Case of the month ETC Tax Your newsletter on tax matters ... that matter Winter 2023

Things tend to be relatively simple where one is upping sticks and moving to the UAE. Say, breaking UK residency and taking up residency in the UAE.

But what about where the entrepreneur is not able, or willing, to leave the UK?

Well, this is where the position is trickier.

In that case, one cannot simply remain in the UK and offshore one’s activities to a new company in the UAE without some substantial tax issues. Depending on the circumstances –these may or may not be manageable.

However, our influencer, who thinks Transfer of Assets Abroad is a cryptic crossword description of suitcase, has not missed a beat.

Corporate taxes

I will start with corporate taxes, as this is perhaps where – from the UAE perspectivethe biggest change is.

UK corporation tax

Assuming that our intrepid entrepreneur has:

• set up a new company in the UAE; and

• has appointed directors in that jurisdiction such that it is ‘managed and controlled’ from the UAE then the company should not be resident for tax purposes in the UK.

However, a UAE company could still have a UK taxable presence where it has a UK trade or where it has a UK Permanent Establishment. (“PE”) The Company might have a UK PE where is has a UK sales office, for example.

It should be noted that the fact that the Company has UK customers is largely irrelevant. However, clearly, at the other end of the spectrum, where the client base is almost wholly non-UK, then the chances of creating taxable apparatus in the UK is less likely.

Further, for corporation tax matters, unless it can be argued he or she is managing and controlling the company from the UK, the location of the individual shareholder does not really matter.

However, if the shareholder remains UK resident, then this will cause issue with a key set of anti-avoidance provisions called the transfer of assets abroad. We will discuss this below.

New local UAE corporate tax

On the 9th December 2022, the UAE set out legislation for the well anticipated corporate tax, which will be effective for financial years starting on or after 1 June 2023.

Up until now, the UAE has not had any tax on direct profits of individuals or companies. It is thought that the introduction of this new regime better reflects international standards. As such, and by not swimming against the tide, it is hoped these changes will fortify the UAE’s growth as a go-to jurisdiction for business and investment.

Under the new rules, the following will be “Taxable Persons”:

• UAE companies and other non-natural persons (referred to simply as Companies for the rest of this article) that are incorporated or effectively managed and controlled in the UAE;

• Non-resident Companies that have a Permanent Establishment in the UAE

• Natural persons (individuals) who conduct a Business or Business Activity in the UAE as specified in a Cabinet Decision to be issued in due course; and Companies established in a UAE Free Zone are also within the scope of Corporate Tax as “Taxable Persons”.

However, there is an all-important qualification around so-called Qualifying Free Zone Persons. These characters will pay 0% on their Qualifying Income. However, it is not yet understood what this Qualifying Income is!

Broadly, the exposure to UAE corporate tax is as follows:

• Resident Persons: taxable on income derived from both domestic and foreign sources

• Non-Resident Persons: taxed only on income derived from sources within the UAE

The headline rate of corporate tax is 9%, which applies to Taxable Income exceeding AED 375,000. Below this threshold, the rate of tax is 0%

This is an overview of the position and we would strongly recommend obtaining formal local advice before taking, or refraining from, any actions.

To discuss how ETC can help with your tax questions call the team on 0161 711 1320 or email enquiries@etctax.co.uk

Personal taxes

Perhaps somewhat counter-intuitively, it can be the personal tax rules, and the personal tax anti-avoidance rules in particular, that make or break such an exercise.

Leaving the UK

As stated above, whether our entrepreneurial friend is leaving the UK or not will be the seminal question here.

Of course, when I say ‘leaving the UK’, I mean becoming non-UK resident for tax purposes. I haven’t got the space to discuss the statutory residence test here. However, here’s one we prepared earlier!

Where the shareholder in the new company is going to be non-UK resident, we do not have to worry about the anti-avoidance provisions listed below. In addition, if the individual is non-UK resident, then any dividends paid by the new UAE company will be free of UK tax.

One needs to be mindful of the 5-year temporary non-residence rule here. However, if the profits of the Company arise after breaking UK residence, then this should not be an issue even if the individual returns within the 5 year window.

The position is much more perilous where the individual remains in the UK, however…

UK anti-avoidance

If the shareholder remains UK resident, then we have to run the gauntlet of the transfer of assets abroad (“TAA”) rules.

These rules have been on the statute for many decades but are over-looked by those who think that ‘doing a Google’ is as easy as the press want us to think.

These rules bite where, in the context of a company, assets are transferred to a non-UK company to avoid tax and they produce non-UK income. Under basic principles, the Company may escape corporation tax for the reasons set out above.

However, the rules put an end to this relatively simple wheeze by allowing HMRC to essentially look through the entity and assess the individual shareholder on the profits. There are two relevant defences to these rules. Firstly, where the non-UK entity is established broadly for commercial purposes. Also, there is a statutory EU defence if the Company is resident in an EU member state (clearly not relevant for the UAE!)

Local personal taxes?

At present, there is no personal income tax in the UAE.

Value added tax

VAT was also introduced in the UAE relatively recently. The standard rate is 5%.

Conclusion

So, there we have it.

As with any tax planning, it all boils down to the personal and commercial objectives of the individual.

In fact, some might say it’s all in the ‘Tank fly boss walk jam nitty-gritty’.

Something that is difficult to distil into a Tik Tok video.