Author: afridi-angell

UAE Federal Decree Law 47 of 2022 on Taxation of Corporations and Businesses

January 2022 began with the announcement that businesses and corporations will be subject to Corporate Tax (CT) from 1 June 2023. While the UAE Ministry of Finance helpfully provided information on the basic tenets of CT, including a comprehensive white paper, the CT Law governing CT was published on 9 December 2022 providing clarity. However, there are still a number of areas that will be further clarified through the implementing regulations. An unofficial translation of the Law together with FAQs have been provided by the MoF.

 

Who will be liable to pay CT?

 

Both corporate entities and individuals who conduct Business/Business Activity in the UAE are considered a Taxable Person and will be liable to pay CT. A Taxable Person can either be a Resident Person or a Non-Resident Person (including Branches, Partnerships and Foundations).

 

A Resident Person includes:

 

– a company/establishment that is established in the UAE;

– a foreign company/establishment that is effectively managed and controlled in the UAE; or

– an individual who conducts business activities in the UAE.

 

A Non-Resident Person is a person who is not considered a Resident Person that:

 

– has a permanent establishment in the UAE;

– derives state sourced income; or

– has a nexus to the UAE, as to be specified by the Cabinet of Ministers.

 

Who is exempt from CT?

 

The following persons are exempt from CT:

1. Government entities;

 

2. a Government Controlled Entity;

 

3. a Person engaged in an Extractive Business, that meets the conditions of Article 7 of the Law;

 

4. a Person engaged in a Non-Extractive Natural Resource Business, that meets the conditions of Article 8 of the Law;

 

5. a qualifying Public Benefit Entity (Charities) under Article 9 of the Law;

 

6. a qualifying Investment Fund under Article 10 of the Law;

 

7. a public pension or social security fund, or a private pension or social security fund that is subject to regulatory oversight of the competent authority in the UAE;

 

8. an entity incorporated in the UAE that is wholly owned and controlled by an Exempt Person that meets the required conditions specified under paragraphs (a), (b), (f) and (g) of Clause 1 of Article 4 of the Law; or

 

9. any other Person as may be determined by the Cabinet of Ministers.

 

What about Free Zones?

 

The Law provides that CT shall be imposed on a “Qualifying Free Zone Person” at the following rates:

 

– 0 percent on Qualifying Income; and
– 9 percent on Taxable Income that is not Qualifying Income.

 

A Qualifying Free Zone Person is defined as a person that meets the condition set out in Article 18 of Law, which includes maintaining adequate substance in the UAE, derives Qualifying Income and has not elected to be subjected to CT.

 

“Qualifying Income” is to be specified further by the Cabinet of Ministers.

 

Importantly, all Free Zone entities will be required to register and file a CT return, irrespective of whether they are a Qualifying Free Zone Person or not.

 

What will be taxed (Taxable Income)?

 

A Taxable Person will be taxed on its worldwide taxable income, regardless of whether the income is derived within or outside the UAE, which will be determined on the basis of the net profit (or loss) in financial statements prepared for financial reporting purposes in accordance with acceptable accounting standards.

 

Also, international agreements (including those for the avoidance of double taxation) should be considered with respect to the CT regime.

 

What is the CT Rate?

 

CT will be levied at a rate of 9 percent on Taxable Income that exceeds AED 375,000. Taxable Income below AED 375,000 will be subject to a 0 percent rate.

 

What about Tax Losses?

 

Tax Losses can be offset against Taxable Income of future periods up to a maximum of 75 percent of Taxable Income for each of such future periods. Any excess, unused Tax Losses can be carried forward and used later.

 

What about Transfer Pricing?

 

The UAE will implement Transfer Pricing rules broadly in line with the OECD Transfer Pricing Guidelines and require periodic Transfer Pricing reporting obligations.

 

Are there Anti-Abuse Rules?

 

The CT contains anti-abuse rules to prevent abuse or avoidance of the CT Law.  The Federal Tax Authority (FTA) may make a determination, in a ‘just and reasonable’ manner, that one or more specified CT advantages obtained as a result of a transaction or arrangement are to be counteracted or adjusted if, having regard to all relevant circumstances, it can be reasonably concluded that:

 

  • the entering into or carrying out of the transaction or arrangement, or any part of it, is not for valid commercial or other non-fiscal reason which reflects economic reality; and
  • the main purpose or one of the main purposes of the transaction or arrangement, or any part of it, is to obtain a CT advantage that is not consistent with the intention or purpose of the CT Law.

 

A CT advantage includes but is not limited to:

 

  • a refund or increased refund;
  • avoidance or reduction of CT payable;
  • deferral of a payment of CT or advancement of a refund of CT; and
  • avoidance of an obligation to deduct or account for CT.

 

When do you have to file a tax return and pay CT?

 

A Taxable Person must file a tax return and pay the CT no later than nine months from the end of the relevant Tax Period. The FTA will be responsible for the administration, collection and enforcement of CT and other federal taxes.

 

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Please contact us if you have any comments or queries with respect to this law. ■

Banking & Finance (UAE chapter)

The Chambers Banking & Finance 2022 guide covers 46 jurisdictions. This chapter guide provides the latest legal information on the impact of the COVID-19 pandemic; environmental, social and governance (ESG) lending; restrictions on foreign lenders and foreign currency exchange; tax and usury laws; guarantees and security; enforcement of foreign judgments; bankruptcy and insolvency; and project finance.

The Energy Regulation and Markets Review (UAE chapter), 11th edition

In our eleventh year of writing the UAE chapter of The Energy Regulation and Markets Review, COVID-19, now in its third year, continued to create challenges in 2021 and the early part of 2022. It has produced a domino effect, resulting in a reduction in investments, relative delays in projects and a cascade of other obstructions confronting the energy sector in the UAE. However, the focus of the UAE has remained on its strength in mass generating electricity from renewable energy sources.

 

The UAE has long been at the centre of technological developments and is now using innovative technology in the power sector, which was reflected in its overall ranking at 33 on the World Energy Council’s Energy Trilemma Index in 2021.

 

The UAE is geared up for and appears to be on track to deliver its Energy Strategy 2050, which was launched in 2017. Backed by impressive technology, the country is well equipped to meet ever increasing energy demands and to create smart and efficient energy production and use. Energy efficiency remains very much at the top of the UAE’s energy agenda.

 

In addition to the focus on the energy sector at home, the UAE is also collaborating with and investing in other countries.

UAE Economic Substance Requirements (ESR) – New Penalties imposed by the Federal Tax Authority

Last year we had reported that the Federal Tax Authority (the FTA) has started to impose penalties on entities that have failed to submit their economic substance notifications by the set deadline of 30 June 2020 for the financial period ended on 31 December 2019, and the economic substance reports by the set deadline of 31 December 2020 for the financial period ended on 31 December 2019.

 

The FTA has now started imposing penalties on entities that had conducted a relevant activity but failed to meet the economic substance test (for example, by failing to demonstrate that the relevant activity was directed and managed in the UAE) for the financial period ended on 31 December 2019. Pursuant to the Cabinet of Ministers Resolution 57 of 2020 concerning the Economic Substance Requirements (Decision), the FTA is imposing a penalty of AED 50,000 for failing to meet the economic substance test. If a licensee commits the same offence in the following year, the FTA can impose a penalty of AED 400,000.

 

Article 17 of the Decision provides that a licensee may appeal against a penalty by filing an appeal to the FTA.

 

A licensee conducting a relevant activity (as per the Decision) is annually required to file a notification within six months from the end of the relevant financial period, and an economic substance report within 12 months from the end of the relevant financial period.

 

For a licensee whose financial year ended on 31 December 2021, the deadline to file a notification is 30 June 2022, and the deadline to file an economic substance report will be 31 December 2022. The notification and/or the economic substance report is required to be filed on the Ministry of Finance’s portal:

(www.mof.gov.ae/en/StrategicPartnerships/Pages/ESR.aspx).

 

Additional information on Economic Substance Requirements can also be found on the Ministry of Finance’s website.

 

 

 

Shareholders’ rights in private and public companies in the United Arab Emirates

A Q&A multi-jurisdictional guide to shareholders’ rights in private and public companies law in the United Arab Emirates. This Q&A gives an overview of types of limited companies and shares, general shareholders’ rights, general meeting of shareholders (calling a general meeting; voting; shareholders’ rights relating to general meetings), shareholders’ rights against directors, shareholders’ rights against the company’s auditors, disclosure of information to shareholders, shareholders’ agreements, dividends, financing and share interests, share transfers and exit, material transactions, insolvency and corporate groups.

Choosing the Right Offshore Jurisdiction

Wealth and estate planning that make use of so-called offshore trust structures are popular. Such structures are useful for many reasons, including to support individuals and families who are seeking a change in residency, and to offer longevity, predictability and security that is not always available in one’s home country. They can more readily adapt to beneficiaries in different and changing jurisdictions, and in the right circumstances they can offer tax efficiencies. If you have determined that an offshore structure is right for you, you will find that there are many offshore jurisdictions that could potentially be suitable for your needs. This inBrief looks at how to go about evaluating and selecting the right jurisdiction for your structure.

 

A brief summary of some of the factors you should take into account follows:

 

– A zero-tax environment. Many jurisdictions offer this.

 

– Reputability. This is really a colloquial catch-all for how well the jurisdiction adopts and implements FATF guidelines, OECD (and US) tax and reporting rules, transparency and level of cooperativeness of local government and courts, among other things. The international reputation is not a matter of perception, but much more importantly, it is a matter of how willing other professionals and financial service providers will be to deal with entities formed in that jurisdiction.

 

– Regulatory compliance. This is related to reputability. A jurisdiction that is compliance-focused will be more readily welcomed by banks, investment managers, insurers, land and asset registries, and others that will interact with the entity you establish. In this context, compliance refers essentially to thorough disclosure of beneficial ownership and processes to keep it up to date and verifiable, and accessible to legitimate government inquiry (not to the public, necessarily).

 

– Quality of service providers. Offshore structures such as trusts can only function properly if they are serviced by qualified, experienced, reliable service providers, in particular trust companies acting as trustees (others include accountants, lawyers, private bankers, investment managers, and insurance advisors). It is of great benefit to establish a trust in a jurisdiction with a mature market of well-established service providers.

 

– The legal environment. Offshore jurisdictions tend to have well-developed laws regulating their trust industry, and many have developed issue-specific specializations.  Depending on your priorities and what you wish to achieve with your trust, you may be better served by one jurisdiction or another.  For instance, the Cook Islands have a relatively strong position protecting Cook Islands trusts against foreign claims.  The British Virgin Islands offer a special regime for so-called VISTA trusts[1], which have advantages when the trust acts as a holding vehicle for shares in an underlying company, especially where the underlying investments are relatively high risk.  The Cayman Islands have a special regime for so-called STAR trusts, which allow for non-charitable purpose trusts, useful for creating “orphan” structures, for example.  There are other examples, and many other uses for VISTA and STAR trusts[2].

 

– The courts. This is really part of the legal environment, but it deserves a separate mention. The track record of the courts in upholding the local laws, and their ability to address trust-related claims in a manner that is sophisticated and predictable is an important factor.

 

– Privacy. This is also part of the legal environment but deserves a separate mention too. Robust, modern privacy laws are important to ensure that your sensitive personal and financial information is not misused or disclosed to third parties or the public or potential bad actors. It is worth clarifying that “privacy” does not mean “secrecy”, and that any reputable jurisdiction will have detailed beneficial ownership disclosure requirements, and will have international reporting obligations and exchange-of-information treaties, including among tax authorities. The purpose of an offshore structure is not to conceal information from governmental authorities who have a legitimate interest. This was the case decades ago and is the source of negative stereotyping of offshore jurisdictions which continues in the media to this day, ignoring the enormous reforms in transparency, regulation and international disclosure that have occurred over the years.

 

– Political stability. A long track record of peace and good order and rule of law is critical. Trusts for wealth and estate planning purposes are often intended to last for many years, over multiple generations.

 

– Cost. The cost of establishing and ongoing maintenance of the trust or other structure is a legitimate focus, of course, but in our view is not the primary driver. The other factors listed above are more important, and, the cost tends to be relatively similar across the board, with limited exceptions.

 

In our view, among the factors listed above, by far the most important factors to focus on are the legal environment and the quality of trust service providers. The legal environment is important because the objectives for the trust may be better served by the laws of one jurisdiction or another. The quality of trust service providers is important not only for the reasons summarized above but also because a good service provider brings with it its own standards and safeguards around privacy (and the IT infrastructure and culture of compliance that goes with that), often at a level higher than that required by local laws.

 

A good service provider will also attract qualified personnel, will be responsive, service-oriented, and will be helpful and capable whenever new demands arise.

 

If you have identified jurisdictions that are reputable, and which have a legal environment that supports your needs, and which have quality service providers available, you can consider some of the softer tie-breaker considerations, such as time zone for ease of communication, and physical accessibility in the event you wish to personally visit from time to time to meet your trustees or other providers.

 

During the planning phase, it can be useful to weigh the pros and cons of different jurisdictions for a number of reasons. Good planning sometimes entails utilizing a structure with elements in multiple jurisdictions (a private investment company owned by a trust, each in different jurisdictions, for example); and, it can be helpful to consider an alternate jurisdiction in case you wish to re-domicile your trust (most offshore trusts are portable from one jurisdiction to another, if the trust deed allows for it).

 

The above is not intended to be a definitive list, and specific factual context must always be taken into account. The factors set out above should usually present a reasonable starting point.

 

If you are considering an offshore trust structure or have questions about whether it may be suitable for you, or which jurisdiction may suit your needs, please contact us and we will be happy to help. ■

 

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[1] Trusts created under the Virgin Islands Special Trust Act 2003 (as amended) (British Virgin Island)

[2] Trusts created under the Special Trusts (Alternative Regime) Law 1997 (Cayman Island)

The Era of Crypto

The new year, 2022, will be the year in which cryptocurrencies gain more legitimacy worldwide through government regulation, oversight and further acceptance. Indeed, in December 2021, the Dubai World Trade Centre announced that it will become a crypto zone and a regulator for cryptocurrencies and other virtual assets – including digital assets, products, operators and exchanges. In September 2021, the country of El Salvador officially recognized Bitcoin as legal tender. Mexico has stated that it will have its own digital currency by 2024.

 

What is cryptocurrency?

 

Cryptocurrency is an electronic cash system, which removes the need for a centralized server (or bank) when a transaction is made. Instead of using a bank as intermediary, a transaction is communicated to and stored electronically simultaneously in multiple, geographically diverse computers (servers) at once. Such distributed, simultaneous notification and storage of such transaction on all these computers establishes that it is legitimate and prevents unauthorized changes later to such transaction. This is how blockchain technology works. A blockchain is a distributed database that is shared among the nodes of a computer network. As a database, a blockchain stores information electronically in digital format. Blockchains are best known for their crucial role in cryptocurrency systems, such as Bitcoin, for maintaining a secure and decentralized record of transactions. The innovation with a blockchain is that it guarantees the fidelity and security of a record of data and generates trust without the need for a trusted third party (i.e., a bank).

 

Why are cryptocurrencies popular?

 

One reason why crypto is so popular is because it doesn’t require too much effort or the involvement of third parties – only a computer.

 

Furthermore, many have predicted that cryptocurrencies will become the future primary currency in the world as they remove the need for banks from transactions and significantly reduces the cost of transactions.

 

Initial coin offerings

 

Much like in the physical world in which private companies go public by listing and selling their shares on public exchanges such as the New York Stock Exchange, cryptocurrencies have initial coin offerings. An initial coin offering is an event where a company sells a new cryptocurrency to raise money. Investors receive cryptocurrency in exchange for their financial contributions. In many ways, an initial coin offering is the cryptocurrency version of an initial public offering in the stock market. With the growth of the crypto industry, initial coin offerings have also increased in popularity.

 

NFTs

 

The new trend in the crypto industry is NFTs. A non-fungible token (NFT) is a unique and non-interchangeable unit of data stored on a blockchain (the Ethereum blockchain is one of the most popular for this purpose), a form of digital ledger. NFTs can be associated with reproducible digital files such as photos, videos, and audio. So NFTs can really be anything digital (such as drawings or music), but a lot of the current excitement is around using the tech to sell and trade digital art. This has very recently created a unique market of buyers and sellers for digital art.

 

Legal considerations

 

In the United Arab Emirates, the Securities and Commodities Authority’s Decision No. 23 of 2020 concerning Crypto Assets Activities Regulation. This regulation aims at regulating the offering, issuing, listing and trading of crypto assets in the UAE and related financial activities. The Central Bank has also issued the Retail Payment Services and Card Schemes Regulation regulating payment tokens.

 

The two financial free zones in the UAE are also becoming more active with respect to the crypto industry. The Dubai International Financial Centre has recently released the first part of a regulatory framework for digital tokens. The Abu Dhabi Global Market issued the Financial Services and Markets Regulations 2015 which regulates virtual assets.

 

The Dubai Virtual Assets Regulation Law

 

On March 11, 2022, the Dubai government issued the Dubai Virtual Assets Regulation Law (VAR Law). His Highness Sheikh Mohammed Al Maktoum said “We have established an independent authority to oversee the development of the best business environment in the world for virtual assets in terms of regulation, licensing and governance and in line with local and global financial systems”.

 

The VAR Law regulates virtual assets (which include Bitcoin) and virtual tokens (such as NFTs) via the Dubai Virtual Assets Regulatory Authority (VARA) at the Dubai World Trade Centre. VARA aims, among other things, to promote Dubai’s position as a regional and global destination in the field of virtual assets; contribute to attracting investments and companies operating in the filed of virtual assets; provide the necessary systems to protect investors and dealers in virtual assets; and set up the regulations, rules and standards necessary related to virtual assets. VARA will also organize, supervise and control the issuance and offering of virtual assets and virtual tokens (such as initial coin offerings).

 

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With the increased digitalization of business, the crypto industry, cryptocurrencies and other virtual assets are making their claim in the future of business. Regardless of the risks involved and the volatility, crypto is an undeniable trend which will be a challenge to the status quo. The VAR Law is the Emirate of Dubai’s pronouncement of its willingness to promote and compete in this new digital economy. ■