The UAE government has passed legislation which will change the shape of the business operating environment in the UAE for years to come. Through press releases and the issuance of some detailed legislation in the last week, reforms on foreign ownership and global tax co-operation have been revealed. In this bulletin, we outline the key relaxations being introduced and the new requirements imposed on UAE businesses. This is essential reading for all UAE businesses, and foreign companies looking to inwardly invest into the country.
One of the core goals of the UAE government in the last few years has been to strengthen the country's attractiveness to foreign business, as a key market in the Middle East. In light of this, the government has been focused on reforms to:
In a landmark week, the UAE government has passed new legislation focused on these reforms.
The Foreign Direct Investment Law* introduced a framework for the UAE Cabinet to increase the proportion of permitted foreign ownership of UAE companies. The FDI Law made clear that any relaxations would be sector based, and relate to specific activities. However, the details of the core "positive list" were to be published through legislation in due course. Click here to see our briefing from November 2018 for more information on this law.
On 2 July, through an official press release and social media channels, the UAE government announced that the Cabinet had passed a Resolution providing the contents of that positive list.
According to the official press release, economic activities in 13 sectors have been specified as eligible for up to 100% foreign ownership.
Sectors mentioned in the press release
Not all economic activities within these sectors will be liberalised. The activities highlighted in the official press release are innovative in nature – such as production of new types of energy, including greener options, biotechnology, e-commerce and transportation of pharmaceuticals. 122 specific activities across these sectors will be listed in the Resolution, once published.
The press release states that the proportion of permitted foreign ownership will be determined by the Emirate governments. Therefore, there may be different levels of permitted foreign participation for the same activity in the seven Emirates (potentially creating greater internal competition for inward investment amongst them). Wholly foreign-owned entities may not be allowed for all of the liberalised economic activities, but the proportion of capital in foreign hands will be increased above 49% to allow majority control.
We will issue further analysis of the effect of this Resolution once published, and when local Department of Economic Development policy becomes clearer.
International tax co-ordination is a focus of governments worldwide. In new legislation issued on 30 April 2019 but only recently published, the UAE government has imposed new reporting requirements which will affect most multinational businesses operating in this country.
The UAE government has issued:
The UAE is not a tax free jurisdiction. In 2018, the UAE introduced VAT to the country, as well as an excise tax applicable to certain goods. Corporation tax is levied on foreign banks and oil companies operating in the country, and the UAE Ministry of Economy has been clear for some time that it is studying the effect of the introduction of a more general federal corporate income tax.
However, there is no widely applicable tax on business profits yet, and, in contrast to other jurisdictions, the UAE remains a low tax environment for most businesses.
Fiscal transparency and regulation is a global priority. International financial organisations such as the Organisation for Economic Co-operation and Development (OECD) champion better global co-ordination on tax regulation, including measures to tackle tax evasion, so that businesses cannot take advantage of differences in tax legislation around the world.
Specifically, governments are co-ordinating to produce a consistent network of legislation to facilitate:
In particular, the European Union has chosen to actively police these principles by applying sanctions against countries which do not meet specific objectives based on these principles.
Cabinet Resolution No.31 contains similar concepts and provisions to legislation on economic substance passed recently by Bermuda, BVI, the Cayman Islands and other no/low tax jurisdictions.
The following are the key take-aways for UAE businesses in the implementation of this Resolution:
Licence activities subject to Cabinet Resolution No. 31
|All business in the UAE will need to submit an annual notice to confirm whether they undertake activities the subject of the Economic Substance Regulation|
Cabinet Resolution No. 32 is designed to fit into a global web of tax transparency legislation, so that there are few jurisdictions in which the amount of profit and revenue is not reportable.
The Resolution is focused on multinational groups of companies, which are groups:
The concept of a group is, essentially, defined by reference to ownership or control, and is referenced against a requirement to produce consolidated accounts for companies within it, by the laws of its country of tax residence (or would have to produce such accounts if it were a listed company).
In other words, this Resolution is focused on large international businesses, seeking to take advantage of non-transparent tax regimes to reduce tax liabilities.
|Subsidiaries, affiliates and branches within Multinational Groups will need to notify the MOF of the group entity with filing responsibility|
Resolution No. 32 places an obligation on an entity established in the UAE to issue a detailed report of financial and other information if:
Note that the filing requirement is referenced to a concept of UAE tax residency. However, there is as yet no generally applicable supporting tax legislation in the UAE which provides guidance on the conditions for UAE tax residency. The reference to this concept may signal that this is to come in future legislation.
In essence, a UAE based company or branch which is part of a Multinational Group will only be subject to a detailed filing requirement in the UAE if another group member is not required to file that information under the tax laws of another country which shares tax information with the UAE.
Affiliates of Multinational Groups will need to notify the MOF of the name and country of tax residency of the parent or other entity responsible for the filing of the information, on or before the last day of the group's financial year.
Reports must be submitted within 12 months of the end of a Multinational Group's financial year, starting from 1 January 2019 so while full reports will not be due until 2020 there will still be some preparatory steps that need to be completed before then.
Contents of the tax report
in each country in which the Multinational Group operates
For UAE entities which are required (or elect) to file a detailed tax report, the Resolution provides for confidentiality, and includes a statement that the MOF will not rely on the contents upon the introduction of transfer pricing legislation. This is a clear indication that these restrictions are to follow.
Transfer pricing is part of the overall global taxation web: through intra-group transactions priced outside of an open market value, a group can move profits around an international group to minimise tax (or for non-tax related reasons). Usually, transfer pricing legislation requires groups to price intra-group transactions at a market value. The types of intra-group transactions which may be caught include supplies of goods and services, financing and IP and other types of licensing arrangements. Implementation in the UAE of transfer pricing provisions may have a significant effect on ownership structures of UAE companies.
The Resolution also provides for significant access powers for the MOF, and for fines (capped at AED1 million in any financial year) for non-compliance.
* Decree Law No. 19 of 2018