United Arab Emirates
Base erosion and profit shifting (BEPS)
The United Arab Emirates joined the Organisation for Economic Co-operation and Development (OECD) Inclusive Framework on BEPS on 16 May 2018. Through joining the Inclusive Framework, the United Arab Emirates has committed to implement, in the immediate to short term, the following four BEPS minimum standards Actions:
- Action 5: Countering harmful tax practices.
- Action 6: Countering tax treaty abuse.
- Action 13: Transfer pricing documentation and country-by-country (CbC) reporting.
- Action 14: Improving dispute resolution mechanisms.
The United Arab Emirates has also committed to implement the other (11) BEPS measures in the medium to long term.
On 30 April 2019, the United Arab Emirates issued its country-by-country (CbC) reporting regulations, which are in line with the guidance issued by the OECD on CbC reporting. The rules introduce a CbC reporting requirement (either filing or notification) for entities that are tax resident in the United Arab Emirates and that are part of a multinational group with consolidated revenues equal to or exceeding AED 3.15 billion in the preceding financial year. CbC reporting requirements are applicable to ‘financial reporting years’ starting on or after 1 January 2019 with the relevant CbC report to be submitted by 31 December 2020.
Failure to comply with the CbC reporting requirements is likely to expose the UAE taxpayers concerned to stringent and varying levels of administrative penalties in the United Arab Emirates.
The United Arab Emirates has signed and ratified the BEPS Multilateral Instrument (MLI). The key positions that the United Arab Emirates decided to adopt include:
- The United Arab Emirates has chosen to include additional wording in the preamble of its DTTs stating that the DTTs should not be used for treaty abuse (BEPS Action 6 minimum standard).
- The United Arab Emirates has chosen to include a Principal Purpose Test (PPT) with the ability to refer to a competent authority for final assessment of the availability of treaty benefits (BEPS Action 6 minimum standard).
- The United Arab Emirates has chosen to include addition wording in its DTTs to improve the dispute resolution process through Mutual Agreement Procedures (MAP) (BEPS Action 14 minimum standard).
- The United Arab Emirates has chosen to retain the existing permanent establishment (PE) definition in its DTTs, and has not elected to adopt the expanded PE definition.
- The United Arab Emirates has chosen to retain its existing position on the taxation of capital gains realised on real estate rich entities, and has not elected to adopt the proposed real estate rich provisions in its existing DTTs.
In respect of the remaining measures included under the United Arab Emirates' MLI position, the United Arab Emirates has opted to agree specific changes to its DTTs through bilateral negotiation.
Economic substance requirements
On 30 April 2019, the UAE Cabinet issued the Cabinet of Ministers Resolution No. 31 of 2019 (concerning economic substance regulations in the United Arab Emirates, 'the Regulations'), requiring all in-scope companies and other persons licensed by a UAE onshore or free zone authority ('Licensees') to carry on certain activities ('Relevant Activities') to have demonstrable economic substance in the United Arab Emirates from financial year commencing on or after 1 January 2019.
On 12 September 2019, the United Arab Emirates published a guidance document (the ‘Guidance’) regarding the Regulations. This ‘first level’ Guidance clarifies certain aspects of the application of the Regulations, with further guidance expected to be issued in due course.
Importantly, the Guidance does not establish a minimum standard for what would be considered ‘adequate’ or ‘appropriate’ substance, which is consistent with the guidance issued by other jurisdictions that have introduced economic substance regulations.
The following are considered as Relevant Activities under the Regulations: banking, insurance, fund management, lease-finance, headquarters, shipping, holding company, intellectual property (IP), and distribution and service centres.
To satisfy the economic substance requirements in relation to a Relevant Activity, a Licensee must:
- conduct the relevant 'core income generating activities' in the United Arab Emirates
- be 'directed and managed' in the United Arab Emirates, and
- with reference to the level of activities performed in the United Arab Emirates:
- have an adequate number of qualified full-time employees in the United Arab Emirates
- incur an adequate amount of operating expenditure in the United Arab Emirates, and
- have adequate physical assets in the United Arab Emirates.
A Licensee that undertakes a ‘Holding Company Business’ is subject to reduced substance requirements. On the other hand, if a Licensee is considered to be a ‘High Risk IP Business’, it is presumed to have failed the substance requirements, resulting in the Competent Authority exchanging information on the High Risk IP Licensee with the relevant Foreign Competent Authorities. A High Risk IP Licensee would nevertheless be required to meet the Economic Substance Test to avoid being subject to penalties, by providing sufficient evidence supporting that it has, and has historically had, a high degree of control over the development, exploitation, maintenance, protection and exploitation of its Intellectual Property Asset(s).
Administrative penalties (between AED 10,000 to AED 50,000) apply in cases of (i) failure to comply with the notification requirements and (ii) failure to provide information / accurate information.
Failure to demonstrate sufficient economic substance is subject to the same penalties of AED 10,000 to AED 50,000 (in addition to having information exchanged with the Foreign Competent Authorities of the parent company, ultimate parent company and ultimate beneficial owner of the UAE entity). Such penalties are increased to up to AED 300,000 in the subsequent consecutive year of failure, where additional penalties such as suspending, revoking or not renewing the UAE entity’s trade license could also apply.
The introduction of Economic Substance Regulations in the United Arab Emirates affirms the United Arab Emirates’ commitment to addressing concerns around the shifting of profits derived from certain business activities to 'no or nominal tax jurisdictions' without corresponding local economic activities.
United States (US) Foreign Account Tax Compliance Act (FATCA)
The United States and the United Arab Emirates reached a Model 1B Intergovernmental Agreement (IGA) in substance as of 10 June 2014.
On 17 June 2015, the United Arab Emirates formally signed the Model 1B IGA, which came into force on 19 February 2016, with the US Internal Revenue Services (IRS) regarding the exchange of information related to US individuals and certain type of US-owned entities.
On 6 July 2015, the UAE government released guidance notes on the requirements of the IGA on the implementation of FATCA. The final guidelines expand upon the UAE-US Model 1 IGA, including the definitions, implementation of the due diligence procedures, and reporting obligations.
The exchange of information is done on a yearly basis, occurring in September of each year, between the United Arab Emirates and the US IRS. Filing of nil reports is required under the IGA.
Common Reporting Standard (CRS)
On 22 February 2017, the UAE government signed the Multilateral Competent Authority Agreement (MCAA) on Automatic Exchange of Financial Account Information, and the Convention on Mutual Administrative Assistance in Tax Matters (CMAATM) was signed on 21 April 2017, enabling the United Arab Emirates to fulfil their commitment to the CRS.