Latest VAT Updates in UAE | Tax Updates

Tax, VAT

UAE VAT Update – VAT Public Clarification on the VAT registration of ‘Sole Establishments’

alnuaimi October 20, 2020

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The Federal Tax Authority (FTA) has released a new Public Clarification on the VAT registration of ‘Sole Establishments’.

As defined by the FTA, the term ‘sole establishment’ refers to a legal form of business which is 100% owned by a natural person. Considering that a sole establishment does not have a legal personality that is independent of its owner, the sole establishment is considered to be the same person as its owner.

The FTA highlights that the Clarification does not apply to a One-Person Company LLC or other similar legal entities that are distinct and separate legal persons from their owners.

WHAT’S NEW?

The FTA clarifies that a natural person owning several sole establishments needs to obtain only one VAT registration for all its sole establishments. The VAT Registration in such cases should be obtained ideally in the name of the natural person who owns the sole establishment. However, it is also allowed to obtain the VAT registration in the name of one sole establishment of the person.

For assessing whether the VAT registration threshold has been exceeded, the value of taxable supplies made by the natural person and the value of taxable supplies of the sole establishment should be considered collectively.

WAY FORWARD

Review of previously submitted VAT registrations of sole establishments

The FTA notes that if the natural person has already received separate VAT registrations for different sole establishments, the FTA will review such registrations in certain cases and will notify the registrants on the corrective steps they should take. No action is required to amend the VAT Registration unless specifically requested by the FTA.

Ensure that taxable supplies of all sole establishments and the natural person have been declared

In light of the Public Clarification, the natural person is required to carefully analyze whether any of its sole establishments or its own taxable supplies are disregarded for VAT purposes. For instance, this may be in the case where the taxable supplies of the sole establishment have not yet reached the VAT registration threshold on a standalone basis.

If the person identifies any undeclared output VAT, it is required to inform the FTA through the submission of the Voluntary Disclosure.

Comply with the Public Clarification for all future registration applications of Sole Establishments

Following the release of the Public Clarification, the FTA expects that all future registration applications of Sole Establishments should adhere to the Public Clarification.

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Uncategorized

Is the Input VAT paid prior to Registration, claimable?

alnuaimi October 17, 2020

1,252 0

In UAE, mandatory VAT registration is required only for those businesses whose value of supplies exceeds AED 375,000 in previous 12 months or anticipated to exceed in next 30 days during the current financial year. For businesses with value of Supplies / Taxable Expenses exceeding AED 187,500 in previous 12 Months or anticipated to exceed in next 30 days during the current financial year, the VAT registration is optional.

All those businesses whose value of supplies are less than the defined threshold limit will not be allowed to register under UAE VAT. However, this does not stop or restrict them to obtain VAT registration in the future, when the value of supplies exceeds or is anticipated to exceed the defined VAT registration threshold. This eventually leads to a business situation, in which, businesses were not registered on the 1st January, 2018, the date on which VAT was implemented but over the period of time, they have exceeded the defined threshold and have been registered under UAE VAT.

If you take a close look at the above situation, there are two phases to the journey of the businesses, Pre-Registration and Post-registration. In pre-VAT registration phase, they had to pay VAT on their purchase/expenses but were unable to recover Input VAT. This is because, only the registered business are allowed to recover Input VAT. In the post-registration phase, they are required to collect 5% VAT on taxable supplies and also, they are allowed to recover the Input VAT paid on purchases/expenses.

While the above discussion looks clear, the confusion is about reclaiming the Input VAT paid before registration? Are businesses allowed to recover the VAT paid before VAT registration?

Yes, the UAE VAT laws allows the recovery of input tax paid on goods, services and imported goods prior to the date of VAT registration. This will be allowed, only if the goods and services were used to make supplies that give the right to input tax recovery upon tax registration. This implies that the purchases / expenses on which VAT was paid before registration were used in making taxable supplies after registration.

The recovery of Input VAT will be in accordance with the general provisions of input TAX recovery and more importantly, the recovery should be done in the VAT Return submitted for the first Tax Period following Tax Registration.

However, the UAE VAT also stipulates certain exceptional scenarios in which VAT paid before registration cannot be recovered. The following are the instances:

Goods and Services purchased for the purpose of making non-taxable Supplies. This implies that, you can recover VAT, only if it is used for making taxable supplies including zero-rated supplies.
Input Tax related to the part of the Capital Assets that depreciated before the date of Tax Registration. This implies that If part of the asset is depreciated then Input tax cannot be recovered on such assets to the extent such assets are depreciated. For example, if you purchase a fixed asset with an expected life of 10 years and when you register for VAT the asset has only 3 years of use left. In this case, you can reclaim only 30% of the VAT you originally paid.
Input VAT on service received more than 5 years prior to the date of tax registration will not be allowed to be reclaimed. This restriction is applicable only for services and not applicable for goods.
If such goods were moved to another GCC country before tax registration.

Except for the instances listed above, in all other cases, you will be eligible to recover VAT paid before registration, if it is used for making the taxable supply.

Conclusion

Allowing the businesses to recover the VAT paid prior to registration prevents cascading of taxes on the end consumers. The businesses registered after 1st January 2018, should be aware of the benefit provided by this provision in reclaiming the Input VAT. Any absence in knowing this provision of law will lead to loss of Input VAT recovery. Also, it is important for businesses to note that reclaiming of VAT paid before registration is allowed only while filing VAT returns for the first return period post registration. Thus, businesses must ensure to file a return for the first tax period after carefully analyzing the provisions discussed above. After, the filing of return of first tax period, recovery of input tax paid before tax registration cannot be made.

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Tax, VAT

Oman confirms roll-out of VAT

alnuaimi October 13, 2020

1,058 0

Essential foods, medicine, education exempt from levy

IDman is planning to introduce a 5 per cent value-added tax in April, following the lead of Gulf neighbors. Essential food items, medical care, education and financial services will be exempt from the planned levy, ac-cording to a royal decree de-tailing the tax yesterday.

Crude prices

Oman, the biggest oil ex-porter outside Optec, was among the more vulnerable economies in the six-nation Gulf Cooperation Council even before it was lashed by falling crude prices and the coronavirus pandemic. Its budget deficit as a share of gross domestic product is

anticipated to be among the highest in the region, according to the International Monetary Fund. The UAE and Saudi Arabia, also impacted by the drop-in oil prices, imposed a 5 per cent VAT in 2018. Saudi Arabia tripled its tax this year.

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Tax, VAT

VAT FAQs on supply of real estate in UAE

alnuaimi October 10, 2020

1,007 0

In our article ‘VAT on supply of real estate’, we have learnt the different scenarios of supply of real estate and VAT applicability in each case. Let us now answer the major FAQs with respect to supply of real estate under UAE VAT.

FAQs on Supply of Real Estate

FAQ 1: What is a supply in relation to real estate in UAE?

Answer: A supply of real estate may include the sale, lease or giving the right in any real estate.

FAQ 2: Is a residential property subject to VAT in UAE?

Answer: The first supply of a new residential building within the first 3 years of it being constructed will be zero rated. All subsequent supplies will be exempt, even if they are made within the first 3 years of it being constructed.

FAQ 3: Is commercial real estate subject to VAT in UAE?

Answer: All supplies of commercial properties are subject to VAT @ 5%.

FAQ 4: Can a real estate owner recover VAT paid in relation to real estate?

Answer: An owner of a residential building will be able to recover VAT in respect of expenses related to the first supply of the building, if it is supplied within 3 years of its completion. This is because the first supply of a residential building, within 3 years of its completion, is zero rated. However, for subsequent supplies of residential buildings, the owner will not be able to recover VAT on expenses, as it is an exempt supply.

Answer: An owner of a residential building will be able to recover VAT in res>An owner of a commercial building will generally be able to recover VAT in respect of expenses related to supply of the building, as it is a taxable supply.

FAQ 5: How is a mixed-use building (residential and commercial) treated for VAT?

Answer: An owner of a residential building will be able to recover VAT in res>Answer: The rent or sale of the residential part of the building will be treated as zero rated or exempt, depending on whether it is a first supply or subsequent supply.

The rent or sale of a commercial part of the building will be treated as subject to VAT @ 5%.

Answer: An owner of a residential building will be able to recover VAT in res>The tax incurred by the owner of the building needs to be apportioned when there is an exempt supply and the portion related to the taxable supply (at 0% and 5%) can be recovered.

FAQ 6: Does a person owning real estate need to register for VAT?

Answer: An owner of a residential building will be able to recover VAT in res>Answer: The owners of residential buildings do not have to register under VAT if they do not have any other business activities. Where owners have other business activities, they should check whether their turnover exceeds the threshold limit for registration. You can learn the threshold limit for registration in our article VAT registration threshold calculation.

Answer: An owner of a residential building will be able to recover VAT in res>The owner of any building that is not residential will have to register if the value of supplies over the preceding 12 months exceeds AED 375,000 over the coming 30 days.

FAQ 7: Will VAT be charged to a tenant on the property he/she is renting in UAE?

Answer: The rent of residential buildings will generally be exempt from VAT. The rent of commercial buildings will be subject to VAT @ 5%.

FAQ 8: What is the VAT rate applicable to different types of supply of real estate?

Answer: The following is the VAT treatment of different types of supplies of real estate:

Standard rated supplies (Taxable @ 5%)

Lease or sale of commercial property
Car parking and hotels

Zero rated supplies (Taxable at 0%)

First supply of residential buildings within 3 years of its completion
First supply of Charity related buildings

Exempt supplies

Supply of residential buildings
Bare land

Answer: An owner of a residential building will be able to recover VAT in res>Hence, the supply of real estate under VAT in UAE is taxed differently based on the type of supply. It is essential that persons dealing in the real estate sector understand the tax applicability on real estate supplies.

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VAT

Input VAT Adjustments in VAT Return Form 201

alnuaimi October 5, 2020

980 0

The adjustment column available in box no. 9 ‘Standard Rated Expenses’ should be used to report adjustments pertaining to input VAT claimed in the previous return period.

he adjustments will arise due to any of the following reason:

Input VAT adjustments under bad debts relief
Input VAT apportionment annual adjustments
Adjustments under the Capital Assets Scheme

Let us discuss these adjustments in detailed.

Input VAT adjustments under bad debts relief

This adjustment is related to input tax previously recovered on purchases where you haven’t paid the supplier of those goods or services for more than 6 months after the due date for payment. In such cases, the supplier has an option to claim output VAT which he had already paid to FTA in his previous VAT returns. The supplier can opt for this under the Bad debt relief scheme.

In case, the supplier opts for bad debt relief, the FTA will repay the VAT to the supplier. As result, you will not be entitled for input VAT recovery on such supplies and you should repay it to the FTA. Such adjustment needs to be reported in ‘Adjustments’ column available in box no. 9. Later, when you pay your supplier the value of purchase along with VAT in the subsequent tax period, you will be entitled to reclaim the Input VAT in VAT return belonging to that tax period.

Based on the nature of adjustment, the value can be positive or negative. When you are asked to repay the input VAT claimed in previous return, you need to mention the value in negative. To reclaim it, you need to mention it in positive.

Input VAT apportionment annual adjustments

The input VAT apportionment annual adjustment is required in the case where you are making taxable and exempt supplies. In such a case, you will not be entitled to recover complete input VAT paid on your purchases or expenses. This is because, the input VAT paid on purchases or expenses which are used for making exempt supplies will not be entitled for input VAT recovery.

In such as case, the executive regulation provides the guidelines for calculating the eligible input VAT recovery, especially when you cannot separately identify as to whether it relates to taxable supplies or exempt Supplies. In addition to calculating and reporting the eligible Input VAT recovery in each of VAT return period, you also need to do the calculation at the end of each tax year and accordingly report the difference, if any. These adjustments will be allowed to be made in the first tax period following the end of the tax year.

In order to enable the taxpayers in identifying the tax period in which such adjustment should be reported, the return form is enabled with ‘VAT Return Period Reference Number’. If the VAT Return period reference number at the top of the VAT return is Period ‘1’ for any tax year, the taxpayer will include such adjustment in that tax period.

Please note since this is an annual adjustment, it will only be applicable from the beginning of 2019 onwards. The values included in the adjustment’s column can either be ‘positive’ or ‘negative’ values

Adjustments under the Capital Assets Scheme

This is applicable only for assets consider under the capital assets scheme. To be considered as capital assets, it should be a single item of expenditure of the business amounting to AED 5,000,000 or more excluding tax, on which tax is payable and which has estimated useful life equal to or longer than 10 years for building and 5 years for other capital assets.

The input tax paid on the purchase of capital assets will be deferred over the period of use of such asset. The input VAT incurred will be adjusted over a period 10 ten consecutive years for buildings and 5 five consecutive years for other Capital Assets, commencing on the day on which the owner first uses the Capital Asset for the purposes of its Business.

If any of your capital assets are eligible for the Capital Assets Scheme, then the input tax incurred in relation to that capital asset should be adjusted in each tax year, according to the guidelines given the Executive Regulation for a period of either five or ten consecutive years depending on the type of capital asset.

Key points for reporting the input VAT adjustments in VAT Return Form 201

1.Only those adjustments which are discussed above should be reported
2.Depending on the nature of adjustment, the value can be either positive or negative. To claim or reclaim, you need to mention in positive and to re-pay, it should be negative
3.If the adjustments are not applicable, do not include anything in the adjustment column

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Tax, VAT

New Residence VAT Refund Scheme in UAE

alnuaimi October 1, 2020

1,266 0

Under VAT in UAE, the UAE Government has proposed a VAT refund scheme for UAE nationals when they construct a new residence. Let us understand the new residence VAT refund scheme in detail.

What is the new residence VAT refund scheme for UAE Nationals?

The new residence VAT refund scheme is applicable to UAE nationals who newly construct a building to be used solely as a residence by the person or his/her family. This is applicable when the person owns or acquires land in UAE on which he builds or commissions the construction of his own residence. Under this scheme, such a person will be entitled to claim a refund of the tax paid on the expenses of constructing the residence.

What are the conditions to be eligible for this scheme?

The conditions to be fulfilled in order to be eligible for this scheme are:

The claim should be made by a natural person who is a UAE national.
The claim should relate to a newly constructed building to be used solely as residence of the person or the person’s family.
The claim should not be made in connection with a building which will not be used solely as a residence by the person or his/her family.

For example: A hotel, guesthouse, hospital, etc.

When should the refund claim be made?

The refund claim under this scheme should be lodged within 6 months from the date of completion of the newly built residence. A newly built residence is considered as completed on the date the residence becomes occupied or the date when it is certified as completed by a competent authority in UAE, whichever is earlier.

Which are the expenses on which refund can be claimed?

The expenses on which refund of VAT paid can be claimed under this scheme are:

Services provided by contractors, including services of builders, architects, engineers, and other similar services necessary for the successful construction of the residence.
Building materials, being goods of a type normally incorporated by builders in a residential building or its site. This does not include furniture or electrical appliances.

What happens if the person later uses the property for commercial use?

When a person who has claimed refund of VAT under this scheme, later uses the property for commercial use, he/she will be required to repay the tax that was refunded earlier.

The new residence VAT refund scheme is an attractive scheme for UAE nationals who newly construct their residence in UAE. They can reduce the expenditure incurred on account of VAT paid on the expenses of constructing the new residence. It is also a measure by the UAE Government to assist UAE nationals to construct residences. UAE nationals can note the conditions of this scheme and use it for their benefit.

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Tax

Retrospective Amendment to ESR In UAE

alnuaimi September 26, 2020

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As part of the UAE’s commitment as a member of the OECD Inclusive Framework, it introduced a Resolution on the Economic Substance (Cabinet of Ministers Resolution No.31 of 2019, the ‘Regulations’) on 30 April 2019 (hereinafter referred to as the ‘Erstwhile Regulations’). The concerned Ministry also released multiple guidance and Frequently Asked Questions (FAQs) for ease of understanding the requirements of the law.

Recently, the Ministry, in an attempt to revamp the Erstwhile Regulation has issued an amended Regulation (vide Cabinet Resolution No 57 of 2020) and guidance (Ministerial Decision No 100 of 2020) that repeals and supersedes the Erstwhile Regulation and guidance with retrospective effect. The said amended Regulations are hereinafter referred to as New Regulations.

Notably, the New Regulations have introduced significant amendments to the extent of changing the governance mechanism, scope and applicability, compliance procedure, and also enhanced the quantum of administrative penalties for non-compliance.

This alert summarizes the key changes and its possible implications on the compliance requirement of the businesses in the UAE.

Re-asses | Scope and Applicability

Licensee

The Erstwhile Regulation was applicable to all the licensees, whether a natural or juridical person, who has been licensed by the competent authority to carry out an activity in UAE. Whereas, the New Regulation covers private/public shareholding company, joint venture company, partnership firm, etc. In other words, the New Regulation does not cover individuals, sole proprietorship, trust, or a foundation under its ambit.

Exemptions

Earlier, licensee owned (more than 51%) by Federal or Emirate Government, directly or indirectly, were exempt from Regulation. This exemption has been removed by the New Regulation.
Additionally, the amended Regulation has enlarged the exemption to the following categories:
- Investment Fund;
- A company that is a tax resident of a country outside the UAE;
- A licensee who is completely domiciled in the UAE (not part of a MNE group and no cross border activities);
- Branch of a foreign entity which is taxed outside the UAE.
However, the exemption to the above categories will be applicable only upon submitting evidence to fulfill the conditions prescribed for exemption.

Applicability to Branch

Earlier, the Regulation required all the licensee (including branches) who have undertaken Relevant Activity to comply with the Regulation.
The amended Regulation clarifies the compliance requirement for UAE as well as foreign branches as under:
- UAE branch of UAE entity – It is merely an extension of ‘parent’ or ‘head office’ and, therefore, not considered as a separate entity for this Regulation.
- Foreign branch of UAE entity – UAE entity is not required to consolidate activities/income of foreign branch for ESR provided that the income of such branch is subject to tax outside the UAE. In this context, the branch includes a Permanent Establishment or any other form of taxable presence for corporate income tax purposes.
- UAE branch of a foreign entity – It is clarified that such an entity is required to comply with Regulation unless the Relevant Income of such branch is subject to tax outside UAE.

Re-validate | Definition of Distribution, Service Center and Intangible transactions

Amendment in Definition of Distribution and Service Centre Business

Earlier, for an activity to be qualified as a Distribution Business, the following conditions were required to be fulfilled:

✓Purchasing from Foreign Connected Person
✓ Importing and storing in the UAE
✓ Re-selling such component outside the UAE

The New Regulation has significantly amended the above definition, perhaps for the right reason. The New Regulation has removed the condition for importing/storing in the UAE. Also, the re-selling of goods within the UAE will now qualify as ‘Distribution Business’ under the New Regulation.
Similarly, as regards the Service Centre Business, it is now clarified that any services provided to foreign connected persons shall qualify as the Service Center Business, regardless of the business of the foreign connected person.
In effect, the scope of Distribution and Service Center Business has now been enlarged to certain activities that were previously falling outside the definition due to the language of the law.

High-Risk Intellectual Property Licensee

The New Regulations have provided much-needed clarity on this relevant issue, which is at the center of profit shifting in most cases – the intangible-related transactions.

The New Regulations have now clarified that a licensee would be covered under the Regulations if it derives income from licensing or selling of an intellectual property to a foreign-related party. Also, if such an intellectual party was previously acquired from (a) Connected Person or (b) in consideration for funding research and development by another person situated in a foreign country.

Re-Notify | Furnish Notification to Ministry

Earlier, the notification was required to be filed at the time specified by the Regulatory Authority in the form and manner prescribed by them. It is pertinent to note that most of the businesses in the UAE have already furnished the notifications to their respective Regulatory Authority. The due date in most cases to file such notification with the Regulatory Authority was 30 June 2020 for the financial year ended on 31 December 2019.
As per the amended Regulation, the notifications must be submitted electronically on the Ministry of Finance Portal within six months from the end of the financial year of the licensee.
Guidelines also clarified that licensees that have already submitted a notification to their Regulatory Authorities would be required to re-submit the notification on the Ministry of Finance portal once the portal is active. At present, no deadline is mentioned for this re-submission.

Re-strategize | More Stringent Administrative Penalties

The amended Regulation has increased the administrative penalty in certain offenses. We have summarized the administrative penalties as under:

Offense	As per original Regulation (in AED)	As per amended Regulation (in AED)
Failure to notify/ filing inaccurate particulars	10000 to 50000	20000
Failure to meet substance test (First Year)	10000 to 50000	50000
Failure to meet substance test (Subsequent Year)	300000	400000

Additionally, in certain cases, the penalty included sharing of information with foreign competent authority as well as suspension/cancellation of license.

Changes in the Governance Mechanism

Regulatory Authority and National Assessing Authority

The Erstwhile Regulation/Ministerial Guidance suggested that the ESR report was to be furnished to various Regulatory Authorities within the UAE, depending upon the type of Relevant Activities.
Under the New Regulation, the Ministry has appointed Regulatory Authorities for different Relevant Activities, and at the same time, it has appointed Federal Tax Authority (‘FTA’) as National Assessing Authority.
It has been clarified that the role of the Regulatory Authorities is mainly to collect/verify information/ documents from the licensees, whereas National Assessing Authority is required to undertake the assessment for determining Economic Substance Test, imposing a penalty, or hearing appeals.

Exchange of Information

The Erstwhile Regulation specified that Information should be exchanged with foreign competent authorities under the following circumstances:
✓ Licensee fails to satisfy substance test
✓ Licensee is High-Risk IP Licensee
In addition to the above, the amended Regulation has also included a circumstance for exchanging information when an entity/ branch of a foreign entity claims to be a tax resident outside the UAE.

Way Forward

With less than four months to the statutory due date for furnishing the first annual economic substance report for most businesses in UAE, the Ministry, by making a retrospective amendment to the Regulation, has, in a way, pushed the licensees to re-test, re-notify, and re-strategize the existing position.

When most of the businesses were busy in preparing/ collating information for preparing annual ESR report (due in December 2020), this additional exercise of re-assessing the applicability of Regulation will increase the compliance burden

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Tax

Economic Substance Regulations in UAE: Changes and their impact

alnuaimi September 24, 2020

1,128 0

In response to a review of the UAE’s tax framework by the European Union and the UAE’s commitment to the Organization for Economic Cooperation and Development (OECD) anti-Base Erosion and Profit shifting (BEPS) Action Plan, in 2019 the UAE Cabinet issued: (i) the Cabinet of Ministers Resolution No. 31 of 2019 concerning Economic Substance Regulations in the UAE (the “Original ESR”); and (ii) Ministerial Decision No. 215 of 2019.

These regulations have been repealed and replaced by: (i) the Cabinet of Ministers Resolution No. 57 of 2020, issued on 10 August 2020 (the “New ESR”); and Ministerial Decision No. 100 of 2020, issued on 19 August 2020 (together with the New ESR, the “Regulations”) respectively.

The New ESR have overhauled the roles and responsibilities of the relevant authorities by introducing the Federal Tax Authority (FTA) as the National Assessing Authority (NAA) and made some changes in the definitions of some relevant activities. Most importantly, the new law has broadened the scope of exemption by including more categories of licensees to avail the exemption from ESR.

The New ESR require entities (both onshore and free zone) that undertake any of the following activities to maintain an ‘economic’ presence in the UAE:

Banking Business;
Insurance Business;
Investment Fund Management Business;
Shipping Business;
Lease-Finance Business;
Distribution & Service Centre Business;
Headquarters Business;
Intellectual Property Business; and
Holding Company Business,

(each a “Relevant Activity”).

Pursuant to the Regulations, several amendments have been introduced and clarifications made, including the following:

1. Definition of Licensee

The New ESR apply to: (i) juridical persons (a corporate legal entity with separate legal personality from its owners); and (ii) unincorporated partnerships that carry out a Relevant Activity in the UAE (including a free zone) (each a “Licensee”). Natural persons (who fell within the definition of “Licensee” in the Original ESR) are no longer covered, and therefore do not need to file a notification or meet the Economic Substance Test (as detailed in Article 6 of the New ESR).

The New ESR have overhauled the roles and responsibilities of the relevant authorities by introducing the Federal Tax Authority (FTA) as the National Assessing Authority (NAA) and made some changes in the definitions of some relevant activities. Most importantly, the new law has broadened the scope of exemption by including more categories of licensees to avail the exemption from ESR.

The New ESR require entities (both onshore and free zone) that undertake any of the following activities to maintain an ‘economic’ presence in the UAE:

Banking Business;
Insurance Business;
Investment Fund Management Business;
Shipping Business;
Lease-Finance Business;
Distribution & Service Centre Business;
Headquarters Business;
Intellectual Property Business; and
Holding Company Business,

2. Widening of the Exemption scope

Pursuant to the New ESR, the following entities are excluded from the requirement to meet the Economic Substance Test:

licensees who are tax resident outside UAE;
investment funds and their underlying SPVs and/or investment holding entities;
wholly owned businesses of UAE resident which are not a part of a multinational group and only carries on business in the UAE;
a branch of a foreign company whose income is subject to tax in a foreign jurisdiction; and
any other licensees as directed by the Ministry of Finance (MoF),

(each an “Exempted Licensee”).

Exempt entities are required to: (i) file a notification; and (ii) provide sufficient evidence substantiating its status as an Exempted Licensee for each financial year in which it is claiming to be an Exempted Licensee.

Previously, the exemption scope was limited to any commercial company in which the Federal government or Government of any Emirate or any Government body had at least 51% direct or indirect ownership.

Overall, the expansion of exemption scope means that more licensees would be able to claim the exemption which would be a relief for many companies.

3. Amendment to the definitions of some relevant activities

Distribution and Service Centre Business:

The old definition of a ‘Distribution and Service Centre Business’ required the purchase of goods from a Foreign Connected Person (as defined in the Old ESR), importing goods into UAE and subsequently reselling them outside UAE. This has now been amended to exclude the requirement to import and export the goods from UAE.

This means that businesses which are engaged in purchasing goods from a Foreign Connected Person (as defined in the New ESR) for the purpose of selling them in within UAE or sells the goods offshore (i.e. high sea sales) should qualify as a Distribution and Service Centre Business under the New ESR.

The definition of a Distribution and Service Centre Business has also been amended to exclude the requirement of the services to be in connection with a business outside UAE. Therefore, licensees providing any services to a Foreign Connected Person will now qualify as service center business.

These changes would likely result in a significant amount of MNCs in UAE having to reassess whether the Relevant Activity of ‘Distribution and Service Center Business’ would apply to them in their respective financial year.

High Risk IP Business:

Pursuant to the New ESR, the definition of a High Risk IP Licensee has been narrowed – the condition relating to a licensee not carrying out any research and development, or branding, marketing and distribution as part of its core income-generating activity in the UAE has been removed as part of the update.

IP related businesses should reassess wither they fall within the remit of the three limbs outlined in the New ESR.

4. Roles and responsibilities of various authorities in ensuring ESR compliance:

The Ministry of Finance remains the ultimate authority to ensure overall ESR compliance and remains responsible for exchange of information with foreign tax authorities.

The New ESR law has introduced Federal Tax Authority as the National Assessing Authority, who shall:

Conduct assessments to determine whether a Licensee has met the Economic Substance Test.
Impose administrative penalties.
Hear and decide on appeals.
Carry out reporting requirements and exchange of information with the Ministry of Finance.
In executing the above-mentioned functions, the FTA will draw support from the Regulatory Authorities (as detailed in Article 4 of the New ESR).
Regulatory Authorities will remain the first point of contact for collection of information and documents from Licensees, and shall:
Collect and review of ESR notifications and reports.
Identify and validate Licensees claiming exemption status.
Support the FTA during audits.
Implement cancellation/suspension/non-renewal of a Licensee’s trade license for instances of consecutive non-compliance.

5. First Reportable Period

All Licensees and Exempted Licensees are subject to the New ESR from the earlier of: (i) their financial year commencing on 1 January 2019; or (ii) the date on which they commence carrying out a Relevant Activity (in the case of a financial year commencing after 1 January 2019).

6. ESR Notifications – Electronic Filing

It is anticipated that the Ministry of Finance will launch an electronic portal to collect notification forms, substance reports and other relevant information. The rules and procedures will be published in due course. Where a notification has already been previously submitted to a regulatory authority, such notification will have to be re-submitted on the new portal once available. Licensees will need to submit their ESR notification within 6 months of the end of the financial year.

7. Board Members

It has been clarified that the ‘directed and managed’ requirement does not require board members (or equivalent) to be resident in the UAE. The board members (or equivalent) are required to be physically present in the UAE when taking strategic decisions.

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Accounting

What Consumers Must Check in a Tax Invoice in UAE?

alnuaimi September 21, 2020

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As a consumer in UAE, you are aware that VAT has been implemented in the country. You have also paid VAT on many purchases since then. However, there have been certain cases which have come to the fore now where suppliers have charged and collected VAT from consumers, though they are not authorized to do the same. As consumers, it is understandable that our knowledge of the intricacies of the VAT Law will be limited. However, you do not need to worry. With this simple checklist, you can ensure that you are receiving a genuine Tax Invoice for your purchase.

This can be a basic checklist for you to ensure that you are paying VAT to genuine suppliers. This, along with the provision for any person to verify the validity of a TRN, gives great power in the hands of consumers to ensure that they are not cheated.

Hence, these 4 things need to be checked by consumers when they receive invoices for their purchase. Note that a TRN (Tax Registration Number) is the identification number given to every registered business under UAE VAT. A business cannot charge VAT without being registered and holding a TRN. Additionally, in case you suspect that the TRN mentioned by the supplier is not true, you can verify its validity. We have explained the process for this in our article ‘How to verify whether a TRN is valid’. With these measures, you can ensure that you pay tax only to the businesses eligible to collect VAT.

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How to Choose the Best Free Zone for Your Business in UAE

alnuaimi September 20, 2020

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Free trade zone is an area designed to promote the international business in UAE by providing 100% foreign enterprise ownership. Free zones are designed to offer a bunch of attractive incentives such as no requirement for a UAE national as a local partner/shareholder, tax exemptions on duties and taxes and much more.

With the introduction of Vat in UAE, most of the free zones are referred to as designated zone offering Vat exemptions to the businesses located in these zones. Take a look at the list of designated zones in UAE

If you are non-UAE national looking to start a business in UAE, free zones are the best place. While this looks obvious, it isn’t an easy one. Each emirate in UAE has a designated area as a free zone and put together, there are more than 35 free zones spread across the UAE. Each of these free zones is regulated by different authorities and has varying guidelines that need to be adhered by the business.

The differing operational guidelines imply that all free zones are not suitable for all type of business in UAE. If you are starting a business in UAE, you need to look for a zone that best supports the nature of business you would like to start.

With this in focus, we are sharing you the factors that will help you choose the best free zone for your business in UAE

Type of business activity

Each free zone in UAE has different guidelines related to business activities that can be performed within the zone. Dubai Multi Commodities Centre (DMCC), a free zone in Dubai, you can choose from over 600 business activities ranging from over 20 sectors such as energy, commodities, gold and diamonds, technology, constructions, FMCG etc. In Dubai International Financial Centre (DIFC), you can conduct financial and non-financial businesses. While the Dubai Multi Commodities Centre (DMCC) allows only single-family offices

You need to carefully access the nature of your business activities and accordingly choose a free zone that permits you to conduct required business activities.

License requirements

This factor is directly connected with the nature of business activities. Depending on the primary activity of your business, you need to apply for a suitable license. Commercial license, service license, production license, general trading license etc. are some of the common license types.

Depending on the number of business activities, you may have to apply for more than one license and each license comes at a cost.

It is important to note that the number of activities your business will be allowed to perform under the single license differs from zone to zone. Dubai Multi Commodities Centre (DMCC) Free Zone allows to perform six business activities under the same type of license and others may require you to have a separate license for each activity.

Capital requirement

To register a company in UAE, you need to deposit the share capital. The minimum capital requirements for each zone differs. Each zone has a defined threshold for minimum capital that a business needs to deposit. Before registering, you need to know the minimum capital requirements for the zones that you have shortlisted.

Some zone like twofour54 in Abu Dhabi does not have a minimum capital requirement. In Dubai Airport Free Zone, you can form an FZ Co. with a minimum share capital of AED 1000. Each share should be in the denomination of AED 1000. Likewise, other zones too have their guidelines for the minimum capital requirement.

Office space

You can either buy or lease office spaces in free zones. Office requirements depend on the number of employees and type of business activity that your company intends to do.

In DMCC, you can choose from a flexi desk of 20-30 sq. m., 200-265 sq. m., or offices running through multiple floors totalling up to 2,000 sq. m. each.

In Dubai Airport Free Zone, you can choose between different office packages designed by the authority. Hamriyah free zone authority provides over 100 executive offices suites ranging in size from 15 m2 to 42 m2 with conferencing and internet facilities.

Based on number employee and business activities, choose a free zone that best fits you.

UAE residence visas

UAE residence visas are issued by the designated authority to foreign national who wants to work, start a business etc. The number of a residence visas a business can get depends upon the office facility type. Each office facility type comes with a limited number of visas that can be obtained. This again differs from one zone to another.

Type of legal entity

In a free zone, you can set up your business as ‘Free Zone Limited Liability Company (FZ LLC)’ also known as Free Zone Company (FZ Co.) or Free Zone Establishment (FZE). The type of legal entity you choose will have limitations on the number of shareholders that a company can have. This also depends upon whether a shareholder is a natural person or a legal person.

Each free zone authority has its own guidelines on the type of legal entity that they can register. For example, the Dubai Multi Commodities Centre (DMCC) allows forming a limited liability company, which could be a newly formed entity with single or multiple shareholders or a wholly-owned subsidiary of local or foreign company.

Now that you know the key factors to choose the best free zone for your business, next you need to know the VAT treatment on Designated Zone in UAE. In addition to obtaining the license and other legal requirements, you should apply for Vat registration. Once you have registered under Vat, you need to issue a VAT invoice for taxable supplies and periodically file Vat return.

For more information on these services, please contact us:

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Tertiary institutions can claim VAT refund

alnuaimi September 14, 2020

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Entities can recover input taxes if they are not in the blocked category

The Federal Tax Authority (FTA), has confirmed that higher educational institutions making only zero-rated and standard-rated supplies may recover input tax in full, except where recovery is specifically blocked. Blocked input tax includes value-added tax (VAT) incurred on certain entertainment services, and motor vehicles that have been purchased, leased, or rented and made available for personal use, the FTA said yesterday.

The Authority noted that higher education institutions providing exempt supplies are eligible to recover only a portion of the input tax incurred.

Supply of material

The FTA’s Basic Tax Information Bulletin focuses on the tax treatment for the higher education sector in respect of universities and higher education institutions recognized by the competent federal or local government entity regulating the higher education sector where the course is delivered.

Moreover, these higher education institutions may obtain zero-rate educational ser-vices supplied in accordance with a curriculum recognized 10 by the government, provided the institution is either owned by the federal or local government or receives more than 50 per cent of its annual funding directly from the federal or local government (qualifying institution).

The bulletin said the supply of printed and digital reading material related to an ap-proved curriculum shall be subject to the zero-rate if the supplier is a qualifying institution. The bulletin also noted that the transportation of students from home to the location of the higher education institution, and vice versa, is exempt from tax.

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News courtesy : Gulf News

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Tax

New deadlines to comply with ESR

alnuaimi September 13, 2020

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The UAE’s Economic Substance Regulations (ESR) have gained momentum again. While not a tax, the rules aim to determine that entities undertaking ‘relevant activities have adequate ‘economic substance’ in the UAE, are directed and supervised, and have adequate assets, resources and qualified people in the UAE.

Recently, significant changes were made to the ESR through Cabinet resolution No. 57 of 2020 and ministerial decision 100 of 2020. The amended ESR is a positive development. UAE businesses should take note of the amendments to reassess the implications and where they stand on compliance.

Extends the scope

The amended ESR covers juridical persons or unincorporated partnerships, while ‘natural persons’ possibly including sole proprietors, trusts and foundations are now excluded. Four categories of licensees have been specifically exempted from the ESR covering (a) investment funds, (b) a licensee that is tax resident in a foreign jurisdiction, and (c) a UAE branch of a foreign entity if the branch’s income is taxed in a foreign jurisdiction. The exempt category also includes entities wholly-owned by UAE residents/ nationals and are not part of a multinational group provided it carries out business in UAE. This is a big relief for local businesses. All exempted licensees are required to submit only the ESR notification along with prescribed documents on an annual basis.

Clarity has also been provided on businesses with multiple branches within the UAE, for foreign branches of a UAE entity, and for entities that undertook the ‘relevant activities’ but did not earn any income.

Among other changes, ESR now covers purchasing of goods from a foreign-connected person as well as the reselling of such goods. Under the original ESR, coverage under the D & SC business required (a) purchasing of goods from a foreign-connected person; (b) importing and storing those goods in the UAE; and (c) reselling the outside the country. With the removal of conditions (b) and c), purchasing of goods from foreign group companies for international distribution typically referred to as “bill to-ship to” transactions, or for local distribution within UAE, would trigger ESR compliance. Mother welcome change is the introduction of a concept of ‘group’ to identify foreign-connected person and link it with the requirements to prepare consolidated financial statements.

Resubmission necessary

A landmark change is the appointment of the Federal Tax Authority (FTA) as the ‘National Assessing Authority’. In addition to VAT and excise tax, the FTA will undertake assessments to determine compliance with economic substance tests by the entities. The FTA will also be responsible for administrative penalties, appeal processes and other prescribed functions. An online portal will be launched by the Ministry of Finance for submission of ESR notification/reports and other documents. Businesses will have to resubmit ESR notifications submitted earlier. The new deadlines for the resubmissions are yet to be announced by the authorities as on date.

ESR notifications and reports should be submitted within six-and 12 months respectively, calculated from the end of the financial year of the company, which is typically December, March or June. It has been clarified that the board members (or equivalent) of the business need not be UAE residents, but must be physically present in UAE when taking strategic decisions. Increased and stringent penalties for non-compliance could range from Dh20,000 to Dh50,000, further increasing to Dh400,000 and possible cancellation/suspension of trade license. Considering that limited time is available to prepare a detailed ESR report and submit/resubmit ESR notification, it is strongly recommended that businesses reassess the implications under the amended ESR.

For more information on these services, please contact us:

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E-mail: mail@alnuaimiauditors.com

News Courtesy : Gulfnews

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Blog

WHAT’S NEW?

WAY FORWARD

Re-asses | Scope and Applicability

Licensee

Exemptions

Applicability to Branch

High-Risk Intellectual Property Licensee

Re-Notify | Furnish Notification to Ministry

Re-strategize | More Stringent Administrative Penalties

Changes in the Governance Mechanism

Regulatory Authority and National Assessing Authority

Exchange of Information

Way Forward

1. Definition of Licensee

2. Widening of the Exemption scope

3. Amendment to the definitions of some relevant activities

4. Roles and responsibilities of various authorities in ensuring ESR compliance:

5. First Reportable Period

6. ESR Notifications – Electronic Filing

7. Board Members

Type of business activity

License requirements

Capital requirement

Office space

UAE residence visas

Type of legal entity

Supply of material

Extends the scope

Resubmission necessary

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