Tax Base Erosion and Benefit Transfer (BEPS)

The United Arab Emirates joined the G20/OECD Inclusive Framework on BEPS (Base Erosion and Profit Shifting) on May 16, 2018. By integrating the Inclusive Framework, they committed themselves to immediately and in the short term implementing the following four minimum standards established by the BEPS Actions:

• Action 5: Countering harmful tax practices.
• Action 6: Countering the abuse of fiscal agreements.
• Action 13: Establish documentation requirements for transfer pricing and country-by-country reporting.
• Action 14: Improve dispute resolution mechanisms.

In addition, they are committed to implementing the remaining eleven BEPS measures in the medium and long term.

On April 30, 2019, and amended in 2020, the United Arab Emirates published its guidelines for country-by-country reporting (CbC), in accordance with recommendations issued by the OECD. These rules impose a CbC reporting requirement for final parent entities resident tax in the United Arab Emirates that are part of a multinational group with consolidated revenues of at least 3.15 billion AED in the previous financial year.

The cBc reporting requirements are applicable to financial reporting periods beginning on or after January 1, 2019, and the cBc report must be submitted within 12 months of the end of the corresponding fiscal year.

Failure to comply with these obligations may result in the imposition of severe and diverse administrative penalties for taxpayers in the United Arab Emirates.

The United Arab Emirates has signed and ratified the BEPS Multilateral Instrument (MLI). The key positions adopted are:

1. Include an additional provision in the preamble of their double taxation treaties to indicate that these treaties should not be used for abuse, in line with the minimum standard of BEPS Action 6.
2. Incorporate a primary purpose test into your double taxation treaties, with the possibility of referring it to a competent authority for the final evaluation of the availability of the treaty's benefits, in accordance with the minimum standard of BEPS Action 6.
3. Establish an additional provision in their double taxation treaties to improve the dispute resolution process through Mutual Agreement Procedures, in compliance with the minimum standard of BEPS Action 14.
4. Maintain the current definition of “permanent establishment” in their double taxation treaties and have not adopted the expanded definition proposed in the MLI.
5. They have decided to maintain their current position with respect to the taxation of capital gains obtained in entities with high real estate assets, and they have not adopted the provisions on “real estate assets” proposed in the MLI.
   

In relation to the other measures included in the MLI position, the country has chosen to agree to specific changes in its double taxation treaties through bilateral negotiations.

BEPS (Base Erosion and Profit Shifting) 2.0

They have introduced a federal tax on business profits that will take effect for financial years beginning June 1, 2023. In this context, the Ministry of Finance published a public consultation covering the application of the Corporate Taxation Act and other relevant issues. The consultation included a brief mention of the implementation of the second pillar of the BEPS standards, indicating that additional announcements will be made about how these rules will be integrated into the UAE's corporate tax regime when appropriate.

On November 24, 2023, the Council of Ministers enacted Federal Decree-Law No.

(60) of 2023, which amends the provisions of the UAE Corporate Tax Act. The amendments introduce key concepts of the Global Anti-Base Erosion (GLObe) standards, such as the definition of supplementary tax and multinational corporation, and constitute the first step towards implementing GLObe.

On March 15, 2024, the Ministry of Finance launched a digital public consultation on the Second Pillar rules, based on the OECD Model Rules. The consultation closed on April 10, 2024 and its objective was to obtain the opinion of interested parties on possible policy design options to implement the GLObe Rules at the global level. Along with the consultation questionnaire, a detailed guidance document was published that provides an overview of GLObe standards in accordance with OECD guidelines, including the scope of application, calculation criteria, collection mechanisms, and safe havens.

The Ministry of Finance has announced that the Second Pillar rules will not apply in 2024, although they will allow the submission of the GloBE information statement to the competent authorities during the same year. The Ministry of Finance is expected to provide additional information on the issue in the near future.

Regulations on Economic Substance Entities Included in the Scope of Application

In accordance with the Regulation on Economic Substance (the “Regulation”), legal entities and corporations without legal personality that carry out a “relevant activity” in the UAE must demonstrate an adequate “economic presence” in the country in relation to the activities they carry out.

The Regulation applies to all license holders in the UAE who carry out one or more of the following “relevant activities”:

• Bank
• Insurance
• Investment fund management
• Financial Leasing
• Central offices
• Shipping companies
• Holding companies
  
• Intellectual Property (IP)
• Distribution and service centers

The Regulation is applicable to financial years beginning on or after January 1, 2019. Only those license holders who carry out and earn income from a “relevant activity” are required to comply with the corresponding economic substance test. It does not apply to non-resident tax entities in the UAE, investment funds and their subordinate entities (except self-managed investment funds), fully locally owned UAE entities that carry out only domestic transactions (and that are not part of a multinational group), and UAE branches of foreign companies that tax all their “relevant income” in a foreign jurisdiction.

Compliance Requirements

There are two filing requirements:

1. Notification: Applicable to all entities that carry out “relevant activities”, regardless of the “relevant income” derived from such activities.
2. Fund Report: Applicable only to entities that carry out “relevant activities” and generate “relevant income” from such activities.

Both the notification and the fund report must be submitted electronically through the online portal of the Ministry of Finance within 6 and 12 months, respectively, from the close of the UAE licensee's financial year. These submissions must be made annually, as appropriate.

Notification Requirements

Under the Regulations, only entities that carry out a “relevant activity” must submit a notification. This notification must be sent through the Ministry of Finance's online portal, within six months after the end of the entity's financial year. For example, an entity whose financial year ends on December 31 must submit its notification by June 30 of the following year.

Annual Declaration

To satisfy economic substance requirements, and unless the license holder in the UAE is operating as a “holding company”, you must provide documentation showing that, in the relevant financial period:

• The licensee's “primary income-generating activities” were carried out in the United Arab Emirates.
• The license holder was “managed and managed” in the United Arab Emirates.

With reference to the level of activities carried out in the United Arab Emirates:

• There were an adequate number of qualified full-time employees in the United Arab Emirates.
• An appropriate amount of operating expenses were incurred in the United Arab Emirates.
• There were sufficient material assets in the United Arab Emirates.
  

In the event that an entity carries out more than one “relevant activity” simultaneously, it must meet the economic substance requirements for each relevant activity.

Entities that operate as holding companies will be subject to reduced economic substance requirements, while “high-risk” activities related to intellectual property will be subject to additional documentary requirements.

If “relevant revenues” (gross revenues related to a “relevant activity”) are generated, the UAE licensee must submit an annual economic substance report through the Ministry of Finance portal within 12 months from the close of their financial year (for example, before December 31, 2021 if the close is December 31, 2020).

The Ministry of Finance has published templates, supporting documentation and the mechanism for submitting the annual substance report on its page dedicated to economic substances.

In general, the UAE licensee must include the following information in the annual substance report:

• The “relevant activity” carried out by the licensee.
• The amount of “relevant revenues” in relation to the “relevant activity”.
• The amount of operating expenses and material assets corresponding to the “relevant activity”.
• The number of qualified full-time employees responsible for carrying out the “relevant activity”.
• Confirmation of the “main income-generating activity” carried out in relation to the “relevant activity”.
• The licensee's financial statements.
• Statement as to whether the licensee complies with the economic substance test.
• In the case where the “relevant activity” is an IP (Intellectual Property) business, a statement as to whether it is a “high-risk IP business”.

If it is declared as a “high-risk IP business”, the National Assessment Authority (i.e., the Federal Tax Authority) will automatically assume that the licensee fails the economic substance test, unless proven otherwise. To do this, the licensee must provide information and documentation demonstrating that he exercises and has historically exercised a high degree of control over the development, operation, maintenance, protection and improvement of the IP asset, carried out by an adequate number of full-time employees with the necessary qualifications, who permanently reside and work in the United Arab Emirates. This can be demonstrated by:

• A business plan that justifies the ownership of IP assets in the United Arab Emirates.
• Information about employees, including their level of experience, type of contracts, qualifications and length of employment with the licensee.
• Evidence that decisions relating to intellectual property were made in the United Arab Emirates.

When a “main income-generating activity” is outsourced:

• The licensee must monitor, control and demonstrate adequate oversight in the UAE of the “primary revenue-generating activity” carried out by the external service provider.
• The employees, expenses and physical assets of the external service provider must be adequate in relation to the “main revenue-generating activity” they carry out.
• The outsourced “relevant activity” must be a “basic income-generating activity” carried out in the United Arab Emirates.
• The employees, expenses and physical assets of the outsourcing provider should not be counted multiple times by different UAE licensees when demonstrating compliance with the economic substance test.

Documentation supporting the above-mentioned aspects is expected to be maintained to assist in the assessment of whether a UAE licensee has sufficient economic substance in the United Arab Emirates in connection with the activities he carries out.

Consequences of Non-Compliance

Failure to comply with the obligation to demonstrate an adequate economic presence can have serious repercussions. These include the exchange of information with foreign authorities, the parent company and the final beneficiaries of the license holder in the UAE. In addition, administrative sanctions will be imposed, which are as follows:

• First offense: AED 50,000.
• Consecutive violations: Up to AED 400,000 per year of consecutive non-compliance.

In addition, additional sanctions may be imposed, such as the suspension, revocation or non-renewal of the holder's business license in the UAE.

Other administrative sanctions include:

1. AED 20,000 for failing to submit the notification.
2. AED 50,000 for not filing the annual substance report, as well as for not complying with the economic substances test.
3. AED 50,000 for providing inaccurate information, which is also considered non-compliance with the economic substance test.

Law of Compliance United States Foreign Account Tax (FATCA)

On June 17, 2015, the United Arab Emirates signed the Model Intergovernmental Agreement (IGA) with the United States, which took effect on February 19, 2016. This agreement, signed with the United States Internal Revenue Service (IRS), establishes a framework for the exchange of tax information relating to U.S. individuals and certain types of U.S.-owned entities. The implementation of the agreement began on July 1, 2014.

On July 6, 2015, the UAE Ministry of Finance published guidance notes on the requirements of the IGA Model 1 between the United States. Department of State and UAE, which detail the implementation of FATCA in the context of the United Arab Emirates. These notes

provide guidelines on definitions, due diligence procedures and reporting obligations.

The national regulations for the application of FATCA in the UAE are established in Cabinet Resolution No. 63 of 2022, known as the “UAE FATCA Regulations”.

The exchange of information takes place annually, in September, between the competent authority of the UAE and the IRS. UAE financial institutions subject to FATCA must submit their FATCA reports to their corresponding financial regulator, or to the Ministry of Finance in the case of unregulated entities, by June 30 of each year, unless otherwise indicated. The FATCA regulations also require the submission of null reports, where appropriate.

Common Information Standard

On February 22, 2017, the United Arab Emirates signed the Multilateral Agreement of Competent Authorities (MCAA) for the Automatic Exchange of Financial Account Information. Additionally, on April 21, 2017, the Agreement on Mutual Administrative Assistance in Tax Matters (MAC) was signed.

The exchange of information under the common standard takes place annually in September, between the competent authority of the UAE and the competent authorities of the jurisdictions that have agreed to exchange information with the United Arab Emirates.

The national regulations for the implementation of the common standard in the UAE are set out in Cabinet Resolution No. 93 of 2021.

On August 3, 2020, updated in September 2023, the UAE Ministry of Finance published the Guidance Notes for the application of the CRS (UAE CRS Guidance Notes). These notes provide interpretative guidelines, but are not binding.

Reporting financial institutions in the UAE must submit their statements related to the common standard to their relevant financial regulators or to the Ministry of Finance in the case of unregulated entities, before June 30 of each year. The submission of null reports is also mandatory.