United Arab Emirates
Base erosion and profit shifting (BEPS)
The United Arab Emirates (UAE) joined the G20/Organisation for Economic Co-operation and Development (OECD) Inclusive Framework on BEPS (the “Inclusive Framework”) on 16 May 2018. Through joining the Inclusive Framework, the UAE 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 UAE has also committed to implement the other (11) BEPS measures in the medium to long term.
On 30 April 2019 and amended in 2020, the UAE issued its 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 ultimate parent entities that are tax resident in the UAE 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 UAE.
The UAE has signed and ratified the BEPS Multilateral Instrument (MLI). The key positions that the UAE decided to adopt include:
- The UAE has chosen to include additional wording in the preamble of its Double Tax Treaties (DTT)s stating that the DTTs should not be used for treaty abuse (BEPS Action 6 minimum standard).
- The UAE has chosen to include a Principal Purpose Test with the ability to refer to a competent authority for final assessment of the availability of treaty benefits (BEPS Action 6 minimum standard).
- The UAE has chosen to include additional wording in its DTTs to improve the dispute resolution process through Mutual Agreement Procedures (BEPS Action 14 minimum standard).
- The UAE has chosen to retain the existing 'permanent establishment' definition in its DTTs, and has not elected to adopt the expanded permanent establishment definition.
- The UAE 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 UAE's MLI position, the UAE has opted to agree specific changes to its DTTs through bilateral negotiation.
Economic substance regulations
In scope entities
On 30 April 2019, the UAE Ministry of Finance issued economic substance regulations (Regulations) which were followed by the amended Regulations on 1 September 2020 introducing a requirement for certain juridical persons (persons with separate legal personality) and unincorporated partnerships that carry on a Relevant Activity in the UAE (UAE Licensees) to have adequate “economic presence” in the UAE, relative to the activities they undertake.
Save for some limited exceptions, the Regulations apply to all UAE Licensees that undertake one or more of the “Relevant Activities” listed below:
- Investment Fund Management;
- Holding Company;
- Intellectual Property (IP);
- Distribution and Service Centre.
The Regulations apply to financial periods commencing on, or after, 1 January 2019. Only UAE Licensees that undertake and earn income from a “Relevant Activity” are required to satisfy the applicable Economic Substance Test. The Regulations do not apply to non-UAE tax resident entities, investment funds and their underlying SPVs/investment holding entities (except for self managed investment funds), wholly UAE resident owned UAE entities with domestic transactions only (that are not part of a multinational group), and UAE branches of foreign companies that are subject to tax on all their Relevant Income in a foreign jurisdiction.
There are two potential filing requirements, being:
- Substance Report (applicable only to entities that perform Relevant Activities and generate Relevant Income from those Relevant Activities).
The Notification and Substance Report should be submitted electronically via the Ministry of Finance (MoF) online portal within six and 12 months of the financial year end of the UAE Licensee respectively. This needs to be considered on an annual basis.
Under the Regulations, only entities that perform a Relevant Activity should file a Notification. This filing should be made via the MoF online portal and will be due six months after the entity’s financial year end (e.g. an entity with a 31 December financial year end should file its Notification by 30 June of the following year).
Annual return/declaration requirements
To satisfy the economic substance requirements, and unless the UAE Licensee is carrying on a “Holding Company Business”, the UAE Licensee must provide documentation to support that, in the relevant financial period:
- the UAE Licensee’s relevant 'core income-generating activities' were conducted in the UAE;
- the UAE Licensee was 'directed and managed' in the UAE; and
- with reference to the level of activities performed in the UAE:
- there was an adequate number of qualified full-time employees in the UAE;
- an adequate amount of operating expenditure was incurred in the UAE; and
- there were adequate physical assets in the UAE.
It is possible for a UAE Licensee to carry out more than one Relevant Activity at a time, in which case the economic substance requirements outlined above will need to be satisfied for each Relevant Activity.
A UAE Licensee undertaking a “Holding Company Business” Relevant Activity is subject to reduced economic substance requirements. On the other hand, additional economic substance documentary requirements apply to “high risk” IP related activities.
In the event Relevant Income (i.e. gross income relating to a Relevant Activity) is generated, the UAE Licensee would be required to file an annual substance Report via the MoF’s Portal within 12 months of its financial year-end (e.g. by 31 December 2021 if the UAE Licensee has a 31 December 2020 financial year-end).
Templates, supporting documentation and the mechanism for the annual substance Report filing have been released by the MoF on their dedicated economic substance landing page. In general, the following information is required to be submitted by the UAE Licensee in the annual substance Report:
- The Relevant Activity(ies) conducted by the UAE Licensee;
- The amount of Relevant Income in respect of the Relevant Activity(ies);
- The amount of operating expenses and tangible assets in respect of the Relevant Activity(ies);
- The number of qualified full-time employees who are responsible for carrying on the UAE Licensee’s Relevant Activity(ies);
- Confirmation of the Core Income-Generating Activity(ies) performed in respect of the Relevant Activity(ies);
- The UAE Licensee’s financial statements;
- Declaration as to whether or not the UAE Licensee satisfies the Economic Substance Test;
- In the case of a Relevant Activity being an IP Business, a declaration as to whether or not it is a High Risk IP business.
If the UAE Licensee declares that it is a ‘High Risk IP business’, the National Assessing Authority (i.e. the Federal Tax Authority) will automatically determine that the UAE Licensee did not meet the Economic Substance Test unless the UAE Licensee can prove otherwise. On this basis, the UAE Licensee should provide the National Assessing Authority with information and documentation that it does and historically has exercised a high degree of control over the development, exploitation, maintenance, protection and enhancement of the intellectual property asset exercised by an adequate number of full-time employees, with the necessary qualifications, who permanently reside and perform their activities in the UAE. This can be demonstrated through submitting the following documents:
- Business plan showing the reasons for holding the ownership in the IP asset in the UAE;
- Employees' information including level of experience, type of contracts, qualifications and duration of employment with the UAE Licensee;
- Evidence that decisions regarding the IP were made within the UAE.
Where Core Income-Generating Activity(ies) of the UAE Licensee’s Relevant Activity(ies) are outsourced:
- The UAE Licensee must be able to monitor, control and demonstrate adequate supervision in the UAE of the Core Income-Generating Activity(ies) being carried out by the outsourcing provider;
- The employees, expenditures and physical assets of the outsourcing provider must be adequate relative to the Core Income-Generating Activity(ies) being carried out by them;
- The Relevant Activity(ies) being outsourced is a Core Income-Generating Activity being carried out in the UAE;
- The employees, expenditure and physical assets of the outsourcing provider must not be counted multiple times by multiple UAE Licensees when evidencing compliance with the Economic Substance Test.
It is anticipated that documentation supporting the above aspects will likely be maintained to assist in the evaluation of whether a UAE Licensee has sufficient economic substance in the UAE relative to the activities it undertakes.
Consequences of non-compliance
In addition to exchanging information with foreign authorities and ultimate parent and beneficial owners of the UAE Licensee, failure to demonstrate adequate substance would result in administrative penalties (AED 50,000 in the first year of failure, increased to an amount of AED 400,000 for a consecutive year of failure, subject to a six-year limitation period). Additional penalties such as suspending, revoking or not renewing the UAE Licensee’s trade or commercial licence could also apply.
Other administrative penalties include: (1) AED 20,000 for failure to submit the Notification; (2) AED 50,000 for failure to submit the annual economic substance annual substance report as well as deemed failure to meet the Economic Substance Test; (3) AED 50,000 for providing inaccurate information as well as deemed failure of the Economic Substance Test.
United States (US) Foreign Account Tax Compliance Act (FATCA)
The US and the UAE reached a Model 1B Intergovernmental Agreement (UAE-US Model 1 IGA) in substance as of 10 June 2014.
On 17 June 2015, the UAE 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 with an effective date of 1 July 2014.
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 conducted on an annual basis, occurring in September of each year, between the UAE competent authority and the US IRS. UAE reporting financial institutions need to submit their FATCA returns to their relevant financial regulator by 30 June of each year (unless otherwise informed). Filing of nil reports is required under the UAE-US Model 1 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 (MAC) was signed on 21 April 2017, enabling the UAE to fulfil their commitment to the CRS.
The exchange of information is conducted on an annual basis, occurring in September of each year, between the UAE competent authority and competent authorities of jurisdictions which have agreed to exchange information with the UAE. UAE reporting financial institutions need to submit their CRS returns to their relevant financial regulators by 30 June of each year (unless otherwise informed). Filing of nil reports is required under the CRS.