Tag: Tax

Tax Residency in the UAE: who qualifies as a UAE Tax Resident?

Recently approved Cabinet Decision 85 of 2022 (the Decision) outlines the requirements and conditions for classification of persons as a “Tax Resident” of the UAE. We briefly outline below who qualifies as a UAE tax resident.

 

Afridi & Angell have assisted a variety of clients in procuring tax domicile certificates and are well versed in the procedures and requirements. If you are interested in learning more about whether you may qualify as a Tax Resident, or the procedures for obtaining a tax domicile certificate, please reach out to one of our team members. Tax domicile certificates are an important and valuable component in the tax-planning structures that we implement for many of our clients.

 

Companies as UAE Tax Residents

 

Article 3 of the Decision provides that a company shall be deemed as a Tax Resident where it meets one of the following criteria:

 

(1) it is established, formed or recognised according to the legislation in force in the UAE. The Decision expressly excludes branches of foreign companies registered in the UAE from the definition of a Tax Resident; or

 

(2) it is otherwise deemed as a Tax Resident by virtue of a different federal law imposing tax (Tax Law).

 

Natural Persons as UAE Tax Residents

 

Article 4 outlines the requirements for a natural person and provides that such a person shall be deemed as a Tax Resident where they meet one of the following conditions:

 

(1) the habitual or primary place of residence of the individual is located in the UAE, so long as it is considered to be the place of fiscal and personal interests of the individual and where it meets the conditions and standards as applicable and determined from time to time;

 

(2) the individual is physically present in the UAE for a minimum of 183 days, within the duration of 12 consecutive months; or

 

(3) the individual may qualify as a Tax Resident where they have been physically present in the UAE for a minimum of 90 days within the relevant duration of 12 consecutive months, if the individual holds UAE nationality or a valid UAE Residence Permit or the nationality of any of the GCC Countries, and meet either of the following conditions:

 

a. the individual holds a “Place of Permanent Residence” in the UAE; or

b. the individual holds a position or is exercising “Activities” in the UAE.

 

A “Place of Permanent Residence” means a place located in the UAE which is deemed available to the individual at all times and “Activities” includes any activity practiced on a regular, ongoing and independent basis by a natural person.

 

The Decision provides that any person deemed as a Tax Resident in the UAE may submit an application to the Federal Tax Authority for issuance of a tax domicile certificate. ■

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. ■

Video inBrief: Business Income Tax in the UAE

In this video inBrief, Shahram Safai, partner, talks about the Business Income Tax that is coming to the UAE on June 1st 2023.

 

 

Disclaimer: Afridi & Angell’s video inBriefs provide a brief overview and commentary on recent legal announcements and developments. Comments and opinions contained in the video and description are general information only. They should not be regarded or relied upon as legal advice.

Business Income Tax in the UAE in 2023

Many are still of the belief that business income tax (also called corporate income tax (CT)) is only under discussion and its introduction uncertain. That is certainly not the case. The UAE federal government has announced the application of income tax for business activities as of 1 June 2023.

 

Although the law for CT has not yet been issued, we know that the Federal Tax Authority (FTA) (which also administers the VAT) is busy preparing for the introduction of CT. We also know that federal public prosecutors are being trained and prepared to prosecute tax crimes such as tax evasion.

 

Also, we have a rough framework of what the CT law will encompass. In May 2022, the UAE Ministry of Finance issued a detailed public consultation document with respect to CT describing their proposals for the CT law and sought views from the public on any improvements/modification (which final version of CT law may be different but we do not anticipate much change).

 

1. TAXABLE PERSONS

1.1 Natural persons

CT will apply to natural persons engaged in a business or commercial activity in the UAE. This will include sole establishments or proprietorships, and individual partners in an unincorporated partnership that conducts business in the UAE. Whether an individual is engaged in a business that is subject to CT would generally depend on whether the activity requires the individual to obtain a commercial licence or equivalent permit from the relevant competent authority.

 

1.2 Legal persons

CT will apply to UAE companies and other legal persons incorporated in the UAE, as well as to foreign legal entities that have a permanent establishment in the UAE or that earn UAE sourced income. For the application of CT, legal persons incorporated in a foreign jurisdiction that are effectively managed and controlled in the UAE will be treated as if they were UAE incorporated entities. Limited and general partnerships and other unincorporated joint ventures and associations of persons will be treated as ‘transparent’ for CT purposes. Their income will instead ‘flow through’ and be taxed in the hands of the partners or members only.

 

1.3 Exempt persons

Certain persons will be exempt from CT, either automatically or by way of application. For examples, regulated investment funds and Real Estate Investment Trusts can apply to the FTA to be exempt from CT subject to meeting certain requirements.

 

1.4 Free Zones

Companies and branches that are registered in a Free Zone will be within the scope of the CT and subject to tax return filing requirements. The CT regime will however honour the tax incentives currently being offered to Free Zone Persons that maintain adequate substance and comply with all regulatory requirements. Therefore, it would be important to review the specific tax incentives offered in each Free Zone. A Free Zone Person that has a branch in mainland UAE will be taxed at the regular CT rate on its mainland sourced income, whilst continuing to benefit from the zero percent CT rate on its other income.

 

2. BASIS OF TAXATION

2.1 Residents

Residency is a key determining factor of whether business profits will be subject to CT in the UAE. A legal person that is incorporated in the UAE will automatically be considered a ‘resident’ person for CT purposes. Equally, any natural person who is engaged in a business or commercial activity in the UAE, either in their own name or through an unincorporated partnership, will also be considered a resident person for purposes of the CT regime. A foreign company may be treated as a resident person if it is effectively managed and controlled in the UAE. UAE resident persons will be taxable in the UAE on their worldwide income, which for a natural person will be limited to the income earned from their business activity carried out in the UAE. However, certain income earned from overseas will be exempt from CT. Where income earned from abroad is not exempt, income taxes paid in the foreign jurisdiction can be taken as a credit against the CT payable in the UAE.

 

2.2 Non-residents

Non-residents will be subject to CT on:

 

  • Taxable income from their Permanent Establishment (PE) in the UAE. The main purpose of the PE concept is to determine if and when a company has established sufficient presence in a foreign country to warrant the direct taxation of the business profits of the company in that country. The activity threshold that will trigger a PE for a foreign company in the UAE will be determined by the following two main tests:

 

(i) Fixed place of business test: a fixed place of business will include a place of management, a branch, an office (including a temporary field office or an employee’s home office), a factory, a workshop, real property, and a building site where activities are carried out for a period exceeding six months.

 

(ii) Dependent agent test: the “dependent agent test” may be met where business travelers or UAE based persons act on behalf of the foreign company in the UAE and have, and habitually exercise, the authority to conclude contracts in the name of foreign company.

 

  • Income which is sourced in the UAE

Considering the UAE’s position as a leading investment and wealth management centre, the CT regime will allow regulated UAE investment managers to provide discretionary investment management services to foreign customers without triggering a UAE PE for the foreign investor or the foreign investment fund.

 

UAE sourced income earned by a foreign person that does not have a PE in the UAE will be subject to withholding tax at a rate of zero percent.

 

3.CALCULATION OF TAXABLE INCOME

3.1 Basis of calculating taxable income

The CT regime proposes to use the accounting net profit (or loss) as stated in the financial statements of a business as the starting point for determining their taxable income.

 

3.2 Treatment of unrealised gains and losses

Unrealised gains or losses arise in instances where an asset or liability held by a business has changed in value but no transaction to generate a gain or loss has yet taken place. For example, when a business property increases in value, but the property is not sold, the gain would be unrealised. These gains or losses may be recorded for accounting purposes even though they are not yet realised. The CT will have specific rules to determine whether an unrealised gain or loss should be taken into account when calculating taxable income. These relate to whether the gain or loss is related to capital items or revenue items.

 

3.3 Exempt income

UAE resident companies will be subject to CT on their worldwide income, including capital gains. However, to avoid instances of double taxation, the CT regime will exempt certain forms of income from taxation.

 

3.4 Exemption for dividends and capital gains

A UAE corporate shareholder will generally be exempt from CT on dividends received and capital gains earned from the sale of shares of a subsidiary company. Also, the proposed CT regime will exempt all domestic dividends earned from UAE companies. Dividends paid by foreign companies, and capital gains from the sale of shares in both UAE and foreign companies will also be exempt from CT, provided certain conditions are met.

 

3.5 Foreign branch profit exemption

A foreign branch would typically constitute a PE in the foreign country and be subject to CT (or an equivalent tax) on its profits in that foreign country. UAE companies can either (i) claim a foreign tax credit for taxes paid in the foreign branch country, or (ii) elect to claim an exemption for their foreign branch profits.

 

3.6 Expense deduction limitations

The calculation of taxable income will largely follow accounting rules, but the CT regime will disallow or restrict the deduction of certain specific expenses. This is to ensure that relief can only be obtained for expenses incurred for the purpose of generating taxable income, and to address possible situations of abuse or excessive deductions.

 

3.7 Interest capping rules

Interest and other similar financing costs are considered a cost of doing business and will accordingly be deductible for CT purposes. The proposed CT regime will cap the amount of net interest expense that can be deducted to 30 percent of a business’ earnings before interest, tax, depreciation, and amortisation (EBITDA), as adjusted for CT purposes.

 

Businesses may be allowed to deduct up to a certain amount of net interest expenditure (safe harbour or de minimis amount) irrespective of the interest deductibility limit based on the EBITDA rule. The interest capping rules will not apply to banks, insurance businesses, and certain other regulated financial services entities. Additionally, the interest capping rules will also not apply to businesses carried on by natural persons.

 

3.8 Non-deductible expenses

Businesses will be allowed to deduct up to 50 percent of expenditure incurred to entertain customers, shareholders, suppliers and other business partners, to acknowledge that these types of expenses often also have non-business or personal element.

 

3.9 Losses

A fundamental principle behind the CT regime is that CT is meant to be paid on the total profit of a business over its entire life cycle, as opposed to a single financial period. A business will be able to offset a loss incurred in one period against the taxable income of future periods, up to a maximum of 75 percent of the taxable income in each of those future periods. Tax losses can be carried forward indefinitely provided the same shareholder(s) hold at least 50 percent of the share capital from the start of the period a loss is incurred to the end of the period in which a loss is offset against taxable income. If there is a change in ownership of more than 50 percent, tax losses may still be carried forward provided the same or similar business is carried on by the new owners. No tax loss relief will be available for the following losses:

 

  • losses incurred before the effective date of CT;
  • losses incurred before a person becomes a taxpayer for CT purposes;
  • losses incurred from activities or assets which generate income that is exempt from CT; or
  • losses incurred by a Free Zone Person that are not attributable to a PE in the mainland.

 

4. GROUPS

Large businesses often conduct their operations through a group of companies, which has a parent company and a number of subsidiaries. The CT regime will allow full consolidation for tax purposes (tax grouping) for essentially wholly-owned groups of companies, and the transfer of losses between group companies that are 75 percent or more commonly owned.

 

4.1 Tax groups

A UAE resident group of companies can elect to form a tax group and be treated as a single taxable person if the parent company holds at least 95 percent of the share capital and voting rights of its subsidiaries.

 

4.2 Intra-group transfer of assets and liabilities

Intra-group transfer relief will be available for transfers of assets and liabilities between UAE resident companies that are at least 75 percent commonly owned, provided the assets and/or liabilities being transferred remain within the same group for a minimum of three years. Where intra-group relief is claimed, the relevant assets and liabilities will be treated as being transferred at their tax net book value, so that neither a gain nor a loss needs to be taken into account when calculating the taxable income of the transferor and the transferee company.

 

4.3 Restructuring relief

To facilitate mergers, spin-offs and other corporate restructuring transactions, the CT regime will exempt or allow for a deferral of taxation where a whole business, or independent parts of a business, are transferred in exchange for shares or other ownership interests.

 

  1. TRANSFER PRICING

This section sets out the proposed treatment under the CT regime of transactions between related parties. The CT regime will have transfer pricing rules to ensure that the price of a transaction is not influenced by the relationship between the parties involved. In order to achieve this outcome, the UAE will apply the internationally recognised “arm’s length” principle to transactions and arrangements between related parties and with connected persons.

 

5.1 Arm’s length principle

All related party transactions and transactions with connected persons will need to comply with transfer pricing rules and the arm’s length principle as set out in the OECD Transfer Pricing Guidelines.

In order for a transaction or arrangement between related parties or with a connected person to meet the arm’s length standard, the results of the transaction or arrangement must be consistent with what the results would have been if they had been between parties that are not related to each other.

 

  1. CALCULATION OF CT LIABILITY

6.1 Applicable CT rates

CT will be charged on the annual taxable income of a business as follows:

 

  • zero percent for taxable income not exceeding AED 375,000; and
  • nine percent, for taxable income exceeding AED 375,000.

 

6.2 Withholding tax

Given the position of the UAE as a global financial centre and an international business hub, a zero per cent withholding tax will apply on domestic and cross-border payments made by UAE businesses.

 

6.3 Tax Credits

To avoid double taxation, the CT regime will allow a credit for the tax paid in a foreign jurisdiction against the CT liability on the foreign sourced income that has not been otherwise exempted. This is known as “Foreign Tax Credit”.

 

The maximum Foreign Tax Credit available will be the lesser of:

  • the amount of tax that was paid in the foreign jurisdiction; or
  • the CT payable on the foreign sourced income.

 

  1. ADMINISTRATION

7.1 Registration and deregistration

A business subject to CT will need to register with the FTA and obtain a Tax Registration Number within a prescribed period. Where a business ceases to be subject to the CT (e.g., due to cessation or liquidation of the business), it will need to apply to the FTA to be deregistered for CT purposes within three months from the date of cessation.

 

7.2 Filing, payment and refund

A business will only need to prepare and file one tax return and other related supporting schedules with the FTA for each tax period. Each tax return and related supporting schedules will need to be submitted to the FTA within nine months of the end of the relevant Tax Period. Payments to settle a taxpayer’s CT liability for a Tax Period will need to be made within nine months of the end of the relevant Tax Period. Where a taxpayer can demonstrate that a CT refund may be due, the taxpayer can apply to the FTA to request a refund.

 

7.3 Assessment

The FTA may review a CT return filed and may issue an assessment within the timeframe prescribed in the Tax Procedures Law. A taxpayer may challenge an amended assessment issued by the FTA via the processes and procedures outlined in the Tax Procedures Law. ■

Dubai Development Authority – Filing of audited financial statements

All entities (free zone limited liability companies and branch offices) registered under the jurisdiction of Dubai Development Authority (DDA) are required to file their most recent audited financial statements along with a summary sheet (to be generated through their AXS portal account) on or before 31 October 2022. Entities are required to make these filings through their respective AXS portal accounts.

 

The following notification can be seen on the AXS portal accounts of entities:[1]

 

“In compliance with the Private Companies Regulations of 2016, FZLLCs and branch offices are required to submit their most recent Audited Financial Statement along with the summary sheet (as per the DDA template) by or before 31st October 2022.”

 

Free zone limited liability companies incorporated under the jurisdiction of the DDA are required to maintain audited financial statements. As per our discussions with DDA representatives, branches of foreign companies may not be required to maintain separate audited financial statements if the accounts of such branches have been included in their parent companies’ audited financial statements.

 

As per the Private Companies Regulations of 2016, free zone limited liability companies were always required to file, with the DDA Registrar of Companies, audited financial statements. Branches of foreign companies were required to file annual returns which were filed in the jurisdiction of incorporation of the parent companies. The DDA, however, has only recently started to enforce these requirements.

 

Certain free zones of the UAE such as Jebel Ali Free Zone and Dubai Multi Commodities Centre already require entities established in such free zones to file their audited financial statements.

 

With the introduction of corporate tax and other laws to closely monitor the activities of entities established in the UAE, it is likely that other free zones in the UAE as well as UAE mainland licensing authorities will start requiring the filing of audited financial statements on an annual basis. ■

 

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[1] We expect the DDA to circulate guidance/clarification on the requirements and/or changes to the deadlines in coming weeks. The DDA may send specific notification to entities depending on their financial year end.

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.

 

 

 

Tax-Driven Changes in Residency for Canadians

For those with sufficient assets, tax-driven relocations and changes in residency have become commonplace.  They began to occur in earnest in the 1990s and have increased in popularity ever since.  In the past 1-2 years in particular, the popularity of residency changes for tax reasons has seen a marked rise.  This has been driven by several factors, which include:  the steady reduction in other viable international tax planning strategies as the OECD continues to press aggressive reform, more mobile lifestyles brought about by COVID-19, and the expectation of an increased tax burden especially for the wealthy (also brought about by COVID-19, at least in part).  In short, more people have begun to enjoy more mobility, and the comparative tax advantages of relocating have never been greater.   As we have stated in prior inBriefs, for Canadians, changing their country of tax residency is almost certainly going to be the single most effective tax planning strategy they can adopt, with both immediate and long-term benefits.

 

The opportunity to attract such mobile, wealthy people is also very appealing to potential recipient countries, who stand to gain economically from an influx of wealthy immigrants.  Competition for economically beneficial immigrants is high.  Many countries have established residency programs and tax incentives specifically intended to attract economic immigrants.  Some of the most popular destinations in recent years have included the UAE, Portugal, Greece and Italy, among many others including some Caribbean nations.  The models adopted by these countries typically require the applicant to make an investment in the country, often in real estate, in exchange for medium- or long-term residency (and sometimes a path to citizenship over time), and access to a favourable tax regime.  The amount of the investment varies greatly from country to country (from EUR 200,000 to EUR 3,000,000).[1]  The favourable tax regime will be one of two models: the   requirement    for   an   annual   lump-sum   payment   of   tax irrespective of actual income each year (e.g., Italy, Switzerland), or, access to a low or no tax environment without the lump-sum in exchange for having made an initial investment (e.g., Portugal, Greece, UAE).

 

Deciding where to seek your new residency can be complex and should take into account many factors, not only taxation.  There are publicly available resources which help you to evaluate potential destination countries according, breaking down some of the more relevant factors on a country-by-country basis, and even offering rankings of countries by popularity for their tax residency offerings.[2]

 

The conditions of residency and favourable tax treatment usually do not require significant “days in country”, so extensive travel is permitted, but you would need to avoid spending so many days in another country that you are deemed tax resident there as well.  The residency status granted normally gives you and your family the ability to live, study, and work in the destination country (and, for EU destinations, these rights would apply anywhere in the Schengen region).

 

From a tax planning perspective, it is crucial to carefully evaluate your assets and your expected sources of income before settling on a destination for tax residency, and to obtain professional advice as to how your specific assets and income will be taxed there.  There are always exceptions to the favourable tax treatment offered by each jurisdiction.  For instance, some may provide that only passive income from foreign sources will enjoy low/no tax, and only if there is a double taxation treaty in place with the foreign source country (in which case, income from assets located in offshore jurisdictions may not qualify, nor income you generate if you are working in your new country of residence).  Also, assets located in the country you are moving away from may continue to impose tax on income and gains on those assets, despite your non-residency.

 

As such, the change of residency journey will almost always include a restructuring of your assets, and planning your sources of income, in order to achieve the desired tax-efficient result.  As part of the planning, it can often be helpful to make use of trusts in low/no tax jurisdictions as a vehicle in which to hold appreciating or income-producing investments.  Distributions from trusts can generally be structured in a manner which attracts little or no tax, depending on whether the distribution is out of trust income or trust capital.  International planning using trusts can be complex and requires cooperation among advisors in your new country of residence, your country of origin, the country in which the trust is established, and every country in which there is a beneficiary of the trust.  Trust distributions to a beneficiary will be treated differently depending on where each beneficiary resides.  However, despite some complexity in the planning phase, trusts remain by far the most popular wealth planning vehicle for good reason, as the benefits of their use can be significant.  For example:

 

– Tax efficient distributions: payments from a trust to its beneficiaries can be managed so as to attract less overall taxation, or no taxation, if the trust has been planned and structured properly.  This can include tax-free distributions to Canadian resident beneficiaries, if properly planned.

 

– Wealth accumulation: trusts in low/no tax jurisdictions often have very long lifespans, or are permitted to exist indefinitely.  As such, they can accumulate investment gains with little or no tax over a long period, and can effectively preserve and grow capital. As such, capital can effectively be sheltered in the offshore trust indefinitely, with distributions made to beneficiaries as and when desired so that only those distributions are subject to tax when received (assuming the recipient is subject to tax).

 

– Transition of wealth: for the above reasons, it is often very advantageous to structure an inheritance through an offshore trust, where the capital can be better preserved, grown and distributed much more efficiently than if the inheritance were given directly to beneficiaries.

 

– Creditor protection: trusts have long been a popular vehicle for asset protection.  Since the trust legally owns the assets, the settlor’s creditors cannot seize them (subject to some exceptions where there are concerns around defrauding creditors).  And, since beneficiaries usually only have discretionary interests which are not vested, the creditors of the beneficiaries have nothing to seize either.  Trusts are also a useful tool to keep wealth outside of the net of “family property” or similar definitions which determine what a spouse is entitled to upon separation, divorce or death.

 

– Flexibility and control: trusts are flexible enough to allow you to transfer legal title to assets and grant beneficiaries economic benefits to or from the assets, without transferring control over the assets.  This flexibility to retain control can be useful for many reasons, including in situations where beneficiaries may not be ready to responsibly manage the assets, or, in the context of a family business, where you may not yet know which child or children will be involved in the business upon succession.  Often of most interest to settlors is the ability to continue to control the management of the trust’s investments, rather than handing over control to a trustee and institutional investment manager.

 

– Estate planning benefits: trusts have a great many benefits in the context of an estate plan, including all of those noted above in this list, along with additional benefits such as the ability to place trust assets outside of the scope of a forced heirship regime, and the fact that trust assets will not be made subject to probate and estate administration procedures which are complex, time-consuming and sometimes expensive.

 

Once you have selected a destination and have considered how to structure your assets and income in order to achieve a tax-efficient result, you may also need to carefully plan your emigration from your current place of residency. For Canadian residents, there are tax consequences of ceasing to be a resident and there may be planning opportunities to reduce the impact upon your exit.  Advance planning is especially important if you own shares in one or more private companies.

 

In light of the above, it is important that you select an experienced advisor who not only has local expertise along with an international network and capabilities, but who can also mobilize other professionals in your country and your new country of residence (and a suitable trust jurisdiction) in order to provide you with cohesive and complete advice.  It is typical to require legal counsel and tax accountants in at least two countries, along with valuation experts and professional trustees, in order to provide complete advice on a tax-driven relocation.

 

If you would like to explore a change in residency and the potential tax advantages, please do not hesitate to contact us. ■

 

[See also our earlier inBrief dated 4 October 2021, “Planning for Non-residency – Doing it Right”]

 

[1] There are other paths to residency aside from investment in some countries, such as through employment or establishing a business.  In the UAE, for example, you may establish a company for significantly less cost than the cost of investing in real estate, and arrange for the company to sponsor your UAE residency.

[2] For example, see the popular Henley & Partners indices and reports which rank investment immigration programs, and perceived quality of different residencies and citizenships:  https://www.henleyglobal.com/publications

The Inward Investment and International Taxation Review: Edition 12

This volume will prove to be a useful guide to the tax rules in the jurisdictions where clients conduct their businesses. This chapter provides topical and current insights on the tax issues and opportunities in the UAE. While specific tax advice is always essential, it is also necessary to have a broad understanding of the nature of the potential issues and advantages that lie ahead; this book provides a guide to these.

A Matter of Some Discretion: Controlling your Trust

Two common reasons for the use of trusts in estate planning are to achieve tax efficiencies and to protect assets from potential creditors and claims.  These are by no means the only reasons that trusts are utilized, but they are important benefits and are sometimes the primary focus of trust structure.  Generally speaking, trusts that provide tax and asset protection benefits need to be structured so as to grant the trustees very wide discretion as to when distributions are to be made, to which beneficiaries, in what amounts, and in which circumstances.  The language used in trust deeds usually gives trustees “absolute discretion” or “unfettered discretion” or similar.  Consider the following two examples of why discretion is important:

 

Example A (tax efficiency):  If a family trust is established with many family members as potential beneficiaries (e.g., “all of my issue”, which would include children, grandchildren, and you may include corporations owned by them, etc.), one of the goals of the trust is probably to take advantage of income splitting opportunities among the beneficiaries.  The trustee needs to be able to assess the individual tax brackets of the beneficiaries so they can “income sprinkle” across the beneficiaries in a tax efficient manner.  If the beneficiaries had fixed entitlements to a specified proportion of trust income or capital, the trustees could not achieve a tax efficient result.  Thus, discretion is needed.

 

Example B (asset protection):  Consider the same example again, but this time one of the beneficiaries has been successfully sued and his/her assets are subject to attachment by the judgment creditor.  If the beneficiary has a fixed entitlement under the terms of the trust, the creditors will be able to attach that interest as well and that beneficiary’s interest is effectively lost.  If the beneficiary’s entitlements are entirely subject to the trustee’s discretion, then the beneficiary has no vested interest at all unless and until the trustee declares each new distribution.  The trustee can confirm before making a distribution whether any beneficiary is subject to creditor claims, and if so, it can exercise its discretion in favour of another beneficiary (or none at all), until the claims are dealt with, keeping the trust assets out of the creditor’s hands.  Accordingly, discretion is again an essential component.[1]

 

With the necessity for a trustee to be granted such broad discretion, the question is often asked:  how do you know the trustee is going to exercise its discretion in the manner you would have intended?  There are essentially three approaches available:  include terms in the trust instrument itself, issue a letter of wishes, and/or the appointment of trust “protectors”.  We will briefly discuss each in turn.

 

(i) Terms of the Trust Deed

 

Some terms can be included in the trust deed itself without unduly constraining the trustee’s discretion.  These may include directions to the trustee not to make distributions to beneficiaries whose assets are subject to attachment; or a term which excludes the trust property from any beneficiary’s net family property to help protect it from being included in equalization payments upon marriage breakdown; or even a direction that requires certain minimum payments or expenses to be paid out of the trust so that the broad discretion only applies to the funds remaining after that.  A trust deed is a very flexible instrument and can be prepared with as many, or as few, specific constraints on a trustee as desired.  However, for the most part, if tax and asset protection benefits are to be maintained, the hard constraints need to be kept to a minimum.  It is more common to do the opposite; that is, explicitly oust duties that trustees would otherwise have as a matter of law that would potentially constrain them.

 

(ii) Letter of Wishes

 

A letter of wishes is separate from the trust deed and is just what its name suggests:  a letter from the settlor to the trustee setting out guidance for the trustee as to how the settlor wishes the trustee to exercise its discretion.  The trustee is not legally bound by the letter of wishes, but in practice trustees do give effect to them, and if a beneficiary challenges the trustee’s choices a court will take letters of wishes into account as relevant context.  Letters of wishes are sometimes very brief and provide simply that the trustees should take into account the views of another person when exercising their discretion (and that person is sometimes the settlor).  This is a potentially acceptable approach in the short term, but it has its drawbacks:  a court may find that the settlor is the person who is “in fact” making trust decisions as a de facto trustee, a finding that would almost certainly have detrimental consequences for any plan for which the trust was needed; and, upon the settlor’s death (or to whomever the letter of wishes referred), the settlor obviously then loses whatever influence he/she had.  Thoughtful, detailed, foresightful letters of wishes are strongly recommended.  Note that the trust deed should oust any default duties that trustees must comply with as a matter of law which may prevent compliance with a letter of wishes (the obligation to treat all beneficiaries equally, for example, should be ousted in the trust deed, along with others).

 

(iii) Appointing a Protector

 

Finally, there is the role of the trust “protector”.  A protector is someone (or multiple persons) who is granted a number of key powers in the trust deed, but who is not a trustee and, typically, has no fiduciary duties to beneficiaries.[2] They are supposed to provide oversight of trust administration and decision making from the perspective of someone close to the settlor who presumably knows what the settlor would have wanted.  Protectors are often granted powers to approve certain decisions of the trustees, to veto certain decisions, to remove and replace the trustee, or to terminate the trust, among other key powers.  The protector provides a significant check on trustee discretion.  The choice of protector is therefore important:  not only should the protector be someone close to you and who understands your wishes, they should be trustworthy and reliable, and without a conflict of interest (e.g., a beneficiary, or a spouse of a beneficiary).  Care must be taken so as not to usurp the role of the trustees altogether, either in the trust deed or in practice, or there will be a risk that the protector will be found to be the de facto trustee, with potentially disastrous consequences.[3]

 

In addition to the above, where a trust is created as part of a plan intended to have specific tax consequences, it is common for trustees to obtain professional advice before making a distribution, to ensure that it is being made in a manner that will not upset the plan.  This is not a limit on the discretion of the trustees, per se, but it does function as one.  Sometimes, detailed tax-driven instructions are provided to the trustees by professional legal advisors when the trust is created, setting out guidelines for how distributions are to be made, when, and also to whom they must not be made.  Such advice has similar status to a letter of wishes, but is arguably even more likely to be adhered to as the trustees will not wish to be responsible for triggering negative tax consequences in the face of having received such advice.

 

The above tools to control the discretion of a trustee are very useful, but they still leave some discretion to the trustee, which is unavoidable if the structure is to be robust enough to withstand a challenge by tax authorities or disgruntled beneficiaries.[4]  On a practical level, these tools are quite effective as professional trustees are motivated to serve their clients (i.e., settlors) as best they can, and to avoid litigation that may arise from ignoring letters of wishes, or professional advice, or contravening a protector’s decision. ■

 

[1] For asset protection trusts, note that it is important that the beneficiary whose interest is being protected is not also the sole trustee (or ideally even one of multiple trustees), as a court may order the beneficiary/trustee to exercise its control over the trust to satisfy the creditor’s claim.  The beneficiary must not have any control over trust decisions.

[2] The issue of whether a protector does have, or should have, fiduciary obligations to beneficiaries similar to the obligations of trustees is an unresolved issue in Canadian law.  Care should be taken to specify the settlor’s intent in the trust deed as to the duties expected of a protector.

[3] Garron Family Trust v. Her Majesty the Queen (2012 SCC 14) is the leading case in Canada on trust residency.  In that case, the courts “looked through” the exercise of powers by a protector, where the protector was in turn subject to replacement by the beneficiaries, and this was one of the reasons that court found that the beneficiaries were effectively functioning as the trust decision makers, with negative consequences for the trust in that case.

[4] This note focussed on trustee discretion with respect to distributions of trust income and capital.  It is important to bear in mind that a trustee’s discretion with respect to managing the trust’s investments can be controlled as well, to a greater degree of certainty and detail than controlling discretion as to distributions.

 

 

Introduction of Federal Corporate Tax in the UAE

The UAE Ministry of Finance announced on 31 January 2022 the introduction of Corporate Tax (CT) commencing from June 2023. In the latest UAE initiative to diversify government income, UAE CT will build upon the tax infrastructure established following the introduction of a Value Added Tax regime in 2018.

 

UAE CT is a Federal tax and will therefore apply across all Emirates, with the Federal Tax Authority responsible for administration and compliance of the UAE CT regime.

 

One CT return will need to be filed per financial period (generally 1 year) electronically. There will be no provisional or advance CT filings, nor any requirement to make advance UAE CT payments (i.e., no tax installment regime).

 

Many details pertaining to the UAE CT regime remain unknown at this time, and once promulgated, the UAE CT Law will provide the operational detail and guidance required.

 

How much?

Taxable income will be the accounting net profit of a business, after making adjustments for certain items to be specified under the UAE CT Law. The accounting net profit of a business will be the amount reported in the financial statements in accordance with internationally acceptable accounting standards.

 

The CT rates to be levied are:

 

  • Zero per cent for taxable income up to AED 375,000;
  • Nine per cent for taxable income above AED 375,000; and
  • A different tax rate for large multinationals that meet specific criteria set with reference to “Pillar Two” of the OECD Base Erosion and Profit Shifting project.

 

A multinational is defined as a corporation that operates in its home country, as well in other countries through a foreign subsidiary, branch or other form of presence or registration.

 

The UAE CT regime will allow a business to use losses incurred (as from the UAE CT effective date) to offset taxable income in subsequent financial periods, provided certain conditions are met.

 

When?

The UAE CT will commence for financial years starting on or after 1 June 2023.

 

For example:

 

  • If your business has a financial year starting on 1 July 2023 and ending on 30 June 2024, your business will become subject to UAE CT from 1 July 2023.
  • If your business has a financial year starting on 1 January 2023 and ending on 31 December 2023, your business will become subject to UAE CT from 1 January 2024 (which is the beginning of the first financial year that starts on or after 1 June 2023).

 

More information on the registration process and ongoing compliance obligations for businesses will be provided in the future.

 

Who?

UAE CT will apply to businesses that operate as corporate entities or as sole proprietorships. It will apply to UAE and non-UAE businesses.

 

All activities undertaken by a legal entity will be deemed “business activities” and hence be within the scope of UAE CT.

 

Dividends and capital gains earned by a UAE business from its qualifying shareholdings will be exempt from UAE CT. A qualifying shareholding refers to an ownership interest in a UAE or foreign company that meets certain conditions to be specified in the UAE CT law.

 

Certain qualifying intra-group transactions and corporate reorganisations will not be subject to UAE CT provided the necessary conditions are met.

 

As provided for by the UAE VAT regime, a UAE group of companies can elect to form a tax group and be treated as a single taxable person, provided certain conditions are met. Tax losses from one intra-group company may be used to offset taxable income of another intra-group company provided certain conditions are met.

 

A UAE tax group will be required to file only a single tax return for the entire group.

 

Businesses engaged in the extraction of natural resources will remain subject to Emirates level corporate taxation and be outside the scope of UAE CT.

 

Individuals deriving business income under (or being required to obtain) commercial licenses (e.g., sole proprietors and freelancers) will be within the scope of UAE CT.

 

An individual’s personal exertion income (i.e., salary) along with dividends, capital gains, investments in real estate and bank interest derived in a personal capacity should not be subject to UAE CT.

 

Free Zones

Free zone businesses will be subject to UAE CT, but the UAE CT regime will continue to honour the CT incentives currently being offered to free zone businesses that comply with all regulatory requirements and that do not conduct business with mainland UAE.

 

A business established in a free zone will be required to register and file a CT return. The UAE CT treatment that will apply to businesses in free zones will be the same across all free zones (i.e., no difference between financial and non-financial free zones).

 

Further details on the compliance obligations of free zone businesses will be provided in the future.

 

International Aspects

Foreign entities and individuals will be subject to UAE CT only if they conduct a trade or business in the UAE in an ongoing or regular manner. UAE CT will generally not be levied on a foreign investor’s income from dividends, capital gains, interest, royalties and other investment returns.

 

Foreign CT paid on UAE taxable income will be allowed as a tax credit against the UAE CT liability. The Ministry of Finance will remain the “competent authority” for purposes of bilateral/multinational agreements and the international exchange of information for tax purposes.

 

Finally, UAE businesses will need to comply with transfer pricing rules and documentation requirements set with reference to the OECD Transfer Pricing Guidelines. ■