RESTRUCTURE YOUR UAE BUSINESS FOR TAX EFFECTIVENESS: REDUCE RISKS & FINES

The UAE has always been a tax-free jurisdiction until VAT came into effect on 1 January 2018. The UAE has revised the tax structure again and effective from 1 June 2023, corporate tax in Dubai and the UAE at a standard tax rate of 9% is expected to be implemented and will be applied to all mainland business and commercial activities on taxable profits above AED 375,000.

WHAT ARE THE EXEMPTIONS FOR DIVIDENDS & CAPITAL GAINS FOR YOUR UAE BUSINESS?

A UAE company will be exempt from corporate tax on dividends received and capital gains resulting from the sale of shares of a subsidiary company (referred to as the “participation exemption”). The main requirement to benefit from the participation exemption is that the UAE holding company must own at least 5% of the shares of the subsidiary company.

Furthermore, the UAE does not impose withholding taxes and there are no restrictions on the repatriation of profits out of the UAE which is a significant advantage over other jurisdictions.

The UAE registered companies that have been established in the UAE for at least one year are eligible to apply for a Tax Residency Certificate (TRC) from the Federal Tax Authority (FTA). If the company provides the following documents and gets approval on them, the UAE company will benefit from the UAE’s Double Tax Treaty network:

• A copy of the trade license with directors or shareholders attachment.
• Establishment contract certified by official authorities.
• A copy of the shareholders and directors’ passports.
• A copy of the shareholders and directors’ Emirates IDs.
• A copy of the shareholders and directors’ residence visas.
• Validated bank statements for 6 months from a local UAE Bank.
• A certified copy of the lease agreement.

WHAT DO DOUBLE TAX TREATIES MEAN FOR A UAE ENTITY?

The purpose of double tax treaties is to eliminate double taxation on cross-border transactions by granting taxing rights to only one country or providing for an exemption or credit system. It also provides tax relief in the form of reduced rates of withholding tax on some cross-border transactions.

The UAE has an extensive network of double tax treaties. In addition to a wide and favorable double tax treaty network, the UAE does not levy withholding taxes on outbound dividend, interest, and other payments.

To ensure these benefits are obtained it is vital that the UAE company has appropriate operational substance, and it has an underlying principle commercial purpose. It also needs to meet the minimum substance and procedural requirements set by the FTA and any source country requirements.

The UAE double tax treaty network is large, especially for a country that historically has had little taxation. With 108 double tax treaties presently, the UAE’s double tax treaty network is already wider than comparable low tax holding company jurisdictions such as Cyprus, Hong Kong, Ireland, Luxembourg, Netherlands, Singapore, and Mauritius. If the UAE double tax treaties that have been signed but are awaiting approval or entry into force are included, the UAE would have a more extensive double tax treaty network than Switzerland and the United Kingdom.

DOES THE UAE HAVE A DOUBLE TAX TREATY NETWORK IN AFRICA?

Historically, Mauritius and Singapore have been commonly used as investment or holding locations for investment into Africa, driven by the relative strength of their double tax treaty network in Africa.

With some of the fastest growing African economies close to the Gulf, the UAE has become a gateway for multinational companies and investors doing business in Africa. This has been coupled with a fast-growing double tax treaty network in the African continent.

The UAE has more double tax treaties with African countries than any other country, with 20 double tax in-force treaties, plus 20 double tax treaties awaiting confirmation or entry. The UAE’s double tax treaty network in Africa includes in-force double tax treaties with key markets such as Algeria, Egypt, Kenya, Morocco, and South Africa.

Out of the remaining 14 African countries with which the UAE currently does not have a double tax treaty, eight also do not have treaties with Mauritius and Singapore, placing the UAE on an equal footing from a tax perspective, but with a strong geographical advantage resulting from its proximity to key fast-growing economies.

TAKEAWAY

Despite the introduction of corporate tax, the UAE continues to be a very attractive tax jurisdiction based on the following reasons:

• It has a larger number of double tax treaties than any other low tax jurisdiction.
• Its’ double tax treaty network is growing at a faster rate than any other country in the world.
• Its’ proximity to Africa and other fast-growing economies is unparalleled.
• Its’ introduction of corporate tax remains amongst the lowest in the world.
• It does not tax the receipt of capital gains and dividends from foreign jurisdictions.

For the above reasons, a UAE company remains an excellent tax optimisation solution for international corporate investors.

For more information regarding how Creation could guide you, contact our tax consultancy experts in Dubai, Abu Dhabi and the UAE, email [email protected] or call +971 4 878 6240.