Dub(ai) be good to me?
Some time ago I wrote a rather bilious article after viewing a video post by a ‘tax influencer’ (should that be effluencer?) shilling the tax benefits of Dubai (UAE).
In short, move here and pay no tax on your personal and business income. It wasn’t a great take. However, it is also not a unique one.
That’s not to say I don’t like Dubai or the UAE, of course. I live here.
I love the sun. I feel I should have been born in a different company. A unique form of body dysmorphia perhaps?
Further, and more seriously, the UAE is bursting with business opportunities and the ambition of the region is as remarkable as it is refreshing.
As such, the attractions for setting up one’s business and life over there are not lost on me.
But does our fresh-faced influencer have a point or not?
Getting serious
Of course, historically, the UAE has had an exceedingly light touch (we’re talking helium, here) to taxation.
However, as we will see, this recently shifted for corporate taxes and did so in most of the gulf states for VAT a number of years ago.
So, can we move seamlessly, fiscally speaking, from the UK to the UAE?
Things tend to 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 from a residence perspective?
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 the UK’s Transfer of Assets Abroad (TAA) provisions are simply 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 perspective – the biggest change has been.
UK corporation tax
Assume that our intrepid entrepreneur has:
- set up a new company in the UAE (Dubai);
- and has appointed directors in that jurisdiction such that it is ‘managed and controlled’ from the UAE
Here, 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 touch points 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, the aforementioned TAA provisions, that we will discuss this below.
UAE corporate tax
Up until 1 June 2023, the UAE levied no tax on the direct profits of individuals or companies.
However, following the enactment of a new corporate income tax law, taxable persons are likely to be subject to tax on business profits.
As one would expect for a ‘corporate income tax’ 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 are potentially subject to the tax/
In addition, Non-resident Companies that have a Permanent Establishment (think branch) in the UAE are within its scope.
Perhaps more surprisingly is that natural persons (including individuals) who conduct a Business or Business Activity in the UAE are also within its scope. 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 persons pay 0% on their Qualifying Income, which is a narrowly defined category.. 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%
One important feature of the regime is a relief called Small Business Relief. This valuable relief might apply where revenue is no more than AED 3m. Where an election is made for SBR then the Taxable Person is deemed to have no income at all – and therefore has no tax to pay.
Not too shabby.
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 (for UAE?)
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! [Draft and link]
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 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!) and, for obvious reasons (the B word), the standing of this defence is a little uncertain.
Local personal taxes in the UAE?
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.
If you require further information on UK tax advice for expats or any other tax planning advice then please get in touch
Mosaic Chambers LLC
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