Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘economic substance’

UAE: Economic substance

The United Arab Emirates (UAE) have enacted new economic substance requirements that entered into force at the end of April 2019.

In response to EU Code of Conduct Group (COCG) initiatives, the governments of Bahamas, Bermuda, British Virgin Islands (BVI), Cayman Islands, Guernsey, Isle of Man, Jersey, Mauritius and Seychelles introduced economic substance rules with effect from 1 January 2019. The rules are based on the guidance and requirements issued by the EU and the OECD, and are designed to ensure that companies operating in a low or no corporate tax jurisdiction have a substantial purpose other than tax reduction and an economic outcome that is aligned with value creation.  To align with the international standards, the UAE has now enacted substance rules.

To meet the economic substance requirement, companies will generally need to satisfy the following three tests:

  1. The company should be directed and managed in the UAE for the specific activity.
  2. The company’s CIGA should be performed in the UAE.
  3. The company should have an adequate level of qualified employees, premises and annual operating expenditures.

Companies with UAE operations, especially without adequate substance, should review the new rules or administrative penalties or reregistration.

EY’s Global Tax Alert provides additional details for reference.

https://www.ey.com/Publication/vwLUAssets/UAE_enacts_economic_substance_rules/$FILE/2019G_003050-19Gbl_UAE%20enacts%20economic%20substance%20rules.pdf

Brazil: Holding company test

Brazil has placed Dutch holding companies back on its list of privileged tax regimes, as it has determined that such companies that do not have “substantial economic activity” will be subject to adverse Brazilian tax consequences.  EY’s Global Tax Alert provides additional details:

http://www.ey.com/Publication/vwLUAssets/Brazil_places_Dutch_holding_companies_without_substantial_economic_activity_back_on_list_of_privileged_tax_regimes/$FILE/2015G_CM6098_BR%20places%20Dutch%20holding%20cos%20wout%20substantial%20eco%20activity%20back%20on%20PTR%20list.pdf

Best Practices: All multinationals should review not only Dutch holding companies, but all holding companies to test economic substance.  Russia has enacted recent rules on beneficial ownership, also looking at economic substance to determine the availability of treaty benefits.  Other countries are expected to be more active in this subjective determination, thus this will be a topic for disputes gong forward.

UK Diverted Profits Tax (DPT): Start your engines

Clifford Chance has provided an excellent primer discerning the objectives, framework and challenges of the UK DPT that await MNE’s with a commencement date of 1 April, 2015.  The most recent guidelines were set forth in the latest UK Finance Bill, including a narrowing of the notification requirement while expanding the permanent establishment (PE) threshold.  A link to the summary and related PDF detail, as well as recently issued guidance from HMRC, are included for reference:

http://www.cliffordchance.com/briefings/2015/03/the_uk_diverted_profitstaxfinallegislatio.html

https://www.gov.uk/government/publications/diverted-profits-tax-guidance/summary-of-amendments-following-the-technical-consultation

This new “tax” is controversial, although its tentacles have already spread to Australia and other countries for similar consideration and implementation.  Additionally, it is worth noting that the OECD is closely watching these actions, remembering the viral discussions that ensued after UK and Germany jointly endorsed the “substantial nexus” approach for intangibles.

MNE’s will need to understand this new initiative and design a course of action, starting with documentation of its actions directly / indirectly in the UK and deciding if it is beneficial, and how, to discuss such conclusions with HMRC.  Apart from potential double taxation, there are many uncertainties introduced by this legislation.

Only time will tell how aggressively HMRC will pursue this “tax,” especially with its commencement on the heels of an upcoming election for which politics and taxes are always intertwined.

%d bloggers like this: