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TWO SPECIFIC PROVISIONS

HOLDING COMPANY BUSINESS

A Holding Company Business is a Licensee that:

• Only holds equity interest(s) in juridical person(s); and
• Only earns dividend and capital gains from its equity interest(s)

A Holding Company Business is subject to reduced substance requirements as follows:

• Comply with existing reporting/compliance requirements under the regulations applicable to the Licensee; and
• Have adequate employees and physical assets (e.g. premises)

A Holding Company Business is not required:

• To be “directed and managed” in the UAE (unless otherwise provided for under the rules and regulations of any Regulatory Authority’s); or
• To have / demonstrate adequate expenditure in the UAE

If a Licensee undertakes any other commercial activity or earns any other forms of income, it cannot be a Holding Company Business.

HIGH RISK INTELLECTUAL PROPERTY BUSINESS

Intellectual Property Business means a business that holds, exploits or receives income from the Intellectual Property Asset(s).

Condition A or B set out below must be satisfied for an IP Business to be considered as “High Risk”

Condition A – all of the following need to be met

1. The Licensee did not create the IP asset which it holds for the purposes of its business;
2. The Licensee acquired the IP asset either from:
   • a connected person, or
   • in consideration for funding research and development by another person situated in a country other than the UAE.
3. The Licensee:
   • licenses the IP asset to one or more Connected Persons,or
   • otherwise generates income from the asset in consequence of activities performed by Foreign Connected Persons

Condition B

The Licensee does not carry out research and development, or branding, marketing and distribution as part of its UAE Core Income-Generating Activity

The increased substance requirements require a High-Risk IP Licensee to demonstrate (and submit proof) that:

• It has (had) a high degree of control over developing the IPasset; and
• It has adequate full-time employees with the necessary qualifications that permanently reside and perform their activities in the UAE – relevant employee information (e.g. experience, contracts, qualifications etc.) would need to be provided; and
• It has a business plan showing the reasons for holding the IP in the UAE; and
• Relevant decision making has and continues to take place in the UAE

Entities Exempted From Application of the Regulation

The provisions of this Resolution shall not apply to any commercial company (as defined in Article 1 of the Commercial Companies Law) in which the Government of the State, or the Government of any Emirate of the State, or any governmental authority or body of any of them has any direct or in direct ownership in its share capital.

Requirements to Meet the Economic Substance Test

The Economic Substance Test in relation to a relevant activity is met by the licensee in the following cases:

1. If the Licensee conducts State Core Income Generating Activity in the State.
2. If the Licensee is directed and managed in the State in relation to that activity.
3. Having regard to the level of Relevant Activity, if there is an adequate number of qualified full-time employees in relation to that activity who are physically present in the State(whether or not employed by the Licensee or by another entity and whether on temporary or long-term contracts), or adequate level of expenditure on outsourcing to third party service providers, whose activities, employees, expenditure, and premises are in the State; and these activities, employees, expenditures and premises are adequate for carrying out the Relevant Activity being outsourced.
4. If there is adequate operating expenditure incurred by it in the State, or adequate level of expenditure on outsourcing to third party service providers whose activities,employees, expenditure and premises are in the State; and these activities,employees, expenditures and premises are adequate for carrying out the Relevant Activity being outsourced.
5. If there are adequate physical assets in the State or adequate level of expenditure on outsourcing to third party service providers in the State, for the activities of the Licensee.
6. In the case of State Core Income-Generating Activity carried out for the

The Emirates was once a heaven for businesses because of complete leeway on taxes. It was one among the rare few countries to not impose tax burdens. Times have changed and so has the milieu around tax regulations. As the country gears up for a wave of tax restructuring, what can we do to stay ahead of the curve?

It will not be inaccurate to point out that there is currently an ongoing global tax reset. Introduction of Value Added Tax (VAT) in the UAE was a radical shift in the economy. The revenue from VAT which exceeded all expectations was again seen as a display of UAE’s bureaucratic strength. UAE residents paid Dh27 billion in value-added tax (VAT) last year, surpassing the government’s target of collecting Dh12 billion, an increase of 125 per cent. It even surpassed the goal of Dh20 billion VAT revenue collections for 2019. This accounted for 1.7% of the UAE’s Dh1.59T nominal GDP. The analysts are unanimous that the VAT revenue is set to go up as more and more firms comply with the norms

There are sweeping changes in tax laws in most of the other countries as well. Companies are finding it laborious to keep abreast of the changes. It becomes especially harder when a company has operations or customer base in multiple countries. In taxation, the influences are no longer limited to the immediate governing body. Global economic developments are creating ripples in the world of taxes. It is becoming hard to keep track of the changes in rules, and even harder to comply. 

As a result, companies feel increasingly baffled by frequent changes. This has increased the level of uncertainty where more and more business executives are unaware of the newer changes in tax legislation. The digitisation of several processes has made it even more complex for businesses. Ambiguities regarding new trade agreements and disruptions like Brexit has made tax a long fight for many. What is driving these changes?

Organisation for Economic Co-operation and Development (OECD) has been a key player in setting the standard for international tax processes across countries. Their work has been to promote best tax practices, robust standards and the tools required to implement these, especially in a digitalised world. OECD has worked extensively to tie up the loose ends in terms of tax regulations and transparency, globally.

The UAE was put in the OECD’s list of uncooperative tax havens because of the lack of transparency, poor communication, and lapses in tax implementation. The UAE was quick to act and promised continued efforts to rectify the shortfalls. These efforts materialized in the form of participation in the Base Erosion and Profit Shifting (BEPS) framework and implementing Economic Substance Regulations and Country by Country Reporting (CBCR). These measures became fruitful when the EU decided to remove UAE from the bloc’s list of countries deemed to act as tax heavens. 

The major goal of CbCR is better transparency regarding economic data. The CbCR framework mandates multinational enterprises to publicly report their revenue by country and make it available to government bodies around the world. It builds transparency and enables sharing of information among key economic players and governments. 

The UAE also came up with Economic Substance Regulation Laws which requires companies to meet certain requirements regarding the nature of their revenue, the failure to comply with which would draw sanctions and penalties. The Economic Substance Regulation makes it compulsory for enterprises to disclose the income and expenses corresponding to the local activities and transactions. It was designed in such a way that makes sure that companies will not be able to shift profits generated in the territory.  

This shift to a tax-based economy will bring more stability to the economy and the scope of it being better structured in the future. Among the outcomes of these developments are that corporations without proper tax management systems in order are likely to face serious issues in the longer run. Tax discussions have the rare power to put senior executives to sleep yet keep them up at night worrying. Business leaders have traditionally compartmentalized tax management as a compliance function, a complex specialty ceded to the experts.  

Using tax data as an integral part of business, Integrating tax data with operations, engaging the tax function with external stakeholders and elevating the tax function to the role of strategic contributor should be the key goals for the business in the region for tackling the transformation of the tax. The key to success is to define organization’s own unique tax strategy and make it part of the overall corporate vision.

Best Regards,

CA. Mohammed Shafeek

Disclaimer: This document has been prepared as a general guide. It is not substitute for professional advice. Neither MSATC nor its partners or employees accept any responsibility for loss or damage incurred as a result of acting or refraining from acting upon anything contained in or omitted from this document.

UAE marks a beginning of new chapter in Transparency paradigm. If at all a country can raise its financial standards to a top-notch supremacy and globally attractive tax standards just by an introduction of a report, believe me it is nothing other than ‘Country by Country’ reporting.

Below are the capsuled facts on ‘CbCR in UAE’.

1. In May 2018, the UAE became a member of the OECD Base Erosion and Profit Shifting (BEPS) Inclusive Framework, committing the UAE to align its domestic tax rules with the shared international consensus on international tax rules, and implementing the BEPS minimum standards.
2. One of the minimum standards is CbCR, which is covered in Action 13 of BEPS Standards.
3. The objective of a CbC report is for tax authorities to assess high-level risks related to transfer pricing and BEPS for MNE groups.
4. A CbC report of an MNE provides jurisdiction-wise amount of revenue, profit before income tax and income tax paid and accrued, number of employees, stated capital, retained earnings and tangible assets. It also requires MNEs to identify each entity within the group doing business in a particular tax jurisdiction and to provide an indication of the business activities that each entity engages in.
5. The new requirements will affect all businesses that have a legal entity or branch in the UAE and are members of a multinational enterprise (MNE) group with annual turnover above AED3.15b (in line with the OECD threshold of Euro 750 mn).
6. The CbCR rules are effective for fiscal years beginning on or after 1 January 2019.
7. MNE groups with operations in the UAE will need to assess if they are subject to CbCR notification and filing requirements under the new rules.
8. Reporting Requirements: First reports due on 31 December 2020 and first notifications due on 31 December 2019.
9. UAE is already a signatory to the CbC MCAA (since June 2018) and accordingly, would now be able to exchange CbC reports with most of the other countries having CbC legislations.
10. The UAE has not yet activated any exchange relationships for CbCR. However, it is expected that these will get activated and become effective in advance of the first CbCR deadline i.e., 12 months after the last day of the fiscal year end.

Let’s welcome the big step! More updates to follow.

Disclaimer: The information provided in the article is for informational purposes only. It should not be construed as, nor relied upon as, legal advice.

Best Regards,

CA. Mohammed Shafeek

Disclaimer: This document has been prepared as a general guide. It is not substitute for professional advice. Neither MSATC nor its partners or employees accept any responsibility for loss or damage incurred as a result of acting or refraining from acting upon anything contained in or omitted from this document.