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The Federal Tax Authority (FTA) of UAE has announced three new VAT free zones which are known as Designated Zones in VAT Law. With the announcement of three new free zone, the number of designated zones is increased to 23. This is indeed good news for the businesses located in those zones. Because VAT at 5% will not applicable to the transactions done within the new Designated Zones barring few exceptions.

List of New VAT Free Zones in UAE VAT

Among the latest addition, Al Ain International Airport Free Zone and Al Butain International Airport Free Zone are the two new Designated Zone added in Abu Dhabi and International Humanitarian City – Jebel Ali in Dubai.

Effective Date of New Free Zone

The new VAT free zone or the designated zones (Al Ain International Airport Free Zone, Al Butain International Airport Free zone and International Humanitarian City – Jebel Ali) will be effective from 18th June 2018. This implies that from 18th June 2018 onwards, the businesses located in these new VAT free zones need to understand the VAT treatment on supplies carried out by them, assess the impact of VAT on their business and accordingly plan. To know more about the VAT treatment on Designated Zone supplies, please read VAT Computation on Goods Supplied from Designated Zone in UAE

Business Benefits for Businesses located in the New VAT Free Zones

The announcement of new VAT free zones provides major relief to the businesses located in those zones. This because, Designated Zone is a VAT free Zone which is considered to be outside the State of UAE for the purpose of VAT. As a result, on any transfer of goods between Designated Zones, VAT will be not be levied. The following are few benefits available for the business located in the Designated Zone.

• Any transfer of goods between Designated Zones will not be taxable.
• Export of goods from Designated Zone to oversee countries will not be taxable.
• Supply of goods from Designated zone to other GCC countries will not be taxable
• Similarly, import of goods from other GCC countries or overseas countries will be non-taxable

While the designated zones offer various benefits, it is important for businesses to note that they have to comply with the certain prescribed conditions which determine their eligibility. Also, there are few supplies which are taxable even when supplied inside the Designated Zone. To know more about the conditions and tax treatment on different types of supplies, please read our article VAT on Designated Zone in UAE.

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Question #1: My company has already submitted the ESR notification in June 2020 after a thorough review. Are the current amendments on ESR relevant for me?

The short answer is ‘Yes’, essentially for the following three reasons:

a) Since the submission of the ESR notifications in June this year, the scope of the ESR has been significantly revised in August 2020. Companies are required to examine whether they are still, or are now, covered under the amended ESR and ensure if their business is compliant.

b) The Ministry of Finance will launch an online portal to facilitate the electronic filing of the ESR notification. Companies are required to resubmit the ESR notification on the online portal even if the notification was earlier submitted in June 2020.

c) If a company is still covered, or is now covered, under the amended ESR, the company would also be required to submit the ESR Report (as per the recently introduced template) on the online portal.

(The online portal is yet to go-live, however, the MoF has recently issued the templates of the ESR notification and the ESR Report on the public domain or website, which gives insights into ESR compliance on the required data and records.)

Question #2: My company’s trade license does not list any of the ‘relevant activities’ covered under the ESR, should I still be concerned?

It is not enough to review the activities listed in the trade license to determine the applicability of the ESR. A ‘substance over form’ approach should be adopted to determine whether a company is conducting any of the ‘relevant activities’ covered under the ESR.

What is a ‘substance over form’ approach? ‘Substance over form’ is a subjective test whereby the actual essence or nature of a transaction is considered instead of the form or name given to such transaction.

WHAT ARE ‘RELEVANT ACTIVITIES’?

Nine activities are covered as ‘relevant activities’ under the ESR namely, (1) Distribution & Service Centre Business (2) Headquarters Business; (3) Lease Finance Business; (4) Insurance Business; (5) Investment Fund Management Business; (6) Banking Business; (7) Shipping Business; (8) Intellectual Property Business; and (9) Holding Company Business. The scope of each ‘relevant activity’ is explained in detail in the ESR laws and guidance.

Question #3: My UAE-based company (let’s call it ‘Company X’) purchases goods from group companies in Belgium and Germany. To save on the logistics costs, the group companies dispatches the goods directly to the end-customers in the US. Are the transactions of ‘Company X’ covered under the scope of the amended ESR?

Among other changes in the scope of ‘relevant activities’, Distribution & Service Centre (D&SC) business now covers purchasing of goods from a foreign connected person and reselling of such goods. Under the earlier ESR, coverage under the D&SC business required (a) purchasing of goods from a foreign connected person; (b) importing and storing the goods in UAE; and (c) reselling the goods outside UAE

With the removal of condition (b) and (c), purchasing of goods from foreign connected persons for international distribution typically referred to as “Bill To-Ship To” transactions, or for local distribution within UAE, could trigger the ESR compliance.

WHAT IS A ‘FOREIGN CONNECTED PERSON’?

Two or more entities are treated as ‘Connected Persons’ if they are related through ownership, like companies within the same group, trusts and trustees, companies and their shareholders, partners and their families. A ‘Foreign Connected Person’ means a connected person that is not tax resident in the UAE.

Question #4: Does my company need to pay additional taxes if my firm falls under ESR purview? Should the company stop the ‘relevant activity’ henceforth to remain outside the scope of the ESR?

Through international cooperation by over 135 countries, the ESR is aimed to curb tax evasion. However, applicability of the ESR in itself does not involve any additional tax obligation.

If the ESR is applicable on a company then the company needs to demonstrate that the ‘economic substance’ is present in the UAE. Only in the absence of ‘economic substance’ in the UAE, stringent penal consequences are applicable. The penalties for non-compliance could range from Dh20,000 to Dh50,000, further increasing to Dh400,00 and possible cancellation/suspension of trade license in the future years.

DID YOU KNOW?

The Federal Tax Authority (FTA) has now been appointed as the ‘National Assessing Authority’ for the ESR. In addition to VAT and Excise Tax, FTA will undertake assessments to determine compliance with ‘economic substance’ tests by the companies. As per the recent ESR notification template , the companies are required to report if they are registered for VAT or not.

Question #5: My company (let’s call it ‘Company D’) was incorporated on July 1, 2018 with its financial year ending June 30, 2019. What would be the first reportable period under the ESR?

ESR is applicable in relation to financial years commencing on or after January 1, 2019. Accordingly, the financial year of ‘Company D’ from July 1, 2018 to June 30, 2019 would not be covered under the ESR. The first reportable period for ‘Company D’ would be from July 1, 2019 to June 30, 2020.

WHAT ARE THE COMPLIANCE TIMELINES UNDER THE ESR?

For the financial year starting on or after January 1, 2019, a company is required to submit ESR Notification within 6 months from the end of the relevant financial year and the ESR report, if applicable, within 12 months from the end of the relevant financial year. The above timelines could vary depending on the go-live status of the online portal by MoF.

Question #6: My company (let’s call it ‘Company Local’) is a mainland company involved in a local grocery shop business. A UAE national and myself are the only two shareholders of Company Local. Is the company still required to comply with the ESR?

The amended ESR has introduced a category of ‘exempt licensees’ which covers (a) Investment Funds, (b) Licensee that is a tax resident in a foreign jurisdiction, (c) a UAE branch of a foreign entity (if taxed in a foreign jurisdiction); and (d) entities that carry out business in the UAE which are wholly owned by UAE residents/nationals and are not part of a multinational group.

Company Local should be covered under category (d) above and would be required to submit only the ESR notification along with certain prescribed documents on a yearly basis. Based on the category of the ‘exempt licensee’, the prescribed documents could include tax residency certificate of the foreign jurisdiction, details and tax residency certificate of the Head Office (Foreign Company), details of the shareholders of the companies and/or financial statements.

Courtesy: Gulf News.

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A business keeps growing and expanding constantly. In this process, it is important for businesses in UAE to be cognizant of the impact of changes in the business on compliance under VAT rules. Let us understand the type of business changes which have an impact on a business’s compliance under VAT and the steps to be taken in each case.

The changes in a business which impact compliance under VAT can be categorized into 2 types:

• Change in account details
• Change in business circumstances

Let us understand these in detail.

Change in business details

This type of change is applicable to persons who are registered under VAT in UAE. When there are changes in their account details maintained with the FTA, it is important that these changes should be notified to the FTA. The FTA will amend the VAT registration accordingly.

Some examples of changes in account details, which should be notified to the FTA are:

• Name or trading name of the business
• Composition of a partnership
• Address of the principal place of business
• Primary business activity or activities
• Bank account details of the business or
• Details of Customs registration

Certain changes in account details, such as business activities, customs registration information, can be changed online by logging in to the FTA portal. These changes and how to make these changes are explained in detail in our article ‘Online amendment of registration details’.

Certain other changes in account details, such as address of the principal place of business, bank account details, have to be notified in writing to the FTA. These changes have been explained in detail in our article ‘Amendment of details blocked for online modification’.

Change in business circumstances

There are certain changes which occur in a business which lead to a change in the business’s circumstances materially. Examples of such changes are:

• The business ceases to be eligible for an exception from registration
• The business ceases trading or
• Certain taxable activities cease for any reason

These changes in business circumstances will result in a requirement to register under VAT or cancellation of registration.

Administrative penalty for failure to notify FTA of business changes

It is a taxable person’s responsibility to ensure that the information on which their registration is based, is accurate and up to date. In the event of a change in business details, whether it is a change in account details or change in business circumstances, the taxable person should notify the FTA of the change, in the relevant manner. In case a change in business details is not notified to the FTA, a penalty could be levied. The administrative penalty for failure to notify the FTA of business changes is as follows:

Hence, it is essential that taxable persons should ensure to inform the FTA in the event of a change in their business details. This change can be a change in account details or a change in business circumstances. Based on the type of change in business details, appropriate actions to notify the FTA need to be taken.

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On bounced cheque cases, Law stipulates how criminal lawsuits can be avoided.

The UAE Cabinet has issued a Decree bringing about changes to the Commercial Transactions Law, including those related to bounced cheques. These come into force in 2022.

This will create mechanisms that will ensure the collection of payments through cheques, such as obliging banks to partially pay the amount after deducting the total amount available to the beneficiary. The Decree also makes bounced cheques an executive document to be executed directly by an appropriate judge in court.

The changes in the Law also aim to bring about an avoidance of criminal lawsuits through encouraging reconciliation and urging the payment of the value of the original cheque as the main condition for the dropping of a criminal lawsuit.

The amendments introduce several other penalties, including cancelling the cheque books of convicted persons and preventing them from obtaining new ones for a maximum period of five years. There will also be a halt to their professional activities.

Additional penalties will be introduced, including the suspension of licenses to practice economic activities for six months.

The amendments also cover the opening of joint accounts. If one of the joint account holders dies or loses legal control, the other holder must notify the bank within 10 days from the date of death. The bank must, from the date of notification, limit the ability to withdraw from the joint account within a party’s share of the account balance on the day of death or loss of eligibility.

News Courtesy : Gulf News

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Changes to help avoid lawsuits, encourage reconciliation

The UAE Cabinet has issued a decree amending the Commercial Transactions Law, including those related to bounced cheques. The amended law comes into force in 2022. The changes will create mechanisms that will ensure the collection of payments through cheques, such as obliging banks to partially pay the amount after deducting the total amount available to the beneficiary. The decree also makes bounced cheques an executive document to be executed directly by an appropriate judge in court.

Main condition

The changes also aimed at avoiding criminal lawsuits through encouraging reconciliation and urging the payment of the value of the original cheque as the main condition for the dropping of a criminal lawsuit.

The amendments introduce penalties, including cancellation of the cheque books and preventing the defaulters from obtaining new ones for a maximum period of five years. Additional penalties will be introduced, including the. suspension of licenses to practice economic activities. for six months. With regard to joint accounts the bank must, in case of one of the joint account holders dies or loses legal control, from the date of notification, limit the ability to withdraw from the joint account within a party’s share of the account balance on the day of death or loss of eligibility.

News Courtesy : Gulf News

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On 24 August 2020, the UAE Cabinet published Cabinet Decision no. 58/2020 on the Regulation of Procedures related to Real Beneficiaries (the “New Cabinet Decision”). The New Cabinet Decision requires companies licensed to carry on business in the UAE to maintain a Register of Partners (or Shareholders) and a Register of “Real Beneficial Owners”. 

A “Real Beneficial Owner” is defined as the individual that ultimately owns and or controls the licensed UAE company, whether directly or indirectly, through at least 25% of its capital.  

What does this mean? 

• Most companies licensed to operate in the UAE will be required to create and maintain a Register of Real Beneficial Owners and a Register of Partners (or Shareholders) by 26 October 2020.
• According to the New Cabinet Decision, new and existing companies are required to submit these registers to the Department of Economic Development of the relevant Emirate (“DED”).
• Under the New Cabinet Decision, the competent licensing authorities are under an obligation to maintain the confidentiality of information submitted to them.

The  New Cabinet Decision applies to all companies licensed in the UAE, except for the following: 

• companies in financial free zones (Abu Dhabi Global Markets and Dubai International Financial Centre), which have their own rules in this regard. For example, Abu Dhabi Global Markets has issued requirements in this regard and which are aligned with the New Cabinet Decision.  
• companies which are wholly owned, directly or indirectly, by federal or Emirate government; and 
• companies licensed in the UAE which are ultimately listed on a market/exchange are exempt from certain of the requirements in the New Cabinet Decision, as they are subject to robust transparency rules on Real Beneficial Owners. 

Although the New Cabinet Decision specifies that penalties may be applicable for failure to comply, such penalties have not been confirmed by the authorities yet.  However, the MOE has confirmed that the Cabinet of Ministers may upon the recommendation of the Minister of Economy issue a new cabinet decision with the various penalties in this regard.  As of today, this has yet to be issued. 

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