

2.2.1. Context

On 30 April 2019, the UAE issued Cabinet Decision No. 31 concerning economic substance requirements (Economic Substance Regulations or “ESR” in short). It later replaced this Cabinet Decision with Cabinet Decision No. 57 of 2020, which had different Implementing Regulations.

UAE onshore and free zone entities that carry on specific activities mentioned in the regulations need to examine whether they meet the economic substance requirements. Failing to meet those will trigger penalties.

The introduction of a legal framework regulating the economic substance criterion in the UAE is a direct consequence of the OECD’s ongoing efforts to combat harmful tax practices under Action 5 of the BEPS project.

It also follows the increased focus by the European Union (EU) Code of Conduct Group (COCG) on companies established in jurisdictions with a low or no income tax regime, resulting in the publication of the first EU list of non-cooperative jurisdictions. In response to the EU COCG initiatives, the governments of Anguilla, the Bahamas, Bahrain, Barbados, Bermuda, British Virgin Islands (BVI), Cayman Islands, Guernsey, Isle of Man, Jersey, Turks and Caicos islands all recently introduced economic substance rules. The UAE followed suit as well.

There has also been growing interest and scrutiny from the public opinion as to whether entities established in no or low tax jurisdictions should be required to have sufficient economic substance before being able to benefit from beneficial tax regimes and benefits under double taxation agreements.

The purpose of ESR is to curb international tax planning of certain business activities, which are typically characterised by the fact that they are “mobile” in nature because they do not require extensive fixed infrastructure in terms of human and technical capital, in a way which allows the business (and attached profits) to be shifted to no or nominal tax jurisdictions, as opposed to taxing profits where the company has actually created economic value.

One of the many reasons why the UAE has attracted so many businesses is because there is currently no income tax regime at a federal level. The ESR legislation therefore is specifically targeted at businesses that do not have genuine commercial operations and management in the UAE to support the underlying activities and therefore also the underlying income.

Economic substance requirements are used to analyze whether a company’s presence in a country such as the UAE has a commercial and/or business purpose rather than reduction of a tax liability.

2.2.2. Scope

The Economic Substance Regulations apply to UAE onshore and free zone entities that carry out one or more of the following activities:

· Banking

· Insurance

· Fund management

· Lease-finance (including intercompany lending for interest income)

· Headquarters

· Shipping

· Holding company

· Intellectual property (IP)

· Distribution and service centre

Especially the definition of distribution and service centre catches a great deal of businesses. Service centre is defined as “providing services to foreign related persons”. Given the fact that the UAE is a regional hub focused on Foreign Direct Investment, a very important part of UAE incorporated businesses falls into this scope.

Entities are required to meet the Economic Substance Test when they conduct any of the above activities and earn income from such activities.

For each Activity, the regulations have defined the so-called Core Income Generating Activities (“CIGA”). This is a list of activities that must be conducted in order to meet the Economic Substance Test. For example, for intellectual property the CIGA would consist of research and development.

In general, the Economic Substance requirements will be met:

· If CIGA are conducted in the UAE;

· If the activities are directed and managed in the UAE;

· If there is an adequate level of qualified full-time employees in the UAE,

· If there is an adequate amount of operating expenditure in the UAE,

· If there are adequate physical assets in the UAE.

In case the CIGA are carried out by another entity, these need to be controlled and monitored.

In accordance with EU recommendations, the regulations provide for less stringent requirements for Holding Company Businesses (“Holding Companies”). Then again, for IP Companies, the standards are set higher.

2.2.3. Disclosures

Businesses that conducted a Relevant Activity during the 2019 Financial Year were required to file an ESR notification by end of June 2020 to the respective licensing authorities, such as the Ministry of Economy for onshore companies and free zone regulators for offshore companies.

Whilst the Ministry of Economy did not require companies to submit an ESR Notification if no Relevant Activity was conducted in the Financial Year 2019, some free zone authorities required a Notification for all companies irrespective of the nature of their activities (e.g. DIFC).

2020 was a transitional year with a revised ESR legislation retroactively impacting businesses and a change in the structure in terms of the enforcement (i.e. the Federal Tax Authority now has the mandate to review ESR filings, issue penalties where appropriate and handle litigation matters).

As a consequence of the revised legislation, businesses now need to resubmit their ESR notifications if Relevant Activities have been performed in FY 2019 and file their economic substance report if income was earned from the Relevant Activities by the end of December 2020 to the Ministry of Finance.

The revised ESR legislation introduced 5 categories of exemptions, amongst which the UAE branch of a foreign head office is the most common exception. However, for this particular exception to apply, it requires that the UAE branch’s income is subject to tax abroad in the country of the head office (to be demonstrated by a copy of the foreign income tax return). The exemptions generally entail important administrative requirements. Benefiting from the exemptions means that no Economic Substance Report needs to be filed (but the Notification is still required).

If a business conducts a relevant activity and has relevant income, and cannot benefit from an exemption, it needs to demonstrate substance in the UAE. The UAE has chosen for a substance over form method and not a “one size fits all” approach, where the conducted activity is important and there is no minimum threshold for meeting the substance.

The requested information as part of the ESR Notification and ESR Report is listed in the official templates published by the MoF, along with a link to the portal for submissions: https://www.mof.gov.ae/en/StrategicPartnerships/Pages/ESR.aspx

2.2.4. Impact

Similar to the effect of CbCR, the UAE companies that are in scope of the new ESR reporting requirements at the year-end will need to disclose, possibly for the first-time ever, sensitive financial and other information (revenues, profits, operating expenditures, headcount, etc.) to a regulatory body in the UAE.

Specifically, the requirement to inform the Ministry of Finance whether the financial accounts of the company (or its consolidating parent company) are being audited and the need to upload financial statements (it is assumed that also non-audited financial statements will be accepted) can trigger the attention of companies’ Tax, Finance and Legal teams. This is because so far compliance with the requirement for UAE companies to prepare and/or submit financial statements to a UAE regulatory body has been spotty.

Finance teams of UAE companies that have not been preparing financial statements and that are in scope of the new ESR regulations will need to prepare a set of financial accounts in a format that is presentable to the Ministry of Finance (expected to cover at a minimum a balance sheet, income statement, cash flow statement and notes).

Similarly, some companies may need to prepare and keep available, for the first time ever, formal Board resolutions (or single manager decisions) which can be requested by the Ministry of Finance and/or the Federal Tax Authority at any time. For companies without a formal Board of Directors, which are for example operating under the leadership of a single Director or Manager, this may pose the question if sufficient evidence for the “directed and managed” test can be provided to the MoF.

2.2.5. Common pitfalls

A thorough and well-documented process for the examination of the substance (not only the form) of activities for each UAE license is absolutely necessary. For this process, the scope of “Relevant Activities” needs to be well understood, because although some definitions may appear straightforward at first glance (e.g. Lease-Finance), the reality of their application may be wider than initially thought (e.g. Lease-Finance includes intercompany lending for interest income while trade credit arrangements are not in scope).

The examination of Relevant Activities should be made on per license basis. For example, while a legal entity with multiple licenses in the UAE (e.g. one onshore and two different licenses in two separate free zones) is generally involved in routine trading operations and therefore would initially be considered outside the scope of the ESR rules, it may be required to file an ESR Notification and/or Report if a significant Relevant Activity is conducted under one of the licenses (e.g. one of the free zones branches is regulated by the Insurance Authority and underwrites insurance for the products sold).

The UAE MoF has clarified that “Relevant Income” means all of an entity’s gross income from a Relevant Activity as recorded in its books and records under applicable accounting standards. A literal interpretation of this clarification would mean that abstraction needs to be made of any actual cash flows for the income in scope. For example, a holding company that records a dividend income in its FY 2019 financial statements, but that is not actually receiving the dividend cash proceeds, would still be required to submit an ESR Notification and Report.

A common reason why businesses might not meet the substance test is that Board Meetings are not physically held in the UAE. In addition, the meeting minutes need to be signed by all members. It may surprise that this condition is necessary in a globalized world, where board members can be dialing in from other countries. These antiquated methods may conflict with modern decision making. In addition, where UAE businesses are looked after by a local manager, he may have a certain degree of autonomy but perhaps not full autonomy. What meets the substance level then?

In a country where free zones often act as landlords as well, it may surprise that the UAE has not prescribed a minimum level of space for offices per license, as this would have created a higher demand for commercial real estate (we do note however that the square footage needs to be provided as part of the ESR report). Additionally, the ESR sometimes conflict with commercial considerations for free zones (e.g. attracting IP for solely licensing purposes would not meet the DEMPE criterion under the ESR).

2.3. UBO

2.3.1. Context and scope

By way of Cabinet Decision No. 58 of 2020, the UAE has implemented a new UBO regime applicable to businesses established in the UAE, except for ADGM and DIFC businesses which already have their own UBO requirements in place. Government owned businesses are excluded from the UBO regulations.

Under the new UBO regime, businesses in the UAE are subject to stricter disclosure obligations. Some Free Zone companies, such as the ones established in the DIFC, already were subject to UBO requirements and therefore the new regime does not change much for them.

The new UBO regime is derived from the Financial Action Task Force (FATF)’s Guidance on Transparency and Beneficial Ownership and it stems from the Anti Money Laundering legislation in the UAE, more in particular Federal Decree-Law No. 20/2018 and its Implementing Regulation. It is suspected to target amongst others disclosures of nominee structures.

The new UBO regime requires businesses in the UAE to maintain beneficial ownership and shareholder registers at their registered office, and to submit information from these registers to their regulatory authority (e.g. Department of Economic development, DED in short or a Free Zone Authority). Any changes in the information previously provided need to be disclosed as well.

2.3.2. Disclosures

The requirement to submit the UBO Register was earlier based on ad hoc requests from the licensing authorities, for example whenever requesting for issuance of a new trade license for a new legal entity in the UAE. However, with the latest Decision, UAE entities are required to maintain a UBO Register more consistently and update the Regulators accordingly for any changes.

A beneficial owner can be determined as follows:

1. Any physical person who owns or ultimately controls through direct or indirect ownership shares at the rate of 25% or more, or whoever has the right to vote at the rate of 25% or more, including retaining ownership or control through other means such as the right of appointment or dismissal of most of the Managers.

2. If no physical person was determined as per (1), the physical person who exercises control over the legal person through other means such as the right of appointment or dismissal of most of the Managers

3. If no physical person can be determined as per (1) or (2), then the physical person who holds the position of the person in charge of Senior Management.

The UBO Register needs to contain the following information on the UBO:

· Name, nationality, date and place of birth

· Place of residence or address

· Number of travel document/ID card, country, date of issuance and expiry

· Basis on which the UBO is the UBO

· Date of acquiring capacity as UBO

· Date on which UBO ceased to be UBO

In this section, we are not discussing the Shareholder or Partner Register.

2.3.3. Impact

In addition to similarities with ESR regulations which also require the disclosure of the UBOs as part of some of the Notifications and Reports, the Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standards (CRS) already required UAE businesses to provide a certain level of information regarding the UBOs. From a tax perspective, it should be ensured that the information provided to the financial institutions and relevant Regulatory Authorities (MoF and licensing authorities) is consistent and under no circumstances incorrect. Inconsistent or misleading information may lead to significant penalties being imposed by the Authorities.

3. Conclusion – Managing and matching disclosures is a delicate exercise

In recent years, the UAE has been signing up to different international standards and conventions to request from companies certain information and exchange this with other countries. From a tax perspective, the UAE did already have broad exchange of information provisions in its large network of double tax treaties.

With the introduction of FATCA/CRS and CbCR, the UAE signed up to different Multilateral Competent Authority Agreements (MCAA in short) for the automatic exchange of information with other countries.

A few years back, the UAE MoF put different MoU’s in place with different authorities, such as e.g. the DIFC, DMCC, RAKFTZ and others. The intention was to allow these authorities to act as agents to collect information from their members, which the MoF required in its international relations.

The recently introduced set of regulations around CbCR, ESR and UBO add another layer to the obligations of UAE businesses.

Whilst the new UAE disclosure requirements detailed above are governed by three separate Cabinet Resolutions, it is important to keep in mind that the information that needs to be provided under the separate regulations is centralized in the hands of the Ministry of Finance (CbCR and ESR), the Federal Tax Authority (ESR) and Licensing authorities (UBO). These bodies can compare and check the consistency of the information being provided for a specific UAE company.

For example, the Ministry of Finance would be able to check if a UAE company that was reported under a certain classification in Table 2 of the CbCR (e.g. Holding, Headquarter, Dormant, IP company, etc.) matches with the information (not) submitted as part of the ESR declarations.

Another example is that where the identity of the UBOs declared to the Licensing authorities as part of the new UBO requirements should match with the UBO information included in ESR filings.

With the implementation of the different regulations, the UAE has lifted itself onto the level of global transparency for tax matters. Although some businesses are still waking up to the impact, insufficiently realizing the consequences of setting up shell companies and other companies, the wake-up call should really be answered now. For other international businesses, it simply entails that they have additional compliance obligations in the UAE, like they would have in other countries. The level of “red tape” is still relatively doable from a tax perspective, given that there is no federal corporate income tax. The UAE keeps its position as an attractive tax jurisdiction given that it additionally applies no withholding taxes and no capital gains tax.

[1] See https://www.oecd.org/tax/beps/common-errors-mnes-cbc-reports.pdf, consulted on 5 December 2020.

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Post author By Thomas Vanhee
Post date November 10, 2020
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Working remotely tax free – not that simple

Post author By Thomas Vanhee
Post date October 31, 2020
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Working remotely tax free – not that simple

The Government of Dubai launched a virtual working program for overseas employees wishing to relocate to Dubai whilst retaining employment in their respective countries. This program aims to enable individuals to utilize the economical and tax advantages associated with residing in Dubai, despite being employed in their countries.

While seemingly very attractive, unfortunately it is not that easy for these employees to ensure that their salary will be tax free. In addition, every case may be different. Of course the UAE does not impose Personal Income Tax, but that does not mean that the other jurisdiction will let go that easily.

One can broadly distinguish the following scenarios:

Scenario 1: No Double Taxation Treaty in place between UAE and country of employment

Nothing shall prevent the application of the Personal Income Tax Law of the country of employment. That country shall retain the right to tax the person on his employment income (but may choose not to tax the employment income).

E.g.: Jim is a US Citizen and and is employed by USCO. He decides to work from Dubai. The US tax authority still has the right to tax Jim.

Scenario 2: Double Tax Treaty in place between UAE and country of employment or tax residency and person does not qualify as tax resident in UAE

A non-resident in the UAE which is employed by a non UAE entity would still be taxed on his income in the state of his residence. Under the treaty, the country of residence would be obliged to provide double tax relief for taxes paid in the UAE. Even though the UAE has a primary right to tax, due to the fact that it does not tax employment income, the state of residence retains the right to tax the income of the employee.

As an exception, in cases where the country of employment applies an exemption system, the person may not pay tax in the country of residence and exercise his employment tax-free in the UAE.

E.g.: Roberto is a tax resident of country A, employed by a company incorporated in country A. Roberto moved to Dubai in December 2020 to benefit from the virtual working scheme. Roberto is not a resident in the UAE for tax purposes and is not aiming to be a resident in the UAE for the near future.

The Double Tax Agreement between country A and the UAE applies the credit method to eliminate double taxation, which entails that country A shall deduct from the taxes calculated, the Income Tax paid in the UAE. As there is no Income Tax in the UAE, country A shall request the tax due in totality and fully retain its right to tax.

The situation would differ if Roberto is a tax resident of country B and relocates to Dubai, and the Double Taxation Agreement between the UAE and country B applies an exemption method. Under the exemption system, any income which may be taxed by the UAE will be exempt from tax in country B. In the absence of the conditional subject to tax rule, the exemption system would effectively allow Roberto to escape the burden of Personal Income Tax in Country B, and pay no taxes in the UAE.

Scenario 3: Double Taxation Treaty in place between UAE and country of employment and the person qualifies as tax resident in the UAE.

This situation may lead to a so-called Dual Residency issue, where two jurisdictions consider a person a tax resident. Given that the person in our assumption qualifies as a tax resident in UAE in addition to being a resident in his country of employment as well, the tie-breaker rule would apply to determine the residency of that person.

On the basis of the tie breaker rule, it may not be that easy to consider a person who just moved as a tax resident in the UAE, if he still has his first home in the country of employment, and if his economic and social interest alongside his habitual abode are in the same country, and if he hold nationality in the country of employment.

In case the person is considered to be a resident in the UAE under the tie-breaker rule, the UAE has the exclusive right to tax, even if such right is not exercised. The other country may argue however that the person is neither liable nor (effectively) subject to tax in the UAE. What happens next depends highly on the other jurisdiction’s tax policy.

Given that there is no Personal Income Tax in the UAE, there are also no domestic legal criteria to consider a person a tax resident in the UAE. There is however a means to obtain a tax residency certificate, based on criteria prescribed by the UAE Ministry of Finance. To obtain such a certificate, the applicant amongst others has to be resident in the UAE for a period exceeding 183 days, and submit an annual lease agreement documented by the competent authority.

E.g.: Roberto in this scenario qualifies as a tax resident in the UAE and also in country A due to his employment ties in country A. Both countries may consider Roberto as a tax resident on under their domestic law. The dual-residency tie-breaker rule in the treaty between country A and the UAE, based on the OECD Model, dictates that Roberto’s residency shall be decided on the basis of:

a) Place of permanent home. If in both/none of the states then;

b) Centre of vital interest. If cannot be determined then;

c) Habitual abode. If in both/none of the states then;

d) Nationality. If national of both states;

e) Competent authority shall determine by mutual agreement.

If it is determined on the previous basis that Roberto is a resident of the UAE, he shall be taxed exclusively in the UAE because the job is executed in the UAE where he is resident even though the employer is resident in country A.

As a consequence, Roberto will effectively not be subject to any Personal Income Tax.

Article by Thomas Vanhee, Faisal Alasousi and Mohamed Alaradi

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