Tax planning is well
on its way as many international conversation and negotiations are taking
place. Topics such as tax planning and avoidance and well as tax evasion have
been the focus of conversation amongst governmental parties throughout the
globe. Many developed economies have highlighted the necessity to establish
corporate transparency as well as balancing financial reforms and the need to
enhance economic growth.
It is a known fact
that multiple international corporations are subject to minimal amounts of tax
when compared to the profits they generate, since they move their revenues
around low-tax jurisdictions, which are known as tax havens. More and more
international enterprises are moving their profits, while establishing their
intellectual property as well as launching and running Intermediate Holding
Companies, known as IHC, in tax haven jurisdictions that offer low tax rates or
even 0%. Through this, international companies take advantage of the thin line
difference between tax planning and evasion.
IHC Tax Planning
In a few words,
tax planning refers as an arrangement of affairs, agreed upon by an individual
so as to fully benefit and profit from the implemented tax regime according to
the law. Therefore, enterprises benefit from low tax rates without breaking the
law. In accordance to the majority of western developed countries, argue that
tax planning is legal under the condition the arrangement of affairs made
comply with the legislation of the jurisdiction and no grey-area tax techniques
are in place.
International corporations that have set up IHC
have proven to run successfully through time. Complicated and efficient
corporate, tax, managing, regulatory evaluations as well as careful planning,
appraisal of the law, political stability level and investment environment of
the country the enterprise plans to set an IHC must be taken into consideration
before taking the step.
Investment Hub-the UAE
Even though many international enterprises seek
to set up IHCs in low-tax jurisdictions, this is not the only feature that is
taken into consideration. Enterprises are required to evaluate and analyze
other important factors as well such as the jurisdiction’s political stability,
whether the jurisdiction is investor friendly, the operational, managerial and
business requirements practiced and repatriation measures as well as tax
regime.
Although the UAE is not defined as a classical
tax haven hub per say, the majority of international enterprises, which wish to
expand into other jurisdictions such as Africa and Asia, seek to set up IHCs in
the country. The reasons for their preference are outlined below.
1. The UAE’s
Strategic Location
The UAE is an ideal
jurisdiction for those seeking to conduct business activities and expand in
neighboring UAE countries such as Africa, Asia as well as throughout the Middle
East world. In terms of infrastructure, the UAE provides both residential and
industrial property, which is considered an additional advantage for
international enterprises interested in setting up an IHC.
2. The UAE’s Political Stability
Being amongst the 10 major oil-producing
countries throughout the globe, the UAE’s diverse and developed economy
alongside to its political stability establishes the country as the ideal
jurisdiction to set up an IHC in a prosperous commercial centered setting ideal
for those seeking to conduct business activities.
3. The UAE’s Investor Friendly Setting
The UAE offers full foreign ownership to
businesspeople and corporations seeking to set up businesses in the UAE due to
the many free zones found throughout the nation. In addition, the UAE does not
impose any restrictions concerning the nationality of shareholders and
directors within its free zone.
Furthermore, business entities established in
the free zones of the UAE have the option of registering the company as new
companies as well as representative offices or branches of both international
as well as local companies. Moreover, the mandatory share capital imposed on
companies seeking to establish a business in the free zone is not standard, as
the amount differs depending on the nature of business intended to be
conducted, the free zone which has been chosen as well as the number of
shareholders.
Finally, the UAE is also a partner of the
International Centre of Settlement of Investment Disputes Convention (ICSID)
and has made multiple bilateral investment agreements with many other countries
in an attempt to protect foreign investors in a variety of ways. Such
protective measures include ensuring investors are treated fairly, are not
subjected to irrational and biased measures.
4. The UAE and
Repatriation of Profits
The UAE does not impose exchange regulations on
corporations and businesses within the country. Therefore UAE investors can
easily and legally save the generated revenues and profits in their UAE
companies and utilise them to fund and finance their other business activities
throughout the world without restrictions.
5. No Tax
The only companies subject to tax in the UAE
are those engaged in oil, petrochemical and gas activities as well as foreign
banks. Any other corporation or business is not subject to taxation in the UAE.
In addition, the UAE has created an extensiveDouble Taxation Avoidance Agreement Network. Therefore, UAE investors are
handled favorably regarding tax credits, withholding tax as well as double
taxation.
With focus being drawn to offshore companies’
tax residency across the globe, establishing IHCs has become complicated. In
such an environment, free zone companies established in the UAE with local
regulatory authorities offer effective solutions as they draw less attention to
themselves from tax authorities.
Recent Tax
Developments
Nowadays, the only
feature that remains stable is the fact developments are constantly altering
and changing. Many modern and developed countries throughout the world have
been led to adopt and implement Beneficial Ownership within their tax
legislation in an attempt to restrain the use of IHC. Two examples of such
countries are China and France. France has implemented the term Beneficial
Owner in two segments of their tax law linked to EC directives and anti-abuse
principles. China has implemented administrative circulars as well as requiring
the beneficial owner not to act as an agent but rather maintain operative
activities. Several other countries, such as China, Indonesia and Canada, are
in the process of evaluating IHC structures to conclude on the income of
beneficial ownership.
The most important
factor corporations look for when seeking to set up an IHC in s foreign
jurisdiction is safety and protection in legal terms. The point is to make sure
the IHC is not only set up as an agent or pass-through unit. The UAE demands
the beneficial owner’s full disclosure at the time the IHC is set up and any
point a new foreign shareholder is introduced to the company from there on.
Additionally, the
majority claim that the UAE is an established tax haven, which in actuality is
false. Even though the UAE does not impose tax on corporations within the
country, this does not prevent the source jurisdiction from imposing tax on the
potential UAE investor when exiting. Thus, corporations seeking to set up IHBs
in the UAE are not only driven by the 0% tax but usually their decision
coincides with the fact the UAE is an established business hub and a means to
expand further in other emerging economies like Asia and Africa.
The UAE has a long
and prosperous success as a global trade hub as well as a business and
financial centre, which does not rely on any other country. Moreover, the UAE
has not been included on the Organization of Economic Co-operation and
Development list, which is a clear benefit. Finally, the UAE has openly
welcomed the alterations made on the revised Implementing Regulations for Federal Law No. (4)
2002, which outlines anti-laundry regulations and measures, by positioning
eight tax officers within Abu Dhabi. This move reveals that the UAE does not
consider itself as a tax haven jurisdiction but rather as a financial, commercial
and business centre whereby its intentions are to attract foreign investments.
Final Comments
In 2013, the Global Foreign Direct Investment
Confidence Index positioned the UAE in 14th place. This is mainly
attributed to the fact that the UAE offers easy access to emerging economies
throughout Asia, African and Middle Eastern countries and its investor-friendly
environment. The UAE is viewed as one of
the top jurisdictions to set up an IHC even though other countries and tax
authorities seek to restrain IHCs.
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