The UAE’s Ministry of Finance (the Ministry) has changed the requirements for obtaining a tax residence certificate, which is needed to secure benefits under one of UAE’s tax treaties as follows:
- to apply for the certificate, a company now must have been in existence for at least 3 years.
- under current practice, the Ministry can issue tax residency certificates retrospectively. For example, for a company incorporated in 2013, the Ministry in 2016 can issue TRCs for 2013, 2014 and 2015
- companies are required to provide audited accounts and a lease agreement
- generally, the Ministry will only issue tax residency certificates to companies registered in either mainland UAE or one of the Free Trade Zones (FTZ) that have signed a Memorandum of Understanding with the Ministry. These FTZs —Jebel Ali Free Zone, Dubai International Financial Centre and Fujairah Free Zone — are committed to require certain substance from their companies.
If the above requirements are not met, the Ministry may consider issuing a tax residency to a company on a case-by-case basis. Companies seeking to obtain tax treaty relief for their UAE companies must assess whether the tax authorities in the other relevant country require a UAE tax residency certificate in order to grant treaty benefits.
UAE has recently signed tax treaties with Brunei, Hungary, Japan, Libya, Lithuania and Mexico.
UAE’s tax treaty with Russia entered into force and will apply from 1 January 2014. From the UAE’s perspective, the treaty with Russia will provide tax benefits mainly to government or government-owned entities operating in Russia.
The tax treaty with Serbia also entered into force and applies from 1 August 2013.
The Mongolia-UAE tax treaty was terminated, along with a number of other Mongolian treaties.
The UAE is included in the list of countries reissued by the US Treasury Department that require cooperation with or participation in an international boycott as a condition of doing business. The listed countries are identified pursuant to section 999 of the US Internal Revenue Code (IRC), which requires US taxpayers to file reports with the Treasury Department concerning operations in the boycotting countries.
Such taxpayers incur adverse consequences under the IRC, including denial of US foreign tax credits for taxes paid to those countries and income inclusion for US shareholders of controlled foreign corporations (CFCs) that conduct operations in those countries.
Along with UAE, the countries on the list include Iraq, Kuwait, Lebanon, Libya, Qatar, the Republic of Yemen, Saudi Arabia and Syria.
Currently, foreign investors are only allowed to hold 100 percent shares in the companies registered in the UAE FTZs. In mainland UAE, foreign ownership is restricted to 49 percent. There have been discussions on loosening the barriers for foreign shareholding for a few years now. Recently, the relevant clause governing foreign ownership restrictions has been removed from the draft 2013 Commercial Companies Law, and it is expected that the proposed new UAE Foreign Investment Law should include regulation of the foreign shareholding exceeding 49 percent in certain cases. The draft new law may be circulated later this year.
Under a new fine applicable to mainland entities only, taxpayers who fail to keep supporting documentation for accounting records may face penalties from 50,000 to 100,000 UAE dirham (AED).
In the absence of a tax authority, the Ministry’s financial audit department undertakes assessments of banks in the Emirate of Dubai. Because representatives of the financial audit department act as tax inspectors, there have been cases where assessments were concluded on the basis of an ambiguous interpretation of a tax decree. More recently, the authorities have adopted somewhat arbitrary measures in carrying out inspections, resulting in increased tax collections from foreign banks.
In other Emirates, such as Sharjah and Abu Dhabi, these assessments have been outsourced to accounting firms, increasing the need for professional support in preparing tax computations and in conducting discussions with the authorities at the time of assessments.