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
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. The latter are subject to their own regulations. Government owned businesses are also excluded.
Under the new UBO regime, businesses in the UAE are subject to more strict compliance obligations. For some Free Zones, certain requirements were already in place, and therefore the new regime does not change much.
The new UBO regime 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. DED or Free Zone Authority). Any changes in the information previously provided, need to be disclosed as well.
Keeping a UBO Register
The requirement to submit the UBO Register has been in place before and was sometimes required e.g. upon issuance of the trade license of a new entity in the UAE. However, with the latest Decision, UAE entities are required to maintain a UBO Register and update the Regulators accordingly for any changes.
Who is the UBO?
A beneficial owner can be determined as follows:
- 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.
- 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
- 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.
What goes in the UBO Register
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
Shareholder or Partner Register
Businesses are further required to hold a Shareholder or Partners Register. Holding a Shareholder or Partners Register constitutes good practice anyways, and is part of good governance for any company. That Shareholder or Partner Register will now need to be submitted as well. Changes to the Register are to be notified within 15 days as well of being aware of a change in the Register.
The Shareholder Register needs to contain:
- Number of quotas or shares owned by each of them and the category thereof, as well as the voting rights associated thereto
- Date of acquisition as capacity as partner or shareholder
- ID’s of natural persons, or corporate information
Compliance before due date
The identification of the UBO can be quite challenging for some UAE companies which are part of a wider and more complex group, when the requirement is to identify the physical person who ultimately owns the company.
According to the new regime, the data needs to be submitted within 60 days of the date of Publication of the Decision. This needs to therefore happen on or before approximately 27 October 2020.
In conversations with the Authorities which need to receive the information, we understand however that the Authorities which need to receive the information, are not yet ready to do so.
Even though the penalty framework is not known yet, we can expect it to be strict and punitive.
The recent introduction of different laws in the UAE such as the Economic Substance Regulations (ESR), Country-by-Country Reporting (CBCR) and Common Reporting Standards (CRS) also require UAE businesses to provide a certain level of information regarding the UBO. From a tax perspective, it should be ensured that the information provided to the relevant Regulatory Authorities is consistent and under no circumstances incorrect. Incorrect or misleading information may lead to significant penalties being imposed by the Authorities.
The penalty for providing inaccurate/incomplete information under different laws are:
- ESR: AED 50,000
- CBCR: AED 50,000
- CRS: AED 20,000
The information will be further exchanged with other jurisdictions.
Should your company require assistance with the UBO compliance, Aurifer can assist you with the following:
- Determine the UBOs of your company
- Prepare the Registers in the Regulator’s form/Declaration
- Assist in the submission of the Registers/Declaration to the relevant Regulators