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 and amended in 2020, the United Arab Emirates 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 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 Double Tax Treaties (DTT)s 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 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 additional wording in its DTTs to improve the dispute resolution process through Mutual Agreement Procedures (BEPS Action 14 minimum standard).
- The United Arab Emirates has chosen to retain the existing 'permanent establishment' 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 regulations
In scope entities
UAE economic substance regulations (ESR) apply to all onshore and free zone entities (including branches and representative offices), on an entity-by-entity basis, established or licensed in the United Arab Emirates that derive income from one or more of the 'relevant activities' listed below, during a financial period commencing on or after 1 January 2019:
- Investment fund management.
- Holding company.
- Intellectual property (IP).
- Distribution and service centre.
Some regulatory authorities (being onshore and free zone authorities) (e.g. Dubai International Financial Centre [DIFC]) requires compliance/filing regardless of whether the UAE entity carries out a relevant activity or not.
There are two ESR filing requirements, being:
- Annual return/declaration (generally applicable only to entities that perform relevant activities and generate income).
Under the ESR, entities that carry out a relevant activity will be required to file a notification with their regulatory authority. Some of the regulatory authorities also require filing from entities that do not have a relevant activity. For the first filing, some of the regulatory authorities had different due dates for the notification filing (i.e. varied from authority to authority). These authorities have also issued different filing guidelines on how to file the notification forms (e.g. by email or through authorities’ online portals).
Annual return/declaration requirements
In the event income is generated from relevant activities, the entity would be required to file its annual return/declaration with the appropriate regulatory authority 12 months from its financial year end (e.g. by 31 December 2020, assuming a 31 December 2019 financial year end).
Templates supporting documentation and the mechanism for the filing of the return/declaration have not yet been issued, although these are expected to be available before the end of 2020. It is anticipated that documentation supporting the following aspects will likely be required to assist in the evaluation of whether an entity has sufficient economic substance in the United Arab Emirates relative to the activities it undertakes:
- Relevant 'core income generating activities' being conducted in the United Arab Emirates.
- Entity being 'directed and managed' in the United Arab Emirates.
- With reference to the level of activities performed in the United Arab Emirates:
- There is an adequate number of qualified full-time employees in the United Arab Emirates.
- An adequate amount of operating expenditure is incurred in the United Arab Emirates.
- There are adequate physical assets in the United Arab Emirates.
It is possible for an entity to carry out more than one relevant activity at a time, in which case the ESR will need to be satisfied for each relevant activity.
Different economic substance requirements apply depending on the relevant activity carried on. For example, entities undertaking 'holding company' activities are subject to a reduced level of substance. On the other hand, additional economic substance requirements apply to 'high risk' IP related activities.
Consequences for non-compliance
In addition to exchanging information with foreign authorities, failure to comply would result in administrative penalties (not less than AED 10,000 but not exceeding AED 50,000 in the first year of failure, increased to an amount not less than AED 50,000 but not exceeding AED 300,000 in the subsequent consecutive year of failure, subject to a six-year limitation period). Additional penalties, such as suspending, revoking, or not renewing the UAE entity’s trade licence could also apply.
United States (US) Foreign Account Tax Compliance Act (FATCA)
The United States and the United Arab Emirates reached a Model 1B Intergovernmental Agreement (UAE-US Model 1 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 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 United Arab Emirates 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 United Arab Emirates. 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.