From a tax perspective, the last week was quite controversial for the UAE.
On March 11, the Ministry of Finance celebrated the 30th anniversary of the first double taxation agreement to protect and encourage investment. The very next day, on March 12, the European Union finance ministers agreed to add the UAE to a blacklist of alleged tax havens (‘EU Black List’).
Consequences for Investors of EU blacklisting
EU member countries can and are to some extent obligated to apply defensive measures against black listed countries.
These measures may include in the tax area administrative measures like:
- reinforcing transaction monitoring,
- increasing audit risks for tax payers benefiting from the respective regimes, and
- increasing audit risks for tax payers using structures or arrangements involving these jurisdictions.
EU countries are obligated to apply at least one of the mentioned measures.
The fact, however, that the UAE has been added to the EU Black List has no impact on existing double taxation agreements or on any national tax law.
In the light of the above, very little has changed. Businesses domiciled in tax havens have always been in the focus of tax audits. Nevertheless, the blacklisting will certainly increase the intensity of tax audits for European entrepreneurs doing business in the UAE.
Consequently, European investors should be even more cautious. Whether and to what extent the corporate structure of a business or the private environment of an Investor contains risks, only a law expert can decide. However, European investors should – inter alia – make sure that:
- his business in the UAE has a certain substance;
- the management of his business is residing in the UAE;
- in case of a mainland company the agreements with the local sponsor (holding 51% of the shares) do not constitute the beneficial ownership of the foreign investor, as this may trigger tax liability in the foreign investor’s home jurisdiction. In most cases foreign investors use ‘simple’ trustee agreements with the local sponsor which constitute the beneficial ownership of the trustor, i.e. the foreign investor;
- in case a European citizen has a residency in the UAE, he should avoid any arrangements that might indicate another residency in the EU.
The above recommendations are not new. But after the UAE has been added to the EU Black List, it is even more important to comply with the double taxation agreements and the applicable national tax laws of the EU member states.
The EU Black List should be updated at least once per year. Taking into account that the inclusion of the UAE was a particularly thorny issue, with Italy and Estonia pushing until the last minute to get the UAE off the list, and the announcements of the UAE that it will give its best endeavors to comply with international tax standards, it is to hope that the UAE will be removed from the EU blacklist very soon.