The Solution to Economic Substance Compliance
In a changing regulatory environment, it’s vital that businesses are able to stay compliant in the face of evolving economic substance rules.
The UAE offers the ultimate destination for any business to locate their business functions in order to benefit from significant tax savings.
Purely ‘brassplate’ companies are finding themselves in increasingly precarious positions in the current regulatory climate, with tax authorities taking a harder line than ever before on deciding if a business is taxable. The economic basis of a given organisation is likely to be closely scrutinised, especially if the business has offices in regions traditionally thought of as ‘tax havens’.
Such anti-tax avoidance measures give authorities more scope to investigate individual transactions to identify the patterns indicative of a lack of real commercial substance, which in turn helps identify companies that might be considered incompliant. This domestic approach to tax avoidance is endorsed by the OECD and is designed to take precedence over double tax treaties.
Anti-avoidance: beneficial ownership requirements
Relevant to the issue of economic substance and tax compliance is the concept of ‘beneficial ownership’. For a long time this definition has been that the person receiving the income (whether dividends, royalties or interest) is classed as the ‘beneficial owner’, and as such, in cases where the legal owner is a different entity, they are granted a measure of anonymity and retain some separation between themselves and the legal entity that grants them their income.
Recent changes in the global regulatory regime now mean that nominees and agents are no longer viewed as eligible to take the role of beneficial owner; due to this, some individuals may find their income held accountable to the need for economic substance. As such, those that fail to demonstrate this may see a sharp increase in their tax liabilities.
The OECD’s commentary on the issue is not exhaustive when it comes to defining the beneficial owner outside of the specific examples of nominees and agents; where the is ambiguity, the outcome will be determined by local laws. Whichever way these changes apply to you, the tax status of your business and income could be uncertain if you can’t demonstrate economic substance, a mandatory requirement if you are to avoid anti-avoidance measures.
The UAE’s Free Trade Zones
A straight forward response to the challenges of demonstrating real economic substance is to do away with relying on beneficial ownership altogether. Incorporating your business in a region where tax regimes are very generous reduces the need to make use of separate legal ownership entities, and the UAE is in a unique position thanks to its tax-friendly Free Zones.
Any eligible business set up in one of the Free Zones of the UAE can expect to benefit from a huge raft of economic and taxation incentives that are unmatched anywhere else in the world.
Among other benefits, incorporating in one of the UAE’s Free Zones (such as Jebel Ali in Dubai) offers:
- Reinforced economic substance
- 100% foreign ownership
- Residence permits for foreign owners and their management
- Local free zone authorities that look after financial and legal formalities (rather than national government departments)
- Duty-free importing of goods (if not intended to be sold locally)
- Zero limitations on the hiring of labour
- Freedom from corporation tax for up to 50 years from incorporation
In addition, the UAE’s major airline hub, high quality professional services, large supply of both skilled and unskilled labour, free immigration and zero minimum wage imposition make the UAE an excellent choice for starting a business - quite aside from the additional taxation benefits. With leading IT infrastructure built for the realities of an expanding commercial hub, the UAE works perfectly for on and offline businesses alike.
To take advantage of the UAE’s Free Zones (FZ), you must own or rent physical business premises in the Free Zones ; even a small office will suffice.
Creating a local bank account allows owners to apply for UAE TAX RESIDENCE STATUS certificates from the Ministry of Finance, enabling owners to produce certificates as required to prove their tax residency to banking and other financial institutions worldwide.
Impact of Double Tax Treaties
The UAE has signed a large number of double tax treaties with OECD members and other nations; whilst some of these treaties include limitations of benefits clauses or tax liability clauses, there are many extremely attractive treaties that offer zero-tax liability, such as those signed with New Zealand, Austria or the Netherlands, maintaining the UAEs status as a premier global location for company incorporation
The UAE is a prestigious centre of commerce and financial services, providing company owners with a business-friendly gateway to the middle east, Asia, Africa and Europe; the UAE’s central location providing excellent transport links to all three regions. Offering a well-established regulatory environment, foreign owned companies can rest assured of proper standards compliance and pro-business legislature.
Dubai has become the crown jewel of the UAE, and is a vibrant and forward thinking city. Offering outstanding infrastructure, transport links, telecoms and a diverse and growing property market, the city provides everything a foreign entity needs to incorporate successfully, source premises, labour, and services support.
Backed by simple residency processes, wide take-up of English as a language of business, and straight forward paperwork, company owners can focus on their business, enjoying limitless repatriation of capital and profits with no tax liabilities.
With the weight of government regulation falling on businesses to prove real economic substance, the UAE’s extremely business friendly environment makes it the ultimate destination for foreign incorporation. Whilst the impact of the OECD’s double tax treaties is a global one, the UAE still benefits from some of the most efficient tax treaties and offers potentially unmatched tax savings.
It’s always vital that any investor or owner properly investigates the ramifications of any business decision, and incorporation abroad is no different; however, with proper diligence, the UAE can allow foreign owners to create highly tax efficient business structures for greater profits.
Should you wish to explore the benefits of incorporating your company in UAE please contact us on [email protected]