How will the tightening of international tax control affect business in the UAE?

How will the tightening of international tax control affect business in the UAE?

As it is known, today, the United Arab Emirates is considered one of the most attractive regions of the globe in terms of business and financial activities. Low tax rates, attractive and favorable conditions for commercial activities, as well as the opportunity to register personal company are the attractive prospects for every businessman. However, over the past few years, in the face of tightening international tax controls, the UAE government has been forced to make some changes to the taxation system in the nearest future. At the same time, the Arab Emirates still remain the status of one of the most profitable countries in the world in terms of commercial and financial activities. Moreover, partial changes in local legislation will allow opening completely new economic opportunities for both residents of the state and for persons, who are not owners of resident status.

So, the first thing that should be paid attention to potential residents and shareholders of companies in the UAE are changes that relate to the automatic tax information exchange. As it is known, previously, the Emirates practically had no obligations to foreign banking and insurance structures to report on the existence of non-residents’ accounts. Due to the fact that the Emirates has joined the OECD (Organization for Economic Cooperation and Development), local banking institutions are obliged to report on the accounts of non-resident individuals to the relevant banking and other financial structures of their countries of origin. Within the developed Unified Standards for the Tax Information Exchange, starting from January 1, 2018, information on non-residents’ accounts opened in local banks will be provided. Information on account holders active collection and systematization has been performed since January 1, 2017.

Moreover, in order to preserve investment attractiveness in the eyes of the world community, and also to be considered an international economic center, the Emirates adopted the concept of the so-called «broadest approach». Within this concept, financial institutions are required to collect information on the owners of all accounts opened after January 1, 2017, irrespective of the citizenship of the individual (i.e. whether the country of citizenship is a member of the OECD or not). Later this approach will also apply to accounts opened before 2017.

Information about those, who are residents of the United Arab Emirates or the United States, will not be collected.

Since January 1, 2017, the automatic tax information exchange within the Standards was implemented by one of the first countries of the post-Soviet space – the Czech Republic. Russia plans to do this in the next year, 2018, but it should be stressed that as of today neither the Russian Federation nor the UAE have signed bilateral treaties. As for Ukraine, currently, the state is not a member of the OECD and there is no clear time frame for its accession to the Organization. Consequently, automatic exchange of information about taxpayers is not performed.

Changes in the tax system of the United Arab Emirates

This year, quite a lot of attention was focused on changing the tax status of the UAE. Indeed, since January 1, 2018, the Emirates will cease to be the owners of the status of tax-free jurisdiction and will pass to the category of low-tax jurisdictions. This is justified by the introduction of 5% VAT in the state, which will allow companies receiving the VAT number. The presence of a VAT payer will simplify the work with companies registered in the EU. At the same time the Emirates still remain one of the states with the lowest VAT rate in the world. It should be understood that there are certain limitations in this context. For example, organizations with a turnover of less than 1.8 million dirhams (about 500,000 US dollars) will not be able to register for VAT, an enterprise with an annual turnover from 1.8 million to 3.7 million dirhams can become a VAT payer in the UAE, and structures, whose turnover exceeds 3.7 million dirhams (about 1 million US dollars) – are required to register as payers of the value-added tax.

Also, for company’s registration as a VAT payer, it will matter how much it receives from transactions that are subject to VAT.

It is also worth emphasizing that the system of VAT payment in the state will be fully automated. The taxpayers companies previously undertake to submit reports once every three months, while the operation can be done online. In addition, in the second half of 2017, the United Arab Emirates plans to form the main tax authority of the state – the Federal Tax Administration.

Currently, the tax residency in the Emirates has one of the most attractive conditions from the point of view of the international economy. Due to the fact that the UAE has signed a number of agreements on avoidance of double taxation with a number of countries, taxpayers are receiving a certificate of the existence of a tax resident status, which fully or partially exempts them from taxation in their country. Such a certificate can be issued for both individuals and legal entities. A legal entity that claims to receive a certificate of a tax resident status must fulfill a number of conditions. For example, the manager of the applicant’s company must have the UAE resident visa, and the structure itself must exist for at least 6 months. Also, the firm must provide extracts from the bank for this period, an audit report and an office lease agreement. In order to receive such a certificate by an individual, in addition to the resident visa presence, it is necessary to provide bank extracts, a real estate lease contract and an extract from the immigration authorities, which will show the number of days, when the individual was within the state.

If the residency confirmation is required for the tax authorities of a country with which there is no agreement on double taxation avoidance, the procedure is somehow simplified: it is necessary to provide an apartment rental contract, utility payment documents, a resident visa and Emirates ID (identity card that is issued for all residents of the UAE). Often, these documents are sufficient for confirming the UAE tax resident status. This option is especially interesting for those, who do not live 180 days in any country, but must show a binding to any state for the tax planning purposes.

What is the benefit of tax cooperation with the UAE?

The attractiveness of the Emirates from the point of view of taxation has long been not a novelty for foreign citizens. It is well known that the United Arab Emirates offers quite profitable economic solutions for both corporate and private customers:

  • First of all, the attention should be paid to the fact that the UAE allows registering a company and opening a bank account in one jurisdiction. The majority of jurisdictions that permit the offshore organizations registration do not allow them opening accounts in the same country. The former scheme of work, where an offshore company is registered in one country, and a bank account in another, for example: «a firm in the Seychelles or a BVI – an account in the Baltic states», is today a kind of «beacon» for banking institutions and is perceived as very suspicious. In this context, the UAE is becoming almost the only alternative to other regions, as it is possible to register a company (resident or offshore) and open an account in a bank that will be quoted by other international banks. This will allow you working with all major world currencies. In addition, one of the great advantages is the stable dollar exchange rate, which has not changed for many years. However, it is worth noting that because of the toughening of combating the money laundering and assets legitimization, the banks of the UAE refused to open accounts for foreign entities. That is, in order that a company could cooperate with a local bank, it must be registered in the same state.
  • Accounts in banks for individuals. Despite the fact that local banks refuse to serve foreign companies, they can still open accounts for individuals, even if they are not residents of the UAE. The balance on such an account should be at least 1,400 US dollars. Banks offer opening accounts with the balance of 1,400 or 96,000 dollars, mostly for non-residents. Due diligence depends on the customer’s citizenship, as well as on the amount that he is going to keep in the bank. Local banks issue payment cards of Visa or Master Card systems, but they are tied only to the account in dirhams. However, this condition should not be confusing, since the dollar exchange rate is stable during the last decade and the use of such a card remains no less profitable.
  • The UAE is one of the most suitable countries for creating a «substance». The state allows legally and for a relatively small amount of money creating not just a company that is a legal envelope, but also a real organization – with a legal address, confirmed in addition to the lease agreement and certificates of payment for utilities. Such organizations should also have a corporate phone number and a minimum number of staff (secretary).
  • Holding companies. The Emirates are the ideal region for a holding company’s registration that will exist not only on paper, but also can really confirm its functioning.
  • The UAE is not a part of the so-called « offshore companies black list» in Ukraine. Only Dubai has got into such list in the Russian Federation, which allows customers working with companies registered in other emirates.
  • Registers of the shareholders of companies registered in the UAE on different terms («local», firms, companies in the FEZ or offshore) are closed and are subject to disclosure only by a court decision.

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