For wealthy individuals, geopolitical uncertainty can create a demand to relocate. Many of the world’s high-net-worth individuals have chosen the United Arab Emirates (UAE) as a private wealth hub due to its favourable tax system. Do tax considerations therefore apply to UAE residents?
Kim Lacombe and Frédéric Cuguen from CW Partners
Tax considerations in the UAE have indeed become a game changer for high-net-worth individuals (“HNWIs”); not only a tax-friendly environment but also the implementation of targeted measures, namely through tailored residency visas, facilitating long-term stays and providing a range of benefits.
The choice of residence is a strategic decision, influenced by multiple factors in the “relocation equation”, including:
- Geographical location,
- Infrastructure development,
- Security and political stability,
- Reliable legal and judicial systems,
- Standard of living, and
- Favorable tax environment.
A key attraction is the absence of personal income and wealth taxes, setting the UAE apart and making it appealing for those seeking to minimize tax liabilities.
To provide additional clarity to individuals (and legal entities) in respect of their UAE tax residency status, the domestic Tax Resident definition has been aligned to internationally recognised standards, through Cabinet Decision No. 85 of 2022, issued on 9 September 2022, and Ministerial Decision No. 27 of 2023 published on 1 March 2023, offering a transparent framework for those considering the UAE as their tax residency.
What is at stake?
This new domestic law gives additional clarity, which facilitates the application of bilateral tax agreements (commonly called Double Tax Agreements (“DTAs”)) and the issuance of Tax Residency Certificates to benefit from such treaties.
Many of the DTAs the UAE has entered into with other territories make reference to the domestic laws of the UAE for determining whether a person is a resident of the UAE for purposes of the respective treaty.
In brief
These provisions apply to both individuals and legal entities and, under the new criteria, an individual will be considered a tax resident if he meets any one of the following conditions:
- Spending at least 183 days in the UAE in a calendar year, whether consecutive or not.
- If his place of habitual residence is in the UAE, i.e. he has a permanent home in the UAE regularly used for personal or family purposes - the introduction of this criterion is a significant departure from the previous system based solely on the number of days spent in the country. It recognizes that many individuals may have strong ties to the UAE, regardless of their physical presence for a significant period.
It is worth noting further that:
- These clarifications, still based on a physical footprint, continue to create difficulties for active businessmen or professional athletes constantly traveling worldwide.
- Many tax considerations apply to UAE residents but also to non-UAE residents who, for example, carry out a business activity or invest in real estate assets in the UAE.
On 9 December 2022, the UAE issued the Federal Decree-Law No. (47) of 2022 on the taxation of corporations and businesses (the “CT law”), which will be effective for financial years starting on or after 1 June 2023. What does this mean for business owners?
The enactment of the CT Law means a drastic tax climate change for all economic actors, impacting both domestic and foreign investors, and it marks a departure from the UAE’s historical absence of corporate income tax.
In brief
A complex matter resumed in a couple of lines:
- All businesses must now register for Corporate Tax (“CT”), regardless of their applicable regime.
- A 9% CT rate applies to generated profits, starting 1 January 2024.
- Free Zone entities can benefit from a favorable 0% tax regime based on a combination of 3 key concepts: Qualifying Free Zone Persons, carrying out Qualifying Activities and generating Qualifying Income.
Investors’ Current Mindset
In response to these developments, many of our clients are currently reassessing their existing budgetary allocations and tax advice to ensure the continued relevance of their strategies.
However, it is crucial to manage expectations beyond the evident frustration, by considering several factors:
- Elements of the new regulations that appear to deviate from the principles outlined in the preceding Public Consultation Document.
- The rapid evolution and recent implementation of these regulations.
- The anticipation of additional guidance on referenced key concepts.
- The dynamics of the Transition Period and the inherent leniency in the concrete application of these regulations.
It is worth noting that, amidst the uncertainty surrounding Free Zone entities, many tax advisors are recommending that clients budget for a 9% corporate tax, while not ruling out the possibility of transitioning to a favorable 0% tax regime should all requirements be met.
Concrete Recommendations
In practical terms, our 3 primary recommendations are as follows:
1 - Enhanced Recordkeeping and Documentation Practices
Comprehensive documentation provides 2 key advantages:
1. Serving as a fundamental support for complying with stringent regulatory and reporting obligations.
2. Acting as a safeguard against potential audits and disputes, demanding meticulous attention to detail from business owners.
2 - Implementation of Structural Adjustments
At the outset, it is imperative to shift attention from solely focusing on the numerator of any tax rate to pay attention to its denominator. Recognizing that the taxable base is derived from accounting profit, methodically allocating revenues and judiciously considering deductible expenses from an accounting standpoint becomes an essential initial step integral to the entire process.
3 - Selecting the Right Tax Professionals for Effective Advice
In the rapidly evolving maze of intricate tax laws, engaging tax professionals is a strategic imperative. Businesses need to capitalize on the expertise of consultants skilled in manoeuvring through compliance complexities, identifying tax-saving opportunities, and effectively navigating the ever-changing tax landscape.
However, beyond the customary recommendation lies a gap in explaining the underlying rationale. In taxation, a comprehensive approach is essential to deliver tailored and actionable advice; deviation from recommended methods can drastically alter the outcome.
Dubai has emerged as a prime destination for property investment in recent years due to its thriving economy, favourable business environment and enviably high standard of living. What are the challenges and considerations for investing in property within the UAE?
Before delving into the dynamics of the UAE real estate market, it is crucial to note that, while we are not experts in this field, we provide clients with valuable insights:
- Market Volatility: Historical fluctuations, particularly in Dubai’s real estate market, require careful consideration.
- Oversupply Concerns: Oversupply in certain property segments in emirates like Dubai has led to market saturation, impacting rental yields, and property value.
- Economic Stability: Dubai’s economy remains robust, driven by sectors such as real estate, tourism, and trade.
- Financing Aspects: Securing financing for Dubai property investment may be subject to specific regulations and eligibility criteria.
Navigating property acquisition in the UAE requires adherence to various legal requirements and regulations for a seamless and legally sound transaction. Here are 5 essential technical recommendations:
1 - Understanding Regulatory Framework
Foreign ownership is limited to designated areas in all emirates, allocated by the UAE government, known as “freehold” properties.
Dubai offers both leasehold and freehold options, specificities of which should be understood and aligned with each investor’s long-term goals and preferences when choosing the ownership structure.
2 - Analyzing Corporate Tax Aspects
The new CT regime may impact real estate transactions, especially certain income from Immovable Property in a Free Zone subject to the 9% CT rate:
1. Income from transactions with non-Free Zone Persons in respect of Commercial Property (i.e. Immovable Property located in a Free Zone and used exclusively for a Business or Business Activity).
2. Income derived from residential units, hotels and other Immovable Property that is not Commercial Property irrespective of payor’s identity.
3 - Completing Efficient Due Diligence
Considerations before finalizing any property purchase:
- Verifying ownership and legal status with the respective emirate authorities to ensure clear legal standing, free from disputes or encumbrances.
- Confirming legitimacy of ownership and seller’s authority to transact.
4 - Addressing Relevant Contractual Aspects
Contracts and agreements must accurately reflect agreed terms including purchase price, payment terms, delivery date, specifically in off-plan purchases, contingencies for project delays.
To mitigate uncertainties, explicitly include provisions for unforeseeable events (“Force majeure”), particularly relevant to off-plan projects that may face challenges linked to pandemics, governmental responses to crises or wars, or armed conflicts.
5 - Ensuring Proper Registration and Transfer of Assets
Completing the registration and transfer of property ownership in accordance with UAE law:
- Obtaining a title deed from the relevant land department (e.g. Dubai Land Department) in the property’s emirate.
- Settling fees and duties, including registration, agency, and transfer fees, typically ranging from 2% to 7% of the purchase price.
What, if any, are the tax considerations for individuals looking to relocate to the UAE and/or structuring ownership of assets within the UAE and are there any possible implications for an individual or business from a non-UAE tax authority?
Implementing a Comprehensive Relocation Strategy
The UAE’s territorial tax system, centered on residency status, governs taxation for individuals, based on key factors like time spent in the UAE and economic ties.
In relocation endeavours, there is often a narrow focus on arrival, neglecting expatriate tax status from the home country’s perspective. Certain home country tax authorities may challenge the departure or impose exit taxes, despite obtaining UAE tax residency.
Before initiating any transition, we strongly recommend individuals thoroughly assess all ties to their home country, including property ownership, company shares, or executive roles which significantly influence tax transitions and global income.
Business and Asset Ownership
For individuals contemplating the establishment or investment in businesses or ownership of income-generating assets within the UAE, understanding the CT environment is essential.
While UAE Free Zones provide attractive tax exemptions, meeting stringent criteria is crucial to benefit from these incentives. Outside Free Zones, a default CT rate of 9% is applicable when requirements relating to the entity, its business activities and nature of income are not satisfied.
Implications from Non-UAE Tax Authorities
We would like to highlight 4 often underestimated tax implications from a non-UAE Tax Authorities’ perspective:
1 - Controlled Foreign Company Rules
CFC rules are key tax regulations deployed by nations to counter tax evasion via foreign affiliated companies in low-tax jurisdictions, by taxing income earned by the latter in the « home country ».
Investors eyeing UAE ventures should carefully consider their home country tax provisions. International agreements can influence the application of CFC rules in specific cases.
2 - Benefits of Double Tax Agreements
The good news is that the UAE boasts one of the most extensive networks of DTAs in the world, with 137 DTAs currently in force!
DTAs aim to prevent individuals or businesses from being taxed on the same income in both the UAE and their home country. Key recommendations include:
- Verifying eligibility for DTA benefits.
- Adhering to prescribed methods for eliminating double taxation, in the relevant DTA.
- Considering state specific interpretations, based on tax culture or domestic practices.
3 - Climate Change in International Reporting Requirements
Individuals with financial connections abroad may encounter reporting obligations, such as the US Foreign Account Tax Compliance Act (FATCA). Notably, the UAE has:
- Adhered to the OECD Common Reporting Standards (CRS) since 30 June 2018 for reporting of tax related information.
- Implemented Economic Substance Regulations (ESR) through UAE Cabinet Resolution No. 57 of 2020 issued on 10 August 2020 which determines that Onshore and Free Zone entities engaged in specific activities must comply with Economic Substance requirements.
Adhering to these global standards is crucial to avoid penalties, ensure transparency, facilitate financial transactions, and establish appropriate corporate structures.
4 - Permanent Establishment (“PE”)
Under UAE CT regulations, where a Qualifying Free Zone Person operates outside a Free Zone through a PE in mainland UAE or a foreign country, the profits attributable to such PE are subject to the UAE CT rate of 9%.
To prevent double taxation of foreign PE profits, relief from CT is usually available under the UAE’s extensive Double Tax Treaty network and its CT Law.
In practice, an in-depth analysis of the governance mechanism and business decision-making process must be performed to efficiently mitigate any PE risks.
What is the future for wealth planning and structuring in the UAE?
We have both been navigating multiple jurisdictions over the past twenty years and witnessed significant structural shifts in the wealth optimization landscape. The UAE has unmistakably emerged as one of the world’s most dynamic global hub for migrating HNWIs, embracing state-of-the-art wealth practices.
A Global Perspective
The objective has been to attract HNWIs, offering a tax-efficient environment, global connectivity, business-friendly setups, and a Western luxury lifestyle, coupled with abundant investment opportunities.
- The launch of the 10-year Golden Visa scheme in 2019, facilitating long term investment prospects for foreign investors.
- Recently notable 2021 regulatory revisions, allowing 100% foreign ownership of non-strategic companies.
More specifically, observing 4 Key Drivers:
1 - Private Wealth Management Ecosystem Development
The outdated perception of Dubai and the UAE as transient markets, reliant primarily on expertise from traditional hubs like Switzerland, Singapore, or London, is now obsolete.
Over the past five years, the advisory network has considerably expanded, with wealth management firms and global financial institutions establishing private banking offices and tailored offerings in Dubai to meet growing client demand.
2 - Enhanced Regulatory and AML/CFT Compliance Frameworks
Amidst global capital inflows, the UAE remains vigilant in its commitment to combat money laundering, strengthening regulatory frameworks to align with international standards, emphasizing transparency.
A noteworthy challenge faced by corporate entities and authorities involves identifying Ultimate Beneficial Owners (“UBOs”) within complex structures, including trusts, foundations, or private investment vehicles. Newly introduced UBO identification procedures provide clarity around these complexities.
3 - A Comprehensive and Efficient Toolbox
A significant surge in UAE family offices over the past three years reflects a trend towards personalized services, to meet high-net-worth families’ distinct wealth management needs. Effective structures, such as Foundation regimes in ADGM, DIFC, and RAK ICC with a proven track record for over six years, and Trusts are recognized tools for multi-generational wealth preservation and achieving succession planning objectives.
Navigating the legal, regulatory, and tax landscapes governing these structures requires expertise and industry insights from local tax advisors and wealth planners, for compliance and risks and liabilities mitigation for clients. With globalization facilitating cross-border wealth movement, international tax advisors guide clients through the complexities of international tax regimes, exchange of information agreements, and jurisdictional nuances, ensuring the sustained effectiveness of these structures in achieving financial goals.
4 - Recent Key Developments
The UAE’s achievement of minimum corporate taxation and its adherence to OECD’s standards (as member of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting) contribute to its international standing.
Following recent assessments of preferential tax regimes conducted by the Forum on Harmful Tax Practices, the UAE CT regime applicable to Free Zones has been reported as No Harmful Tax Practice.
And breaking news, on 23 February 2024, the Financial Action Task Force has removed the UAE from its “grey list”!
Epilog: The Golden rule in a new era
For any client, clearly defining a meaningful project and addressing the “why” when establishing a structure will help anticipate potential challenges. In order to navigate the strict and rapidly evolving regulatory environment, only clients who seek guidance from forward-thinking legal and tax advisors will truly capitalize on the wealth of opportunities available in the UAE.
About Kim
Kim Lacombe is the Chief Operating Officer of CW Partners with over 15 years of experience in wealth structuring and corporate services in multiple jurisdictions.
Prior to joining CW Partners, Kim honed her management and structuring skills at esteemed institutions, including Investec Bank (Mauritius), Summit Trust International Group, Olexco SA, and Interfinexa SA. Her extensive background involves managing complex multinational structures with diverse asset portfolios, encompassing art collections, shipping yachts, residential properties, and private trust companies.
About Frédéric
Frédéric Cuguen is a seasoned qualifying and practicing lawyer with more than two decades of experience in international taxation and wealth structuring in Europe and MENA Region.
Before co-founding CW Partners in 2007, Frédéric embarked on his career as a Tax Advisor at prestigious firms such as Arthur Andersen and Lovells in Paris, France. Subsequently, he assumed the role of Senior Advisor in wealth structuring and project management for High-Net-Worth Individuals at Credit Suisse in Geneva.
About CW Partners
CW Partners is a privately owned consultancy firm specializing in tailored solutions for families, investors, and entrepreneurs worldwide.
Our team, characterized by its dynamism and ingenuity, is dedicated to understanding the unique needs of each client, providing strategic advice and guidance, throughout the process.
In our respective capacities as Chief Operating Officer and General Counsel, our mission is to provide forward-thinking counsel beyond traditional limitations. We are steadfast in guiding our clients through every stage of their journey, from ideation to seamless implementation, propelling them toward global success.
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