Nikita Zharov, Head of Tax Compliance practice area, will share his experience of tax planning in cross-border transactions within holding companies at the XVII Tax Congress on May 23.
Ahead of the Congress, Nikita Zharov gave an interview for Trinity Events Group.
- Currently, Russian business is actively transferring trading and holding structures to the United Arab Emirates (UAE). What are the tax advantages of doing business in the UAE?
The UAE has historically attracted entrepreneurs from all over the world with its stable business environment and preferential tax regime. Remember there is no income tax and the income tax will only be in effect from 2023. Despite this, we still see a high interest from Russian business to work in the UAE. If we talk about tax advantages, the main ones, in my opinion, are the following: (1) for trading companies - the possibility to apply a zero rate of income tax; (2) for holding companies - if certain conditions are met, income in the form of dividends is exempt from taxation. In addition, it should be noted that the UAE management is not interested in burdening the business with unnecessary requirements. This manifests itself, among other things, in the tax sphere. For example, the amount of tax is calculated on the basis of regular financial statements (after making certain adjustments), and the local tax authorities can provide the necessary explanations on controversial issues.
- As of June 2023, the UAE is introducing for the first time a universal income tax. Does it really apply to all companies or are there exceptions?
In short, almost everyone. However, the legislator has fixed certain categories of taxpayers who will be exempt from profit taxation, for example - representatives of the public sector (government agencies, state-owned companies, etc.). Other business entities, as a general rule, should take into account the requirements of the new law. This applies, among others, to residents of Frison. However, the above-mentioned business entities are entitled to claim exemption if they meet the following criteria: (1) the criterion of sufficient economic presence in the UAE; (2) compliance with transfer pricing rules; (3) no will of self-payment of income tax; (4) receipt of "qualified" income.
In addition, the legislator has provided additional benefits for other categories of taxpayers - depending on the volume of profits / revenues.
- What tax risks should be considered when doing business in the UAE? Are there any tax benefits for residents there?
The main risk, in our opinion, is the lack of established practice of application of the new law. This may cause disputes with tax authorities. Other risks that should be taken into account by Russian business: (1) application of TP rules; this means that transactions between interdependent persons should be carried out on market conditions. In addition, the taxpayer's opening balance sheet, which will be used in calculating the liabilities for the first tax period, should be prepared taking into account the TCO rules; (2) the risk of recognition of the company as a tax resident of the UAE; the UAE legislation provides for the possibility to recognize a foreign company as a tax resident of the UAE on the basis of the place of its effective management. This risk seems to be particularly relevant in the context of mass relocation of teams to the UAE.
Key benefits to keep in mind for businesses: (1) for freezone-based trading companies, the possibility of applying a zero rate; (2) for holding companies, the possibility of exempting dividend income from taxation if certain conditions are met; (3) for small businesses, exemption from taxation; the taxpayer is entitled to take advantage of this benefit if his taxable income does not exceed 3 million AED for the preceding or current tax period or he is not a "qualified" resident of the freezone
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