The days of “brass plate” registrations are coming to an end. An increasing number of double tax treaties incorporate anti avoidance provisions. Further, tax authorities are not looking only at the place where central management and control is exercised in order to determine where a company is taxable. In fact, they are also looking at the economic rationale behind a company in a particular country. More so, if it happens to be a low or no tax country.
An increasing number of tax treaties incorporate anti avoidance provisions. Transactions which lack commercial substance or not entered into for bona fide purposes, are caught by the provisions.
The OECD in its commentary to a “model treaty” states: “A guiding principle is that the benefits of a DTC (Double Tax Convention) should not be available where the main purpose for entering into certain transactions or arrangements is to secure a more favourable tax position and obtaining that more favourable treatment would be contrary to the object and purpose of the relevant provisions”. It was also made clear that the OECD approves of domestic anti avoidance provisions taking precedence over double tax treaties.
The UAE is particularly well positioned to cope with the increasing requirements from tax authorities to provide real economic substance. By making use of the UAE free zone (FZ) structures it is now possible to locate business functions, realize tax savings and satisfy the criteria of economic substance which is very significant these days. By making use of the UAE FZs, there are now opportunities for companies of any size to locate business functions in the country. It is hard to think of a place where it is so easy and quick to set up a business as it is in a UAE FZ.
Free zones A free zone (FZ) entity in the UAE offers many tax and business possibilities. Certain jurisdictions are better positioned to benefit from this trend than others. It is hard to think of another place where it is as easy and quick to set up a business as in a FZ in the UAE. FZs as a concept were started in Dubai, the first one being Jebel Ali free zone. Benefits of operating from a FZ include:
100 percent foreign ownership
no restrictions on hiring labour
economic substance is reinforced
residence permits for the overseas owners and management of the FZ entity
guarantee for 15-50 years against future imposition of corporation tax
import of goods is duty free, provided the goods are not supplied to the local market
streamlined procedures: all formalities are typically dealt with through the FZ authorities instead of the various government apartments
A further possibility available to a FZ is to issue residence permits and obtain tax residence certificates from the UAE authorities for its foreign owners and executives. A FZ company, must have physical presence in the UAE and, in that respect, it must own or hire premises. If only a small office is required the most cost effective options are available by free zones in the northern emirates, notably Hamriyah and Ajman free zones. Physical presence options include flexi desks or flexi offices.
Furthermore, if a local bank account is maintained with some movements, the foreign owners and executives Newsletter can apply to the Ministry of Finance to receive UAE tax residence certificates. A UAE residence permit and a tax residence certificate can be useful to many foreign owners and executives of FZs who wish to register tax residency in the UAE. Banking institutions in the UAE and many outside consider UAE tax residence certificates as proof of tax residency in the UAE. The advice of a competent tax lawyer must be sought also.
Our affiliated Oneworld MidEast ltd (OME) is rendering a wide range of fiduciary and business services to our international clientele. We provide clients the whole spectrum of corporate structures - offshore, free zone, mainland and specialized entities - depending on each client’s circumstances and targets.
If you are interested in setting up a Free Zone company in the UAE, please contact us for a complimentary consultation at email@example.com