Cross-border taxation in the UAE becomes relevant as organizations expand their operations through exports, investments, and acquisitions internationally. While the UAE has not adopted any extensive corporate tax regime, the companies operating in the country are confronted with other cross-border taxation demands and risks while dealing with foreign tax administrations. This article provides some of the present cross-border tax issues that firms in the UAE may experience and how they may assist in Global tax planning for UAE businesses.
Main Cross-border Taxation UAE Issues
Some of the main cross-border taxation issues facing UAE companies include:
- Compliance with foreign jurisdiction tax laws on income derived from overseas operations and investments. Business profits of a foreign permanent establishment (PE) are taxable in the source country.
- Application of controlled foreign company (CFC) rules in other countries. Profits of certain foreign entities could be currently taxable in the parent entity's home country under CFC rules.
- Tax treaty eligibility and withholding tax on cross-border payments such as dividends, interest and royalties. Over 100 double tax treaties provide relief but eligibility must be established.
- Transfer pricing documentation and compliance for related party cross-border transactions to support arm’s length pricing under BEPS Action 13.
- Economic substance and beneficial ownership requirements in jurisdictions where entities are located to avoid penalties.
- Global anti-tax avoidance measures such as interest limitation rules, exit taxation and hybrid mismatch arrangements.
- Cross-border group relief or tax consolidation is generally not available but should be evaluated under applicable domestic laws.
Cross-border tax compliance UAE
- UAE businesses can adopt the following practices to ensure compliance with international tax regulations:
- Monitor foreign business operations and investments to determine tax filing obligations, obtain relevant licenses, and register for taxes in other countries.
- Ensure that transfer pricing documentation is as per the OECD guidelines so as to support the inter-company pricing.
- Minimize the employment and social tax costs of the company’s expatriate employees using global mobility and compensation structuring.
- Determine whether cross-border payments are exempted or subject to lower withholding tax by applying tax treaties and obtain appropriate certificates from the FTA.
- Conduct economic substance assessments for overseas entities engaged in specified activities to satisfy local regulations.
- Undertake periodic reviews of group structures, financing and supply chain arrangements to avoid adverse tax consequences from anti-avoidance rules.
- Engage qualified international tax advisors and auditors for tax compliance, advisory and assurance needs across multiple jurisdictions.
Benefits of Corporate Tax Treaties UAE for Businesses
The extensive UAE tax treaty network offers several benefits for cross-border operations including:
- Lower Withholding Tax Rates: Typically treaties provide lower rates or an exemption on payments such as dividends, interest and royalties compared to statutory rates. This enables greater repatriation of overseas profits.
- Elimination of Double Tax: Treaties allocate taxing rights between countries to avoid double taxation which promotes cross-border trade and investment.
- Guidance on Permanent Establishments: Treaty rules provide clarity on conditions required to create a taxable presence overseas through services or dependent agents.
- Mutual Agreement Procedure: Disputes over treaty interpretation can be resolved through the mutual agreement process rather than costly unilateral appeals.
- Access to Tax Residency Certification: The FTA issues Tax Residency Certificates allowing treaty benefits, subject to meeting qualifications annually.
Transfer Pricing and Cross-Border Tax UAE
Transfer pricing is an important consideration due to its impact on the taxable profits reported in different countries. Key issues include:
- Pricing of cross-border related party transactions for goods, services and intangibles must comply with the arm’s length principle.
- Extensive transfer pricing documentation must be prepared and kept contemporaneously including a masterfile and local file as per the 3-tiered structure.
- Industry benchmarking data is required to substantiate that inter-company prices are comparable to prices charged between independent enterprises.
- Advance Pricing Agreements can provide certainty but the process is time-consuming involving negotiations with multiple tax authorities.
- Penalties may apply if the tax authorities successfully challenge the transfer prices applied and disagree with the taxpayer’s position.
Global Tax Planning for UAE businesses
Proactive international tax planning can help UAE businesses legitimately optimize their global tax costs through strategies like:
- Evaluating various holding and financing structures to locate group headquarters, IP platforms, supply chain and financing hubs in favorable tax jurisdictions.
- Using cash-pooling, notional interest deductions, and other treaty-based measures to enhance interest deductibility on overseas financing.
- Claiming treaty relief and tax incentives like exemptions, lower rates or accelerated depreciation available in specific industries and regions.
- Considering dual-resident company treatment under tie-breaker rules to access preferential regimes where eligible.
- Adopting a cross-border M&A approach rather than asset acquisitions where possible for VAT and capital gains tax advantages.
Table: key cross-border taxation issues for UAE companies
| Issue | Description | Implications |
|---|---|---|
| Foreign profit taxes | Income from overseas branches/PEs taxed locally | Higher effective tax rates |
| CFC rules | Undistributed profits of foreign subsidiaries taxed currently in parent's jurisdiction | Unexpected domestic tax liabilities |
| Withholding taxes | Dividends, interest and royalties subject to WHT in source countries | Additional taxation reduces cash flows |
| Transfer pricing | Inter-company transactions must demonstrate arm's length prices | Risk of penalty tax adjustments on non-compliant pricing |
| Economic substance | Foreign entities must satisfy local business activity tests | Penalties for failure to pass economic substance requirements |
| Treaty eligibility | Qualification criteria and documentation required to claim tax treaty benefits | Higher taxes paid if treaty benefits are denied |
| Anti-avoidance rules | Interest limitation rules, exit taxes, hybrid mismatches may apply | Restrict ability to utilize tax-efficient financing structures |
| Group relief | Generally cross-border tax consolidation not permitted | Inability to offset profits and losses across jurisdictions |
Frequently Ask Questions (FAQs)
Q1. What are the main cross-border taxation issues facing UAE companies?
Some of these issues include foreign taxation and legal requirements, Controlled Foreign Companies (CFCs), withholding taxes, transfer pricing documentation and requirements for economic substance, and globalization’s anti-avoidance measures.
Q2. How can businesses ensure compliance with international tax rules in the UAE?
Integration of compliance activities in the foreign operations, documentation on transfer pricing, global mobility planning, evaluation of tax treaties and engaging competent legal advisors are some of the strategies to follow.
Q3. What are the benefits of corporate tax treaties for UAE businesses?
Some of the benefits include reduced withholding tax, avoidance of double taxation, guidance on permanent establishment, and access to tax arbitration and residency certificates.
Q4. How does cross-border taxation affect transfer pricing in the UAE?
Transfer pricing primarily involves cross-border transactions and prices, which affect the taxable profits in various countries and have to abide by what is called the arm’s length principle which is supported by documentation and benchmarks available in the industry.
Q5. What strategies can UAE companies use for global tax planning?
Some of the approaches to optimize international taxation are holding structure analysis, financing arrangements, tax incentives and preferential M&A.
Conclusion
In conclusion, with cross-border taxation there are issues that have to be managed on a strategic level for multinational companies. Thus, it can be seen that major cross-border tax compliance and optimization considerations –observation of foreign tax changes, strong and sufficient documentation for transfer pricing, the proper assessment of the benefits under tax treaties, and the utilization of the effective planning strategy –are key strengths for the UAE organizations that will continue expanding their operations internationally. or contact tax consultant in dubai for any tax-related querry.
