Tax Global Guide 2016-2017 Volume II: Tax on Finance Transactions: United Arab Emirates
Tax on Corporate Lending and Bond Issues in the United Arab Emirates: Overview
1. What are the main authorities responsible for enforcing taxes on finance transactions in your jurisdiction?
Financial transactions are not subject to tax under any federal or local decree in the United Arab Emirates (UAE). These includes financial transactions involving a change in the value or title of an asset and liability and financial services rendered by banks and other financial institutions. The UAE federal government does not impose any national tax on the income earned by companies in the UAE. However, there are a few local decrees and ordinances that require payment of certain direct and indirect taxes by specific categories of companies. For instance, a 'transfer tax' is payable upon transfer of title of a real estate property.
Corporate income tax applies to companies under local decrees issued by individual Emirates. The Emirate of Abu and Dubai has Taxation Decree Number 4 of 1972 and Dubai Income Tax Ordinance of 1969 (as amended), which require companies to pay taxes depending on their activity and income. In practice, this tax applies only to oil and gas producing companies and branches of foreign banks within the relevant Emirate. Entities that are engaged in upstream petroleum activities must pay taxes under the applicable concession contract, along with royalties on oil and gas production. Branches of foreign companies must pay 20% of their annual income as a corporate income tax under local decrees of the individual Emirates. This tax is payable to the Department of Finance of the Emirate where the company is established.
The customs department of every Emirate charges a customs duty on all goods that are imported, exported, in transit, transferred or temporarily admitted into their jurisdiction.
Pre-completion Tax Clearances
2. Is it possible or necessary to apply for tax clearances or obtain guidance from tax authorities before completion of a finance transaction?
There is no specific authority responsible for levying taxes on financial transactions. Therefore, corporate firms are not required to apply for tax clearances or obtain guidance before finalizing transactions. However, companies are required to analyze the implications of certain corporate transactions (such as mergers and acquisitions) under Federal Law Number 4 of 2012 Concerning Regulation of Competition.
The customs department of each Emirate can levy customs duty on goods imported into that Emirate by any company or individual. A 5% duty is charged on the cost insurance freight (CIF) of the imported goods. However, alcoholic products and tobacco are subject to 50% and 100% duty respectively. Companies may also require a customs clearance to import goods into the country. The customs department of individual Emirates (state) issue these approvals. For instance, the Dubai Customs has implemented an e-clearance system for facilitating the process of obtaining customs clearance for imports, exports, transits, transfers and temporary admissions in the Emirate of Dubai.
Circumstances for getting clearance
Companies or individuals have to obtain a customs clearance from the customs department upon importing goods in the territory, and, at the time of export, in-transit, transferred or temporarily admitted in or into an individual Emirate.
Mandatory or optional approval?
Customs duty applies to all goods imported into the country.
Procedure for obtaining clearance
To obtain permission for import of goods, exports, in-transit, products being transferred or temporarily admitted, companies must provide to the customs department of an Emirate a list of documents, including:
i. Delivery order;
ii Bill of Lading; and
iii. Copy of Trade License
The General Directorate of Customs in Abu Dhabi has a e-services platform through which all the required documents can be uploaded to obtain a customs bill.
Dubai and the other Emirates also have similar online systems. In Dubai, companies can apply for customs clearance through e-clearance services. The following documents must be submitted to the Dubai Customs to obtain a customs clearance:
i. Invoice of purchase of goods.
ii. Packaging list.
iii. Certificate of origin of goods.
iv. Delivery order.
v. Airway bill or bill of lading.
vi. Any other document that the customs department may require, depending on the regime type and cargo channel.
Pre-completion Tax Clearances
3. Is it necessary to disclose the existence of any finance transaction to the tax authorities?
Companies incorporated in the United Arab Emirates are currently not required to divulge any current financial transaction(s) to the tax authorities since no specific statutes or provisions are imposing a tax on financial transactions. However, Federal Law Number 2 of 2015 concerning the Commercial Companies Law (the Companies Law ) imposes an obligation on public joint stock companies (the PJSC ) to submit a copy of balance sheet. Additionally, PJSCs are also required to publish their balance-sheets in two local newspapers. This act of providing the balance sheets should not, however, be construed as compliance with any tax statute.
Circumstances where disclosure is required
Public joint stock companies must comply to conform with international corporate governance standards.
Manner and timing of disclosure
Public joint stock companies must publish their balance sheet within 15 days of their approval by the company's general assembly.
Taxes on Corporate Lending/Borrowing
Taxes potentially chargeable on amounts receivable
4. What are the main corporate taxes imposed on interest and other amounts receivable under a loan?
There are no corporate taxes that are chargeable on interest or any amounts receivable under a loan.
Tax Reliefs available for Borrowing Costs
5. What are corporate tax reliefs available for borrowing costs (including interest and other amounts payable under a loan)?
Please refer Question 5 and response to that Question above.There are no tax reliefs available for borrowing costs because the UAE does not levy any federal or local taxes on loans or corporate borrowings.
Tax Payable on Transfer of Debt
6. What corporate, transfer, stamp or other taxes are payable on the transfer of a debt under a loan?
Key characteristics. Companies and individuals in the UAE are not liable to pay any corporate, stamp or other taxes on the transfer of a debt under a loan. However, the local authorities of each Emirate can require the payment of a transfer fee that can apply to companies in certain circumstances. For instance, the Dubai Land Department levies a transfer fee on a transfer of a debt or mortgage of a property registered with the Dubai Land Department (Dubai Law Number 7 of 2013).
Calculation of tax. The fee is calculated based on the total value of debt that is transferred from one party to another.
Triggering event. These taxes are levied when a debt or mortgage that has underlying real estate property in the Emirate of Dubai is transferred.
Liable party/parties. The party in whose name the right or title of a property is being transferred must pay the fee to Dubai Land Department.
Applicable rate(s). The liable party must pay a fee of 0.25% of the value of debt on the transfer of a debt or mortgage over an underlying real estate property in Dubai.
7. Is there a withholding tax or any other payment under a loan?
When Withholding Tax applies
Withholding taxes are not (in general) applicable in the UAE. However, foreign financial institutions (as defined) that do not comply with US Foreign Account Tax Compliance Act (FATCA) must pay withholding tax on US-source payments and gross proceeds paid to them by US taxpayers (see Question 20). No other form of withholding tax is applicable to companies or financial institutions in the UAE.
Applicable rates of withholding
Foreign financial institutions are liable to pay 30% of US-source payments and gross proceeds paid to them by US taxpayers if the financial institution fails to disclose information relating to US taxpayers in conformance with FATCA guidelines.
Exemptions from withholding tax
These provisions only apply to the foreign financial institution(s) that hold investments from US taxpayers. All other entities within the UAE are exempt from complying with FATCA guidelines and therefore from paying any withholding tax.
8. Do any particular tax issues arise on the provision of a guarantee?
Taxes do not apply to the provision of guarantees in the UAE. Guarantees are generally governed by Federal Law Number 5 of 1985 (Civil Code). However, the Civil Code is silent on the application of taxes to guarantees. The Emirates hasve also not enforced any specific local legislation or decree requiring the payment of tax on the issuance or effect of guarantees. However, banks may levy a varying nominal commission on the issuance of a bank guarantee, depending on the bank and the Emirate. The banks in the UAE generally charge a commission of AED200, along with other surcharges and variances, depending on the specific bank and type of guarantee that is being issued.
9. For Corporate Taxation Purposes, are bonds treated any differently from standard corporate loans
There is no difference in the treatment of corporate bonds and standard corporate loans as no taxes are applicable.
Taxes Payable upon issue or transfer of Bonds
10. What stamp duties, transfer, or similar taxes are payable on the issue and/or transfer of Bonds?
11. Are any exemptions available?
Not applicable (Refer Question 10 above).
Plant and Machinery Leasing
Claiming Capital Allowances, tax depreciation
12. What are the basic rules enabling the lessor or lessee of plant and machinery to claim capital allowances or tax depreciation?
Claiming capital allowances is a process whereby entities that pay tax, write off their capital expenditure on plant and machinery against their net profits, thereby reducing the amount of tax payable. However, no capital allowances or tax depreciation are available to the lessor and/or lessee of plant and machinery in the UAE as both parties are not liable to pay tax on a lease.
Rate of Capital Allowances, tax depreciation
13. What is the rate of capital allowances or tax depreciation? Does it depend on type of assets
Not Applicable (Refer, Question 12)
Lessees not carrying on business in the jurisdiction
14. Are there any special rules or regulations for leasing to lesses that are not carrying on any business in the jurisdiction?
No federal or local legislation has been issued in relation to leasing to lessees that do not carry on business in the same jurisdiction.
Taxation of Rentals
15. How are rentals taxed?
In each Emirate, taxes are levied by the local municipality on all companies receiving income from renting office spaces or warehouses, at a rate of 10% of annual rent collected. Companies that provide accommodation to their employees are also liable to pay tax at 5% of the rent. However, in Abu Dhabi, landlords must pay an annual license renewal fee instead of a direct tax on the rental income.
16. Is a ruling or clearance necessary or common?
Unpaid or deferred interest or rental
17. What is the tax treatment of the borrower and the lender if interest or capital is unpaid or deferred?
Debt write-off/release and debt for equity swap
18. What is the tax treatment of the borrower and the lender if the loan is:
a. Written off or released (wholly or partly);
b. replaced by shares in the borrower (debt for equity swap)?
There is no difference in the tax liability of a borrower or lender where a loan is written off or released or replaced by shares on a debt for equity swap.
Unpaid or deferred interest or rental
19. Briefly explain the key features of the tax regime applicable to securitisations, including details of any specific tax rules that apply or issues concerning securitisations
A securitisation is a tool employed by many institutions to generate long-term funds at a relatively cheaper rate. However, there are no explicit provisions regulating taxation of securitisation in the UAE. Therefore, companies initiating their IPOs are not subject to pay any specific taxes on to this.
The Foreign Account Tax Compliance Act (the FATCA)
20. Has the United Arab Emirates entered into an intergovernmental agreement (the IGA) to implement the FATCA or does it intend to enter into an IGA to implement FATCA?
The Foreign Account Tax Compliance Act (FATCA) was introduced by the US to improve income tax reporting by US citizens and non-US entities with US owners on money invested offshore (outside the US). FATCA requires foreign financial institutions such as banks, investments management firms, insurance companies and so on to disclose information on accounts held by US investors.
The UAE is party to an IGA with the US to enhance international tax compliance and to enforce FATCA in the UAE. Therefore, all financial institutions operating in the UAE must disclose information on accounts held by US taxpayers in the UAE, depending upon their classification per the IGA. Financial institutions in the UAE must undertake an enhanced due diligence process to determine the accounts held by US taxpayers. UAE has adopted the Model 1 IGA to implement these steps in the country. Financial institutions that fail to provide such information are subject to a 30% withholding tax on US-source payments and gross proceeds paid to them by US taxpayers.
21. Have there been any particular difficulties in light of your jurisdiction's domestic legislation with implementing the FATCA regulations?
The UAE has signed an IGA with the US to implement FATCA to monitor the bank accounts of US citizens with financial institutions located outside the US. However, FATCA implementation procedures have given rise to numerous issues whereby UAE financial institutions may not be able to adhere to some aspects of FATCA due to the lack of stringent domestic legal restraints. The convoluted guidelines and limited time available for financial institutions to comprehend and adhere to the established international standards is a major concern.
22. Are there any provisions of your jurisdiction's IGA and domestic implementing legislation, if any, that are more onerous than the US FATCA requirements?
The UAE does not have any domestic legislation or international agreement that obligates financial institutions to disclose citizen's account information. Therefore, the implementation of FATCA guidelines is the only onerous legislation dealing with international tax compliance.
23. Are there any bank levies or similar taxes imposed specifically on the financial institutions?
Banks and other financial institutions in the UAE are not subject to any sector-specific tax. However, branches of foreign banks in the country must pay a mandatory corporate income tax.
24. On what are such levies or taxes charged?
Branches of foreign banks must pay corporate income tax on their annual income.
25. At what rates are such levies or taxes charged?
Branches of foreign banks in the UAE are subject to corporate income tax at a flat rate of twenty percent (20%).
26. Are there any thresholds or exemptions?
There are no limits or exemptions since all the branches of foreign banks within the UAE must pay corporate income tax on their annual income at a flat rate.
27. Please summarize any proposals for reform that will impact on the taxation of finance transactions in the United Arab Emirates
The UAE is known for its low tax environment, which has lured investors from various sectors. However, the Minister of State of Financial Affairs of UAE has recently announced that a Value Added Tax (VAT) will be implemented from 1 January 2018. The VAT is a major tax reform since residents would for the first time become liable to pay 3% to 5% VAT in the country. However, since it is expected to affect the retail sector the authorities have remained silent on the ambit and application of this tax, and there is no information on whether it would apply to financial transactions. It will be necessary to provide the UAE corporate environment with a clear set of guidelines to enable them to understand the applicability of upcoming tax reforms. The establishment of a dedicated department for dealing with tax-related issues will also be necessary for the speedy disposal of tax cases.
UAE Ministry of Finance
Description. This is a governmental website maintained and updated by the UAE Ministry of Finance. Although the UAE has not yet imposed any federal tax, this website is updated with the legalities and applicability of the proposed VAT, which is due to take effect from 1 January 2018.
Central Bank of the UAE
Description. The Central Bank of the UAE is responsible for monetary and banking policies. The website includes guidelines for compliance with FATCA provisions in the UAE.
Central Bank of the US
Description. This website is updated by the US Treasury Department. It contains the original copy of the agreement between the US and UAE on international tax compliance and FATCA implementation.
Withholding tax requirement on interest on corporate debt, and key exemptions
What is the withholding tax requirement on interest on corporate debt?
What are the key exemptions (ignoring double tax treaties)
What is the tax rate applicable?
There is no withholding tax requirement on interest on corporate debt
What is the withholding tax requirement on interest on corporate debt?