Tag: Tax

Planning for Non-Residency: Doing it Right

Where you choose to be resident is obviously driven by more than just the tax consequences, but for many people tax is a major factor in that decision.  Canada, like most other countries, taxes on the basis of residency.  If you are a Canadian “resident” for tax purposes, you pay Canadian income tax on your worldwide income, and you have broad reporting obligations to the Canada Revenue Agency (CRA) on your foreign interests.  There are many ways for a Canadian resident to optimize their tax position both in life and upon death, but none are quite as effective as becoming non-resident. When you are non-resident, you are not subject to Canadian income tax (with some exceptions regarding Canadian source income) and this article aims to provide a general overview of what you should consider when planning for non-residency.[1]

 

First, be sure you really do cease being resident for tax purposes.  Canada’s definition of “residency” relies on assessing your life as a whole and identifying the number and importance of so-called “connecting factors” that you have in Canada.  This is a widely written about issue and will not be discussed in any detail here, other than to remind you to make sure you really do break ties with Canada sufficiently to ensure you are indeed a non-resident.[2]  Next, and a point that seems to be strangely overlooked more often than one might think, is that you also need to clearly obtain and keep residency status somewhere else, otherwise the CRA will not agree that you have sufficiently severed your residential ties to Canada.  Living a mobile lifestyle where you spend a few months here and a few months there without putting down roots anywhere, may not be enough to cut ties in the CRA’s view.

 

You should also be aware that you will trigger a taxable event upon your exit from Canada.  You are deemed to have disposed of many of your capital assets and realised any latent gain (or loss) on them, and you will be taxed on the gain, and this includes assets worldwide (and virtual assets like cryptocurrencies). There are important exclusions to the assets that are deemed disposed of, including Canadian real estate[1], RRSPs (Registered Retirement Savings Plan) and TFSAs (Tax-Free Savings Plan), and life insurance policies, among other things.  Importantly, the CRA expects you to have obtained valuations of your assets at or around the date of your exit to support the values you report, and that there will be a cost to having such valuations carried out, so be sure to plan for this.

 

Once you have successfully become a non-resident of Canada, and become a resident of another country, are you safely outside of the reach of the CRA?  In many important ways the answer is yes, but a non-resident remains taxable on certain income and property.  Summarised here are some important points to bear in mind as a new or prospective non-resident.

 

  • RRSPs: Nothing happens to your RRSP account(s) when you cease to be resident in Canada.  In your year of exit, you can still contribute to the account to the full extent of your eligibility for that year (although it might be low if you leave early in the year).  The funds in your RRSP are sheltered from Canadian tax while they remain in the RRSP, but this may not be the case in your new country of residence, which may view it simply as any other investment account and may tax it accordingly.[2]  You can withdraw some or all of the funds in an RRSP that you had accumulated prior to your exit.  As a non-resident, these withdrawals will be subject to the non-resident withholding tax of 25 per cent, but that is a much lower rate than the graduated rate you would otherwise have been subject to had you withdrawn the funds whilst being a Canadian resident (unless you withdrew the funds during a very low-income year).  Once the funds are out, you are free to use or invest them and you will not be subject to Canadian tax on the proceeds of such investments going forward.  Withdrawal is not always the best option though, as you may wish to simply keep the funds sheltered in the RRSP for a time in the distant future, or to keep as part of your estate and pass on to a spouse on a rollover basis, for example.

 

  • TFSAs: Similar to RRSPs, nothing happens to these upon exit and such accounts remain sheltered from Canadian tax, including upon withdrawal (no non-resident withholding tax either).  Additionally, like RRSPs, note that other countries may simply view these as regular investment accounts and tax them accordingly to their regular rules of taxation.  The same advice therefore applies regarding crystallization of latent gains that may be unrealised, prior to exit.

 

  • Real estate: If you continue to own real estate in Canada as a non-resident, you are probably leasing it out (if it is residential, you should absolutely be leasing it out on arm’s length terms or your non-resident status will be in jeopardy).  Rental income from a Canadian property is Canadian source of income and will be subject to non-resident withholding tax, and may also be subject to preferential treatment under a bilateral tax treaty, if applicable.  Canadian source income, whether from real estate, business, investments or otherwise, will result in the requirement to continue to file returns with the CRA.

 

  • Investments: Dividends you receive from Canadian sources are subject to non-resident withholding tax, which may be reduced by an applicable treaty.  Interest (assuming it is from an arm’s length party), is not subject to Canadian tax when paid to a non-resident (not the case if the source is not an arm’s length party).  These income sources also give rise to Canadian filing requirements, even if no tax is actually payable.

 

  • Foreign trusts: It may occur to you that setting up an offshore trust is attractive now that you are no longer a tax resident of Canada. It may well be that there are excellent opportunities available to you since you will be clear of many of Canada’s aggressive reporting and attribution rules that apply to trusts, but, as with most dealings with trusts, professional advice is critical.  Canada’s deemed residency rules as they relate to foreign trusts can catch many people off guard.  If you establish a trust within 5 years of your departure from Canada, for example, and there are Canadian beneficiaries, that trust will be deemed resident in (i.e., taxable in) Canada even though you established it after you were firmly and clearly non-resident.  There are similar considerations that will apply to the years prior to your return to Canada too, so good planning from the outset will be critical to ensure you do not inadvertently lose out on some of the tax advantages of non-residency.  Things to consider are the timing of the trusts’ establishment, how to structure the initial settlement and future contributions, who will make those contributions, who the beneficiaries will be, whether that will change in the future, and when they will actually receive any funds from the trust and under what conditions (e.g., only if and when they cease to be Canadian resident?), among other things.  These decisions will also affect what information the trustee is obligated to keep on file, and may be obligated to report, so bear that in mind if you have privacy concerns.

 

  • Wills and POAs: Any wills, powers of attorney, and other estate planning you may have done prior to your exit should be re-assessed in light of your new residency situation, which likely came with a shift in at least some of your assets, and likely more of a shift the longer you remain non-resident.  Multiple wills are common among the expatriate community; one (or more) for assets in Canada, and another for assets in your new country of residence, and perhaps more for certain assets elsewhere such as real estate or bank accounts you may own in yet a third country.  A local will in each jurisdiction can dramatically ease the estate administration process; it avoids the need to seek resealing of foreign probate, or equivalent, in each jurisdiction, a cumbersome and often non-transparent process.  Multiple will preparation requires careful drafting to ensure the documents work seamlessly together and do not conflict, and, of course, to ensure they meet the requirements of the jurisdiction in which each is intended to operate.  Similarly, any POAs you may wish to have in place in the event of your incapacity will need to be prepared (or re-prepared) in your new place of residence to ensure they are effective there.

 

Determining how to break residential ties with Canada (and not accidentally re-establishing them), reporting to the CRA in an effective manner on exit, structuring your assets while non-resident in the context of a broader wealth and estate plan, and knowing your continuing Canadian tax or reporting obligations even as a non-resident, are all key areas to consider in order to ensure your non-residency is both compliant and tax efficient.  The issues discussed in this article are only examples intended to provide a general overview of some of the common considerations, but there are often many other factors to consider depending on your specific circumstances, assets, plans, and risk tolerance.

 

If you are considering non-residency status in Canada and want to make sure you get the most out of your years abroad or are otherwise concerned about the tax implications of the move, please contact us and we will be delighted to provide the guidance you need. ■

 

 

[1] As a quick aside, note that Canadian citizenship is not the same as residency; a Canadian citizen can become non-resident forever and still retain citizenship.

 

[2] Consider obtaining a copy of the CRA’s form NR73, which includes a list of questions about your ties to Canada.  If you answer yes to 5 or more questions, you may need to break more ties or seek advice for more guidance.  Refer to the NR73 for your own reference only, but I do not suggest filing one.  Filing your “final tax return” is generally sufficient and the preferred approach.

 

[3] Note that a “principal residence” undergoes a “change of use” rather than a deemed disposition, although the effect is similar in that there is a deemed realization of the latent gain, but the principal residence exemption can still apply to shelter the full amount (assuming the property is otherwise eligible for the principal residence exemption for all the years the property was owned).

 

[4] Consider crystallizing any latent gains within the RRSP account prior to exit, for this reason (i.e., to minimize capital gains that may be realized as a non-resident when they are no longer sheltered).  Unless of course your new place of residence is a very low or no tax jurisdiction.

UAE FDI: the doors are open to foreign investors but what are the practical considerations?

As most readers will now know either via the press or through other legal publications, the requirement for a limited liability company (LLC) to have at least 51 per cent UAE national ownership was removed on 30 March 2021 pursuant to Federal Decree-Law 26 of 2020 (Decree Law).

 

Under the Decree Law, local licensing authorities (i.e., the relevant economic departments) of each Emirate were granted the authority to determine a list of activities for which up to 100 per cent foreign ownership is permitted (FDI Activities).

 

The Department of Economic Development in Abu Dhabi and the Dubai Department of Economic Development have already published their list of FDI Activities. We understand that the Department of Economic Development in Sharjah will publish its list imminently.

 

No conditions/restrictions on 100 per cent foreign owned LLCs?

What has changed since September 2018 when Federal Decree-Law 19 of 2018 regarding Foreign Direct Investment (the 2018 FDI Law) was enacted?

 

Pursuant to the 2018 FDI Law, Cabinet Resolution 16 of 2020 was issued which contained a positive list of 122 activities wherein a 100 per cent foreign owned company could be established with certain conditions and/or restrictions. The key conditions and/or restrictions were the requirement to have a specified minimum share capital and a minimum level of Emiratisation of the workforce (to be determined by the Ministry of Human Resources and Emiratisation).

 

The 2018 FDI Law was repealed with effect from 2 January 2021.

 

While the 2018 FDI Law did impose some conditions/restrictions on 100 per cent foreign owned companies, as of now, no special conditions/ restrictions have been imposed by the Economic Departments of Abu Dhabi and Dubai.

 

Other Considerations

While a 100 per cent foreign owned LLC in mainland UAE is an attractive option, there are various other matters to be considered before deciding on an ownership structure for an LLC.

 

1. GCC Customs Exemptions

Goods manufactured in the UAE by 100 per cent foreign owned LLCs under the current customs regime, will not be able to avail the benefit of the 5 per cent GCC customs duty exemption offered to entities which are owned at least 51 per cent by GCC nationals. Exports by a 100 per cent foreign owned company, would not be eligible for national treatment when exported to another GCC member state.

 

2. Tax holiday offered by free zones

Most free zones in the UAE offer a guaranteed tax holiday. For example, the Dubai Airport Free Zone offers a 50-year exemption from all tax (including income tax).

 

If an investor can conduct its business from one of the free zones of the UAE, even if a 100 per cent foreign owned company can be established in mainland Dubai or Abu Dhabi, such an investor may still wish to establish within a free zone in order to benefit from the guaranteed tax exemption.

 

Restructuring of existing LLCs

In addition to the issues raised above, the following points should also be kept in mind while restructuring ownership of existing LLCs:

 

 1. Arrangements with local partners

The terms of any existing arrangements with local partners should be reviewed in advance of triggering any proposed restructuring to ensure that the arrangements permit the foreign partner to request the transfer of the interest in the LLC held by the local partner.

 

2. A UAE LLC with branches in other Emirates

To the extent that there are variances among the Emirates in relation to the permitted FDI Activities, it will be interesting to see if a wholly foreign owned LLC will be permitted to register a branch in a different Emirate even if that Emirate does not have the LLC’s licensed activity on its list of permitted FDI Activities.

 

3. Name of the LLC

If the shares of an LLC are being transferred so that the LLC becomes a 100 per cent owned subsidiary of a foreign investor, note that as per Article 72 of the Companies Law, the name of the LLC will be required to be amended to reflect that the LLC is a single shareholder company. The phrase (One Person Company) must also be added to the LLC’s name. The implications of this change of name on the business operations of the LLC should be considered in advance of any restructuring. It is also worth noting, that under the Decree-Law, it is expected that the Cabinet will issue a Decision determining the procedures for the management of single shareholder LLCs. Once this decision is issued, foreign investors will be required to consider the effects of the decision on the running of their business.

 

Whilst the issues discussed in this inBrief are not an exhaustive list of matters to be considered, before incorporating a 100 per cent foreign-owned LLC or restructuring an existing LLC, they represent some useful and important considerations. For each type of business, careful analysis and planning will be required to determine the most suitable structuring option(s). ■

 

Afridi & Angell’s corporate department has extensive experience in advising on foreign direct investment and corporate restructuring matters. Should you have any questions, please contact the authors or your usual Afridi & Angell contact.

UAE Economic Substance Requirements – Penalties Imposed by the Federal Tax Authority

The Federal Tax Authority (the FTA) has started to impose penalties on businesses 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.

 

Pursuant to the Cabinet of Ministers Resolution 57 of 2020 concerning the Economic Substance Requirements (Decision), the FTA has imposed a penalty of AED 20,000 on a licensee who has failed to submit the notification and an amount of AED 50,000 on a licensee who has failed to submit the economic substance report. The Decision empowers the FTA to impose certain other types of penalties on licensees.

 

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 30 June 2020, the deadline to file an economic substance report is 30 June 2021, and if the financial year ended on 31 December 2020, the deadline to file a notification is 30 June 2021.

 

The notification and/or the economic substance report is required to be filed by creating an account on the Ministry of Finance website (www.mof.gov.ae/en/StrategicPartnerships/Pages/ESR.aspx). Additional information on Economic Substance Requirements can also be found on the Ministry of Finance website.

Canadian Immigration: The Importance of Tax Planning

For anyone planning to immigrate to Canada, or former Canadian residents preparing to return after a period of non-residency, it is worth taking the time to do some pre-immigration tax planning.  It may well be that the Canadian tax environment is a lot more aggressive than where you’re coming from. If you wait until after you arrive to start arranging your affairs, it will be too late.  Each personal or family situation will be unique and will benefit from bespoke professional advice, but this note will outline a few things that a prospective new/returning Canadian should bear in mind before making their move.

 

Canada imposes tax on the basis of residency, so once you become a Canadian resident you will be subject to Canadian taxation on your worldwide income, including foreign investments, foreign trusts, foreign rental properties, proceeds of the sale of foreign properties, and any other income from any source, anywhere in the world.  Foreign tax credits may apply to reduce your Canadian tax burden to some extent on foreign sources of income to avoid “double” tax on such amounts. The Canada Revenue Agency (CRA) actively investigates foreign income and has information exchange treaties with many other countries (including automatic exchange of information treaties that provide for easy, fast, automated sharing), so your assumption should be that the CRA will be able to find or verify any foreign income you may have. It is your responsibility under Canadian law to voluntarily report it – if the CRA has to seek it out, you will be subject to interest and penalties.

 

Certain income earned before you arrive in Canada, but which you receive after you arrive (i.e., become “resident” in Canada) are taxed in Canada, so make sure you receive as much income as possible prior to your arrival and do not leave amounts accrued and unpaid.

 

The deemed tax cost (i.e., the adjusted cost base) of your capital assets (worldwide) for Canadian tax purposes will be their fair market value as of the date you become a Canadian resident. This is a benefit because when you dispose of any such assets, you pay tax only on the capital appreciation over and above the adjusted cost base of the asset, so the higher it can be, the better. You should obtain third-party valuations of your material capital assets shortly before or after you become a resident and keep this information on file, as you will need it.

 

Consider arranging for the establishment of one or more trusts which can help reduce your Canadian tax burden during life and upon succession. Canadian tax laws apply various so-called attribution rules and deemed residency rules for non-Canadian trusts, which operate to severely restrict offshore planning opportunities. Other rules do the same for corporate entities that hold property for a Canadian resident (attributing passive income directly to the individual shareholder). There is greater opportunity to implement effective structures without falling afoul of these rules prior to becoming a Canadian resident. The same is true of a restructuring of existing trusts, that will become Canadian resident trusts when you move to Canada. The rules are complex and professional advice is necessary before attempting to implement any structures or changes.  The consequences of poor planning can be disastrous from a tax perspective, and such consequences are often avoidable.

 

Note in particular that even some actions taken prior to residency will come under the scrutiny of the CRA.  For instance, if a foreign trust has been settled, or contributed to within the 5-year period prior to Canadian residency, the trust could be deemed to be Canadian resident, including retroactively to the time of the contribution. It depends on who made the contributions and how. For trusts which do become Canadian resident when you do, note that those trusts will be taxable from January 1 of that year (even if you only became resident later in the year). If you can arrange for those trusts to receive payments prior to January 1 of the year you will become a Canadian resident, you should do that (such as paying out dividends to the trust on shares it holds).

 

Where a Canadian resident is a beneficiary of an offshore trust, and if the trust has been established in a manner that successfully avoids application of the Canadian attribution or deemed trust residency rules, it is possible to receive payments from such trusts on a tax-free basis. To achieve this, payments need to be made out of trust capital, not income, but this is not difficult to arrange with trusts that are established in jurisdictions that do not impose income tax on trusts. Such payments still need to be reported to the CRA as income received from a foreign trust on form T1142, but Canadian income tax is not payable on such amounts.

 

Even after Canadian residency is obtained, there remains many very good tax and non-tax reasons to make use of trusts in estate and succession planning, and they remain a central tool to the Canadian wealth planning community. However, there are unique and potentially very beneficial opportunities available to non-residents; be sure to take full advantage of them.

 

Our experienced team members will be pleased to arrange a confidential meeting or call to discuss your situation and goals, and how we can help you protect your wealth. ■

EU Removes UAE from Tax Blacklist

The European Union (EU) has removed the UAE from the EU’s blacklist of non-cooperative jurisdictions for tax purposes.

 

The EU Blacklist

 

The EU maintains a blacklist of non-cooperative jurisdictions for tax purposes. The EU has published criteria on tax transparency, fair taxation and implementation of anti-BEPS measures that EU Member States undertake to promote.1  BEPS refers to domestic tax base erosion and profit shifting due to multinational enterprises exploiting gaps and mismatches between different countries’ tax systems. Under the OECD/G20 Inclusive Framework on BEPS, over 130 countries are collaborating to put an end to tax avoidance strategies that exploit gaps and mismatches in tax rules to avoid paying tax. The EU has been active in trying to combat such tax avoidance not just in the EU itself but internationally and the blacklist is a key pillar of such efforts.

 

Brief History

 

Several jurisdictions that were either on the EU blacklist or at risk of being blacklisted responded by introducing legislation requiring entities established in such jurisdictions to demonstrate economic substance in the jurisdiction of establishment. The UAE had committed to enact legislation of this nature by 31 December 2018 but did not meet this deadline. On 12 March 2019, the EU placed the UAE on the blacklist.

 

In an apparent response to the UAE being blacklisted, the UAE Cabinet issued Cabinet Resolution 31 of 2019 Concerning Economic Substance Regulations (the UAE Economic Substance Regulations or the Regulations) which came into effect on 30 April 2019. On 11 September 2019, pursuant to Article 6(6) of the Regulations, the UAE Ministry of Finance issued Guidance2  on the Regulations.

 

The EU updates the blacklist periodically and on 10 October 2019 an EU press release announced that the UAE has been removed the blacklist.

 

Going Forward

 

The EU Code of Conduct Group monitors compliance with the EU’s criteria so the UAE’s removal from the blacklist is not necessarily the end of the story. A detailed discussion of the UAE Economic Substance Regulations is beyond the scope of this Legal Alert (for more information on these Regulations see Afridi & Angell’s inBrief articles dated 7 July 2019 and 10 October 2019). However, one issue to highlight is that the Regulations contemplate a further UAE Cabinet Resolution designating a Regulatory Authority3  to regulate compliance with the Regulations. The Regulatory Authority has not yet been designated. As such, the regulatory regime under which the Regulations will be enforced is not yet complete.

 

The appointment of the Regulatory Authority and the approach such Regulatory Authority will take in enforcing the UAE Economic Substance Regulations is a future development that warrants monitoring by any businesses that are potentially subject to the Regulations. ■

 

*****
1 See Council of the European Union, Outcome of Proceedings dated 5 December 2017. The Criteria on tax transparency, fair taxation and implementation of anti-BEPS measures that EU Member States undertake to promote are set out in Annex V thereto.
2 Ministerial Decision No. 215 of 2019 on the Issuance of Directives for the Implementation of the Provisions of Cabinet Decision No. 31 of 2019 Concerning Economic Substance Requirements.
3 The Guidance issued by the Ministry of Finance on 11 September 2019 raises the possibility that there could be more than one Regulatory Authority.

UAE Ministry of Finance issues guidance on Economic Substance Regulations

A previous inBrief dated 7 July 2019 discussed UAE Cabinet Resolution 31 of 2019 Concerning Economic Substance Regulations (the UAE Economic Substance Regulations or the Regulations).

 

The UAE Economic Substance Regulations designated the UAE Ministry of Finance as the Competent Authority. One of the responsibilities assigned to the Competent Authority under the Regulations is the issuance of guidance on how the Economic Substance Test (as defined in the Regulations and discussed below) may be met for the purposes of complying with the Regulations. The Ministry of Finance issued such guidance (the Guidance)1 on 11 September 2019.

 

Article 2.2 of the Guidance explains that the Regulations were issued pursuant to the global standard set by the OECD Forum on Harmful Tax Practices (FHTP), which requires companies to have substantial activities in a jurisdiction and also taking into account the standards developed by the European Union (EU), specifically the code of conduct developed by the EU Code of Conduct Group (a group responsible for the EU’s taxation policy).

 

Economic Substance Test

 

Under the Regulations, a Licensee (as defined below) engaged in a Relevant Activity (see the nine activities listed in bullet points below) must meet an Economic Substance Test in relation to each Relevant Activity carried on by such Licensee. This includes but is not limited to demonstrating that its State Core Income-Generating Activities are carried out in the UAE. The activities that constitute State Core Income-Generating Activities vary for each of the nine Relevant Activities to which the Regulations apply. Such Relevant Activities are:

 

  • Banking Businesses
  • Insurance Businesses
  • Investment Fund Management
  • Lease-Finance Businesses
  • Headquarters Businesses
  • Shipping Businesses
  • Holding Company Businesses
  • Intellectual Property Businesses
  • Distribution and Service Center Businesses

This inBrief highlights thirteen topics covered in the Guidance that may be of interest to businesses affected by the UAE Economic Substance Regulations.

 

1. More than one Regulatory Authority?

 

The Regulations contemplate that a yet-to-be designated Regulatory Authority (the Regulatory Authority under the Regulations is different from the Competent Authority) will regulate compliance with the Regulations. The Regulations read as if there will be a single Regulatory Authority for the entire UAE. However, the Guidance, in certain places, contemplates the possibility of more than one Regulatory Authority which raises the question as to whether the Regulatory Authority may be different in each Emirate?

 

A Cabinet Resolution appointing the Regulatory Authority (or Authorities) is awaited. For stylistic purposes, the remainder of this inBrief will assume a single Regulatory Authority.

 

2. Clarification regarding definition of Licensee

 

The Regulations apply to Licensees. Article 1 of the Regulations defines a Licensee as “any natural or juridical person licensed by the competent licensing authorit/(ies) in the UAE, to carry out a Relevant Activity in the UAE including a Free Zone and a Financial Free Zone.” The Guidance clarifies that every Licensee “that carries on a Relevant Activity and derives an income therefrom in the UAE, including a Free Zone or a Financial Free Zone must meet the Economic Substance Test.” This implies that a Licensee that does not derive any income from a Relevant Activity carried out in the UAE would not be required to meet the Economic Substance Test.

 

3. Majority-owned government owned companies exempt

 

Under Article 3(2) of the Regulations, the Regulations do not apply to any commercial company (as defined in Article 1 of the UAE Commercial Companies Law2) in which the UAE Federal Government, the Government of any Emirate, or any governmental authority or body of any of them has any direct or indirect ownership in its share capital. By contrast, Article 3.2 of the Guidance states that the Regulations do not apply to any commercial company with at least 51% direct or indirect governmental ownership. An EU document indicates that the change to the 51% threshold was made to accommodate concerns of the EU Code of Conduct Group that exempting companies with any government ownership created a risk of circumvention of the substance requirements.

 

4. Filing requirements commence with effect from 1 January 2020

 

Under Article 8(1) of the Regulations, a Licensee shall notify the Regulatory Authority annually of the following:

 

“(a) Whether or not it is carrying on a Relevant Activity.

 

 (b) If the Licensee is carrying on a Relevant Activity, whether or not all or any part of the Licensee’s gross income in relation to the Relevant Activity is subject to tax in a jurisdiction outside of the State; in all cases such Licensee shall provide the Regulatory Authority with all information and documentation   required to be submitted by it pursuant to this Resolution or any further guidance or decision issued pursuant to this Resolution.

 

 (c) The date of the end of its Financial Year.”

 

Under Article 8(2) of the Regulations, the foregoing annual filing shall be made at the time specified by the Regulatory Authority and in the manner approved by the Regulatory Authority. As noted above, the Regulatory Authority has not yet been identified. However, Article 4.2 of the Guidance clarifies that such filing must be made with effect from 1 January 2020. This suggests the Competent Authority believes (or assumes) that the Regulatory Authority will be appointed before 1 January 2020.

 

5. List of core activities in the Regulations is not exhaustive

 

The Regulations require a Licensee to demonstrate that it conducts its State Core Income-Generating Activities in the UAE. Article 5 of the Regulations identifies, for each Relevant Activity, certain activities that must be carried out in the UAE.

 

Article 4.3(a) of the Guidance explains that the list set out in Article 5 of the Regulations “is not exhaustive” and that the list “includes the activities listed but is not limited to them.” The Guidance further explains that the general principle is that the activities listed in Article 5 of the Regulations “are regarded to be the most important activities that a Licensee carrying out a Relevant Activity is expected to be carrying on in the UAE.”

 

6. Directed and managed in the UAE

 

One of the requirements of meeting the Economic Substance Test, under Article 6(2)(b) of the Regulations,  is that a Licensee must be directed and managed in the UAE in relation to its Relevant Activity. Article 4.3(b) of the Guidance explains that the aim is to ensure that there are an adequate number of board meetings held and attended in the UAE. Article 4.3(b) of the Guidance further explains that:

 

“A determination as to whether an adequate number of meetings are held and attended in the UAE will be dependent on the level of Relevant Activity being carried out by a Licensee. It is expected that it must be at least one (1) meeting held in a Financial Year in the UAE. Consideration must also be given to meeting requirements prescribed under the applicable law regulating the Licensee or as may be stipulated in the constitutional documents of the Licensee.”

 

Additional requirements highlighted in Article 4.3(b) of the Guidance include:

 

  • meetings shall be recorded in written minutes and signed by attendees and such minutes are kept in the UAE;
  • quorum for such meetings shall be met and those attendees are physically present in the UAE;
  • directors shall have the necessary knowledge and expertise to discharge their duties; and
  • the minutes of board meetings must refer to all the relevant decisions taken and must be signed by directors physically present.

7. Meaning of “adequate” and “appropriate”

 

The Regulations use the undefined term “adequate” in several places. For example, “adequate number of qualified full-time employees”, “adequate level of expenditure”. In addition, the Guidance uses the terms “adequate” and “appropriate” several times. Article 4.3(g) of the Guidance explains that businesses vary in size and therefor the employees, expenditures and premises which are adequate or appropriate for a large or medium sized business may not be adequate or appropriate for a small business and that the Regulations are not intended to impose requirements to engage employees or incur expenditures beyond what is actually required by a business.

 

What is adequate or appropriate for each Licensee will be dependent on the nature and level of Relevant Activity being carried out by such Licensee. But a Licensee should maintain sufficient records to demonstrate the adequacy and appropriateness of the resources utilized and the expenditures incurred.

 

Article 4.3(g) also explains that the requirement for adequate employees is aimed at ensuring that employees carrying out a Relevant Activity are suitably qualified to do so.

 

8. Outsourcing

 

The Regulations permit the use of the third party service providers to satisfy certain requirements of the Economic Substance Test. Article 4.3(h) of the Guidance explains certain criteria that the third party service providers must meet including, by way of example, having adequate activities, employees, expenditures and premises in the UAE. Article 4.3(h) of the Guidance contains further elaboration and explanation of requirements for outsourcing that is not discussed herein but may be of interest to businesses subject to the Regulations who use third party service providers.

 

Article 4.3(h)5 of the Guidance explains that a Licensee who uses a third party service provider must demonstrate to the Regulatory Authority that outsourcing is not being done with the objective of circumventing compliance with the Economic Substance Test. This is perhaps one topic on which the Guidance may have created more potential confusion than clarification. It is not clear under what circumstances outsourcing would be deemed to be circumventing compliance.

 

9. Holding company business

 

Under Article 6(4) of the Regulations, a Holding Company Business that derives its income solely from dividends and capital gains is subject to reduced substance requirements. Such Licensee must satisfy only two criteria:

 

  • compliance with requirements to submit any documents, records or information to the relevant Regulatory Authority; and
  • maintaining adequate employees and holding and managing for the Holding Company Business.

Article 5.1 of the Guidance explains that Holding Company Businesses that undertake a Relevant Activity and derive income from such activity other than solely receiving income from equity interests do not benefit from this exemption and must meet the full substance requirements of the Economic Substance Test. The Guidance further explains that:

 

“A Licensee which owns other forms of assets (e.g. bonds, government securities, interest in real property) will clearly not be a ‘pure equity holding’ entity (even if it also owns equity participations) and will not be treated as carrying on holding business.”3

 

Moreover:

 

“Because it is possible for a Licensee to carry on more than one Relevant Activity, the fact that the Licensee is a ‘pure equity holding entity’ does not preclude the possibility that it may carry on one or more other relevant activities, in which case the CIGA [Core Income Generating Activities] shall be those associated with the income generated.”

 

10. Headquarters business

 

Article 5.2 of the Guidance explains that whether an entity carries on a headquarters business for the purposes of the Regulations is entirely dependent on the services it provides to other group companies and is not dependent on its position in the group structure.

 

11. High risk intellectual property activity

 

The Regulations identify certain activities relating to Intellectual Property Business as high risk and set out additional conditions that a Licensee carrying out such activities must satisfy. Article 5(3) of the Guidance explains that because income derived from intellectual property assets activity poses a greater risk of artificial profit shifting as compared to income from non-IP related activity, there is a presumption under the Regulations that a Licensee who carries out such activities is not complying with the Economic Substance Test. The burden is placed on the Licensee to rebut this presumption by providing sufficient evidence “demonstrating that the Licensee does and historically has exercised a high degree of control over the development, exploitation, maintenance, enhancement and protection of the Intellectual Property Asset by an adequate number of full-time employees, with the necessary qualifications, who permanently reside and perform their activities in the UAE.”

 

12. Businesses should retain records for at least six years

 

Under Article 7(1) of the Regulations, the Regulatory Authority may make a determination that a Licensee has not met the Economic Substance Test no later than six (6) years from the end of the Financial Year to which the determination relates. Article 4.4 of the Guidance explains that while the Regulations do not prescribe a set period for the retention of information by a Licensee, it is advisable to retain information relevant to evidencing compliance for a period of at least six (6) years.

 

13. Disclosure to overseas regulators

 

Article 9 of the Regulations addresses the exchange of information with foreign regulators. Article 9(3) states:

 

“Upon receipt by the Competent Authority of notification containing information that a Licensee has not met the Economic Substance Test for a Financial Year from a Regulatory Authority pursuant to the above Clause 2, the Competent Authority shall, pursuant to an international agreement, treaty or similar international arrangement to which the State is a party, provide the information relating to such Licensee to – 

 

(a) the Foreign Competent Authority of the country or territory in which resides the parent company, the ultimate parent company, and the Ultimate Beneficial Owner of the Licensee. 

 

(b) If the Licensee is incorporated outside the State, the Foreign Competent Authority of the country or territory in which the Licensee is incorporated.”

 

Article 6.4 of the Guidance explains that the Competent Authority shall provide information to the Foreign Competent Authority:

 

  • if a Licensee fails to meet the requirements under the Regulations for a specific Financial Year; or

 

  • the Licensee carries out a High Risk IP business.

 

UAE removed from European Union Tax Blacklist

 

The UAE Economic Substance Regulations were enacted after the UAE had been put on EU’s blacklist of non-cooperative jurisdictions for tax purposes. On 10 October 2019, the EU issued a press release announcing that the UAE has been removed the blacklist. This topic is covered in more detail in Afridi & Angell’s Legal Alert dated 10 October 2019.

 

Next steps

 

All businesses in the UAE should make an assessment as to whether they are subject to UAE Economic Substance Regulations and those that are subject to the Regulations should begin initiating steps to ensure compliance with the Regulations. While the Regulatory Authority has not yet been appointed, the Guidance states that reporting requirements will commence on 1 January 2020 so it is anticipated that the Regulatory Authority will be appointed before year end. It would be prudent to start taking steps to comply with the Regulations as soon as possible. ■

 

_____________________________

1 Ministerial Decision No. 215 of 2019 on the Issuance of Directives for the Implementation of the Provisions of Cabinet Decision No. 31 of 2019 Concerning Economic Substance Requirements.

 

2 UAE Federal Law No. 2 of 2015, as amended.

 

3 The phrase “will not be treated as carrying on holding business” is potentially confusing. Read in the context of the entirety of Article 5.1 of the Guidance, we interpret this to mean that a Licensee owning other forms of assets such as bonds, securities, etc., would not be able to qualify for the reduced substance requirement under Article 6(4) of the Regulations. We do not interpret this phrase to mean ownership of other assets would automatically result in a company not being a holding company.

UAE VAT designated zones defined

The UAE Ministry of Finance has released Cabinet decision No. 59 of 2017 specifying all Designated Zones to be effective from 1 January 2018 for the purposes of implementing the Designated Zone provisions in Federal Decree Law No 8 of 2017 on Value Added Tax.

 

The Cabinet has the authority to amend the list of Designated Zones as required.

 

A Designated Zone is required to be a specific fenced area with security measures and Customs controls in place to monitor entry and exit of individuals and the movement of goods to and from the area.

 

Concessional VAT treatment may be available for transactions involving the supply of physical goods within Designated Zones. No VAT concessions are available for transactions involving the supply of services within Designated Zones.

 

The list of Designated Zones for UAE VAT purposes are as follows:

 

No.  Designated Zones (Abu Dhabi)

 

1. Free Trade Zone of Khalifa Port

2. Abu Dhabi Airport Free Zone

3. Khalifa Industrial Zone

 

No.  Designated Zones (Dubai)

 

1. Jebel Ali Free Zone (North-South)

2. Dubai Cars and Automotive Zone (DUCAMZ)

3. Dubai Textile City

4. Free Zone Area in Al Quoz

5. Free Zone Area in Al Qusais

6. Dubai Aviation City

7. Dubai Airport Free Zone

 

No.  Designated Zones (Sharjah)

 

1. Hamriyah Free Zone

2. Sharjah Airport International Free Zone

 

No.  Designated Zones (Ajman)

 

1. Ajman Free Zone

 

No.  Designated Zones (Umm Al Quwain)

 

1. Umm Al Quwain Free Trade Zone in Ahmed Bin Rashid Port

2. Umm Al Quwain Free Trade Zone on Sheikh Monhammed Bin Zayed Road

 

No.  Designated Zones (Ras Al Khaimah)

 

1. RAK Free Trade Zone

2. RAK Maritime City Free Zone

3. RAK Airport Free Zone

 

No.  Designated Zones (Fujairah)

 

1. Fujairah Free Zone

2. FOIZ (Fujairah Oil Industry Zone)

UAE VAT executive regulation update: free zone guidance

The UAE Ministry of Finance has announced the Executive Regulation for the Federal Decree-Law No. (8) of 2017 on Value Added Tax (UAE VAT Legislation) at a Cabinet meeting on 7 November 2017, headed by His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE, Ruler of Dubai.

 

It is expected that the Executive Regulation to UAE VAT Legislation will be released this week in draft form on both the UAE Ministry of Finance’s website (www.mof.gov.ae) and the Federal Tax Authority’s website (www.tax.gov.ae).

 

The Executive Regulation operates in conjunction with, and provides substantive details to many operative provisions within the UAE VAT Legislation.  As such, the UAE VAT Legislation, Executive Regulation and relevant UAE Cabinet decisions are required to be read together for a practical application of UAE VAT law.

 

In this multi-part inBrief, we will disseminate the most significant provisions for which the release of the draft Executive Regulation has provided additional legislative and procedural detail for the application of VAT within the UAE.

 

Operative clarifications in a number of specific areas have now been provided in the Executive Regulation, amongst which the most important and anticipated is the intended application of UAE VAT regime with respect to Free Zone entities.

 

Designated Zones

 

The Executive Regulation does not specifically prescribe treatment to UAE Free Zone entities or references the term Free Zone, as not all Free Zones will attract the same treatment.

 

Rather the Executive Regulation introduces a new term, Designated Zone, which is defined by the Executive Regulation as:

 

Any area specified by a decision of the Cabinet upon the recommendation of the Minister, as a Designated Zone for the purpose of the Decree-Law.

 

Therefore, as a Designated Zone will be specified by a decision of the UAE Cabinet and such decision has not been published in the UAE Federal Gazette the situation remains that there is no comprehensive guidance on whether a specific Free Zone entity would fall under the Designated Zone VAT provisions, or if they would be treated as a regular onshore entity for UAE VAT purposes.

 

The operative provisions of the Executive Regulations pertaining to Designated Zone entities however do allow us to provide some certainty to a large number of Free Zone entities.

 

A Question of Physical Segregation

 

A Designated Zone specified within a future UAE Cabinet decision will be treated as being outside of the UAE and of the GCC for VAT purposes subject to three conditions.

 

The Designated Zone is required to be a specific fenced area with security measures and Customs controls in place to monitor entry and exit of individuals and the movement of goods to and from the area. A Designated Zone will also have internal procedures regarding the method of keeping, storing and processing of the goods within the Designated Zone, and the operator of the Designated Zone shall comply with the procedures set by the Federal Tax Authority (FTA). These specific procedures are at this time unknown.

 

If a Designated Zone fails to maintain the required conditions above, it will cease to be treated for UAE VAT purposes as being outside of the UAE/GCC.

 

It is apparent that the UAE has chosen to align the concept of a Designated Zone with existing bonded customs procedures both as a concession to compliance (as entities currently trading within such bonded Free Zones would be familiar with the imposition of Customs Duties) and also as a simplification measure (as such areas already have the physical and procedural infrastructure in place to control the flow of goods within a fenced geographic area).

 

From the required Designated Zone conditions above, a large number of forty five Free Zones within the UAE will not satisfy the physical segregation requirements in order to qualify as a Designated Zone, and thus entities incorporated within these Free Zones will be subject to the same VAT operative provisions as all other onshore entities within the UAE.

 

Bonded Free Zones

 

Free Zones such as Dubai Airport Free Zone, Jebel Ali Free Zone, Sharjah Airport International Free Zone, Hamriya Free Zone, Ras Al Khaimah Free Trade Zone, and Fujairah Free Zone currently have geographic segregation, security and customs controls in place and hence have the ability to be scheduled as a Designated Zone in a future UAE Cabinet decision.

 

Imports of goods from outside the UAE into Designated Zones will not be treated as imported into the UAE and thus will not be liable for UAE VAT until such a time when a supply of goods is made from within the Designated Zone to another person to be used by them, or consumed by the owner within the Designated Zone.

 

Acquisition of goods within a Designated Zone for incorporation into another unconsumed good located within the same Designated Zone will not be subject to UAE VAT.

 

Goods may also be transferred between Designated Zones without being subject to tax if the goods are not used or altered during the transfer process, and the transfer is undertaken in accordance with the rules for customs suspension per GCC Common Customs Law. The FTA may require a guarantee equivalent to the tax liability of the goods to be transferred in case the conditions for the transfer of goods between Designated Zones are not met.

 

The movement or supply of goods into a Designated Zone from within the UAE will not be considered an export of such goods from the UAE,  and as such will not receive zero-rating which an export outside of the GCC would receive.

 

Service Entities

 

A large number of entities operating in bonded Free Zones that may qualify to be Designated Zones would provide services as their primary taxable supplies. The Executive Regulation provides that the place of supply of services is considered to be within the UAE if the place of supply is within the Designated Zone  and in effect, aligns the VAT treatment of service entities operating within Designated Zones to similar onshore entities within the UAE.

 

Conclusion

 

The draft of the Executive Regulation to the UAE VAT Legislation in respect of Free Zone entities confirmed our view of the expected UAE VAT treatment of Free Zone entities insofar that it would be harmonious to all other onshore UAE entities. Although a number of Cabinet decisions are still to be released pertaining to the implementation of the UAE VAT regime, most Free Zone entities now have reasonable certainty to their UAE VAT outlook. Free Zone entities that have delayed planning or registration for the implementation of UAE VAT on 1 January 2018 have a highly compressed timeline in which to make important internal procedural and operational changes.

 

The general alignment of UAE VAT and Customs Duty in regard to the definition, operation and compliance of Designated Zones provides some familiarity in changing times to Free Zone entities already operating within the bonded goods warehouse regime, which will reduce administrative compliance overhead to importers and exporters of physical goods.

 

Please stay tuned for our next installment of this multi-part inBrief as we further disseminate the most significant provisions for which the release of the draft Executive Regulation has provided additional legislative and procedural detail for the application of VAT within the UAE. ■

VAT Registration in the UAE has Commenced

The United Arab Emirates (UAE) Federal Tax Authority (FTA) has commenced accepting registrations for Value Added Tax (VAT) through its online portal.

 

Registrations are currently being accepted on a voluntary basis by entities that satisfy the following registration criteria:

 

  • Any business resident in the Gulf Cooperation Council (GCC) making supplies of goods or services in the UAE with a turnover subject to VAT of more than AED 375,000 in the last 12 months, or an expected turnover of more than AED 375,000 in the next 30 days (i.e. entities with mandatory registration requirements).

 

  • Any business resident in the GCC making supplies of goods or services in the UAE with a turnover or expenses subject to VAT of more than AED 187,500 in the last 12 months, or an expected turnover or expenses of more than AED 187,500 in the next 30 days (i.e. entities who can voluntarily register).

 

  • Any business resident outside of the GCC that expects to make supplies of goods or services within the UAE that does not have another entity to account for the VAT liability in the UAE on their behalf (there is no registration threshold for non-established taxable entities).

 

Businesses that satisfy mandatory registration requirements will need to ensure they are registered prior to 1 January 2018, whilst for businesses under the AED 375,000 threshold, registration at this time is purely voluntary.

 

For entities that have previously registered for Excise Tax with the FTA and already hold a Tax Registration Number (TRN), registration for vat registration UAE will still be required as a different TRN will be issued for their VAT registration.

 

Article 15 of the VAT Decree Law No. (8) of 2017 provides an exception to registration if an entity only supplies zero-rated supplies. A VAT registration application must still be completed through the FTA portal, however by answering ‘Yes’ to the question ‘Are you applying for an exception from VAT registration’, the applicant will have satisfied any mandatory requirements from a registration perspective.

 

It is relevant to note that although the VAT registration has commenced, the Executive Regulation and the Cabinet Decision in relation to the VAT Decree Law No. (8) of 2017, that are likely to contain many relevant operative provisions, are yet to be issued.

 

VAT Grouping

 

Each GCC country is provided the choice by the Common VAT Agreement of the States of the GCC to adopt VAT groups. VAT grouping law is domestic, meaning only local entities are allowed to be VAT-grouped together. There is no cross border VAT group concept, as not every country may elect to adopt VAT grouping.

 

Article 14 of the VAT Decree Law No. (8) of 2017 provides for two or more legal persons resident in the UAE that are conducting business to apply for VAT registration as a Tax Group.

 

VAT groups will be allowed where one person or one company controls the others. The applicant will need to explain and provide evidence of legal commercial control in order to form a VAT group.

 

In the UAE it is common to have multiple branches of the same entity registered in different emirates. From a legal and a VAT perspective they are not different entities. There is no VAT accounting needed when moving goods and services between branches as there is no supply to a different entity.

 

VAT grouping provides quasi branch treatment to entities with common control. VAT grouping is by election. For instance, in a scenario of 100 companies with common legal control, a differing number of companies could be placed in a VAT group based on operational and business priorities, although each company can only be part of one VAT group.

 

By grouping VAT payers with refund entities, VAT liabilities can be offset, possibly reducing cash flow implications created by the imposition of VAT. However, there appears to be the choice of not establishing any VAT groups and proceeding with individual VAT registrations. If the FTA perceives abuse of the grouping provisions in any situation (e.g. not grouping multiple entities to stay under registration thresholds) then the FTA has the power to refuse VAT grouping or remove entities from a group.

 

Once a VAT group has been successfully created, only one TRN number will be issued to the group and one VAT return will be required to be filed, resulting in a simplification of VAT administration.

 

Members of a VAT group become jointly and severally liable for each other’s VAT liabilities and can ignore transactions between entities within the group for VAT purposes.

 

VAT Registration Process

 

The FTA estimates that the registration process should take approximately 15-20 minutes to complete. However, this estimate is predicated on the applicant having all the relevant information compiled at the time of making the application. During the application process, various documents (listed in the table below) relating to the taxpayer’s entity will be requested to be lodged on the portal. Soft copies of the relevant documents should be available before commencing the registration process.

 

Once an application has been submitted with the FTA for processing, it will be assessed to ensure the applicant satisfies all requirements to be eligible for a VAT registration. The FTA may require additional information for certain applications, and they will contact the applicant for clarification before the application is allowed to progress. Applications will be rejected if the FTA does not believe that all registration requirements are met. Once an application has been approved by the FTA, a TRN for VAT purposes will be issued. This will allow the registered entity to submit VAT returns, along with paying any VAT liability due. ■

 

Individual Person  Incorporated Entities (e.g. a Civil Company, a Sole Establishment, or a Limited Liability Company) Non Corporate Entities (e.g. a Partnership, Trust, Charity, etc) Government Entity
Trade License(s) Trade License(s) Trade License(s) Law or decree of establishment
Emirates ID Certificate of Incorporation (Free Zone Companies) Certificate of Incorporation (if applicable) Contact Information
Passport ID Page Certificate of Incorporation (if applicable) Club or Association Registration Bank Account Details
Partnership Agreement (if applicable) Articles of Association/Partnership Agreement (if applicable) Contact Information Customs Details (if applicable)
Contact Information Contact Information Bank Account Details Authorized Signatory Documents
Bank Account Details Bank Account Details Financial Statements
Financial Statements Financial Statements Customs Details (if applicable)
Customs Details (if applicable) Customs Details (if applicable) Authorized Signatory Documents
Authorized Signatory Documents Passport and Emirates ID of manager, owner and senior management
Passport and Emirates ID of manager, owner and senior management

 

Source: Federal Tax Authority website (www.tax.gov.ae) article by Afridi & Angell

VAT and excise tax

The UAE has issued substantive law on Value Added Tax (VAT) and Excise Tax.

 

Federal decree law No.8 of 2017 deals with VAT.  The imposition of VAT will commence in the UAE from 1 January 2018 at a rate of 5%.  The VAT law provides a framework for implementation of VAT in the UAE.  Many operative provisions specific to the UAE are not incorporated in the VAT law and instead will be disseminated in both the Executive Regulation and the Cabinet Decision to be issued in relation to the VAT law.  Once issued, we will receive guidance on a number of areas which currently remain unlegislated.  In the meantime, this inBrief deals with the provisions of the VAT law and information otherwise available in the public domain.

 

Tax Registration

 

Registration is mandatory for any taxable person/business if the total value of its taxable supplies made within the UAE exceeds the mandatory registration threshold of AED 375,000 over the previous 12 months period or, if it is anticipated that the taxable supplies will exceed the threshold in the next 30 days.

 

Voluntary registration is available for taxable persons/businesses that do not meet the mandatory registration threshold, but exceed the voluntary registration threshold of AED 187,500 subject to the same taxable supply tests above.

 

A taxable supply refers to a supply of goods or services made by a business in the UAE that may be taxed at a rate of either 5% or 0%.  Reverse charged supplies and imports are also taken into consideration for this purpose, if a supply of such imported goods and services would be taxable if it were made in the UAE.

 

Entities which are not based in the UAE but provide goods or services in the UAE are also required to apply for registration if they meet the threshold requirements. Registrations will commence in the fourth quarter of 2017 via the Federal Tax Authority (the FTA) website.

 

Exempt and Zero Rated Items

 

The supply by a taxpayer of either an Exempt or Zero Rated good or service will result in no imposition of VAT on that transaction. Although the result of both categories of supply seems identical, these terms are not to be used interchangeably.

 

The key distinguishing feature between the two supplies is that a supplier of a Zero Rated good or service will be able to claim a refund on any VAT paid on their purchases (input tax) whilst a supplier of an Exempt good or service will be unable to recover any VAT paid on their purchases.

 

VAT law provides a list of Zero Rated and Exempt supplies. The list includes:

 

Zero Rated Supplies

 

  • Exports of goods and services outside the GCC;
  • International transportation and related services;
  • Supplies of certain sea, air and land means of transportation (such as aircraft and ships);
  • Certain investment grade precious metals of at least 99% purity (e.g. gold, silver and platinum);
  • New residential properties that are supplied for the first time within 3 years of their construction;
  • Supply of certain education services, and supply of relevant goods and services;
  • Supply of certain healthcare services and supply of relevant goods and services;
  • Supply of crude oil and natural gas.

 

Exempt Supplies

 

  • Certain financial services including sharia compliant products;
  • Residential properties (save those which are zero rated);
  • Bare land;
  • Local passenger transport.

 

Tax Grouping

 

VAT law provides for tax grouping which allows companies with common control and / or ownership to be combined together into one entity for the purposes of VAT. Only one VAT registration number will be issued to the group and a combined VAT return will be required to be filed for the group, resulting in a simplification of VAT administration.

 

Members of a VAT group become jointly and severally liable for each other’s VAT liabilities and no VAT will be payable on transactions among entities within the group.

 

VAT Interactions within the GCC

 

Generally a VAT registered customer must account for VAT paid in respect of purchases however certain transactions between entities within the GCC will be subject to VAT by Reverse Charge.

 

The concept of reverse charging VAT allows the simplification of transactions within a single market (i.e. GCC states). The Reverse Charge removes the obligation to account for the VAT on a sale from the supplier, and places it on the customer. It is a concessional relief measure to assist the FTA with its administration so that foreign businesses do not need to register for VAT.

 

When a transaction is subject to Reverse Charge, and if your customer in another GCC country is VAT registered, then you will not be required to charge local VAT.

 

The customer will Reverse Charge VAT (i.e. account for VAT on your behalf) on their VAT return in their GCC country whilst simultaneously claim a VAT refund for the VAT paid on the purchase on the same return (if appropriate).

 

For the vendor it will effectively result in a Zero Rated transaction, with full entitlement to a refund of any VAT paid locally and no further obligation to account for the transaction.

 

If a GCC customer is not VAT registered (e.g. a private consumer) then reverse charging does not occur and UAE VAT would be charged until the vendor exceeded the AED 375,000 registration threshold in that GCC jurisdiction, at which time VAT registration would be required.

 

Note that for the purposes of a single market (GCC) VAT treatment, only those countries will be taken into account that have implemented VAT at the relevant time; the non-implementing countries would be treated like any other foreign country.

 

Application of VAT in UAE Free Zones

 

VAT law does not provide guidance to the application of VAT within any of the free zones in the UAE.  It is expected that the Executive Regulation to the VAT law will specify the tax treatment of free zone entities.

 

VAT Compliance

 

Registered entities will be required to maintain records for at least a five year period.

 

Tax invoices issued are required to be denominated in Arab Emirate Dirhams (AED) and if a currency conversion is required to AED, only approved rates scheduled on the UAE Central Bank website may be used.

 

VAT returns will be required to be completed with summary level data and filed online via the FTA portal. Reporting of Emirate level sales data will be required, summarized per Emirate. This statistical information is important for each Emirate, as revenue from the implementation of VAT will be distributed between the Federal Government and each Emirate. All communications with the FTA will also be facilitated online via the same portal.

 

The VAT law provides for penalties (imprisonment and/or fines) for contravention of the provisions of the VAT law. Penalty rates have not been set and will be specified by Cabinet Decision. Late returns and errors on VAT returns will be penalized on a tax liability due basis, whilst compliance failures (e.g. persistent non lodgment of VAT returns) will be penalized on a fixed penalty per infraction.

 

Excise Tax

 

Federal decree law No.7 of 2017 deals with Excise Tax and became effective in the UAE as of 1 October 2017.  A reasonably high rate of tax on a limited number of goods is imposed by way of an excise tax.  This includes a 50% excise on carbonated drinks and a 100% excise on energy drinks and tobacco products.  It is clear from the items on which excise has been applied that it is a tax to change social behavior by discouraging consumption of such products.

 

Conclusion

 

The introduction of Excise and Valued Added Taxation are likely to change the way business is conducted and administratively maintained in the UAE and the GCC.  This is a paradigm shift in a region which was largely free of taxation and the associated tax infrastructure. Although the rate of VAT imposition is set at a low 5% initially, and as such its effect economically will not be severe, the development and eventual maturity of a tax regime will have a much more pronounced effect on the economy and businesses alike. ■