Is the foreign offshore companies like BVI companies and Cayman Islands Countries are taxed in UAE Corporate Tax?

Many business owners have this question in mind: those who are staying in the UAE and having companies in offshore countries like BVI, Cayman Island, St. Kitties & Nevis, etc., will they declare such companies to the UAE Tax Authority and pay taxes on the profit made by such offshore companies? The answer is “maybe,” and through this article, we are going to figure out the circumstances where foreign offshore companies are taxed in the UAE Corporate Tax regime.

Corporate Tax is implemented in the UAE with effect from 01 June 2023 and Corporate Tax is imposed on the taxable income/taxable profit of the company. The tax rates are as below:

• Taxable profit up to AED 375,000 is taxed at 0%.
• Taxable profit above AED 375,000 is taxed at 9%.

There is a special rate announced for Free Zone companies who are called Qualifying Free Zone persons, and those who satisfy certain conditions, such as qualifying Free Zone persons, are taxed at 0%. Want to know more? Read here

Corporate Tax is applicable for residents as well as non-residents. Residents are taxed on their worldwide income whereas non-residents are taxed on their income generated from UAE or income attributable to UAE. We have written a detailed article about residence in the UAE for Corporate Tax purposes and their taxation. Read here

There are 3 categories of residents in the Corporate Tax regime, and one of them is foreign companies, which are effectively managed and controlled in the UAE. We are going to analyze this type of resident person and how they will be taxed in the UAE when they should register for Corporate Tax etc.

Before diving into the Corporate Tax, let us understand the terminology used, which is effective management and control. There is always confusion between management and control vs. effective management and control.

The place of effective management can be explained as “a place where the key managerial and commercial decisions are made that are essential to running the business." UAE Corporate Tax Law has not given any clear interpretation so far on the Place of Effective Management Concept. The Organization of Economic Cooperation and Development (OECD) has given the guidelines to determine where a company has the place of effective management.

Below factors shall be considered:

• Where are the board meetings of the company usually held? A company’s strategic decisions, which can have a long-term impact on the business, are generally taken through board meetings. The place where the board meetings are held is the vital place for the business.
• Where do the core people of the business usually carry on the responsibilities? People like Chief Executives and Senior Executives are key managerial persons, and the place where they stay and deliver their responsibilities is a key place to determine the long-term and short-term plans and actions of the company.
• Where is the senior manager carrying on his day-to-day operations? The senior managers who are handling the day-to-day operations can be located anywhere in the world.
• Where is the headquarters of the company? Headquarters are generally responsible for the overall performance and success of the group companies. The place where the headquarters of the company is is the place where major commercial decisions are taken.
• Which country’s law governs the legal status of the company?
• Where are the accounting records of the company maintained and kept? Accounting records and maintenance are integral parts of the business. It implies that the accounting records are mostly kept in the interest of the person who has control over the business.

In order to determine the place of effective management One or more conditions may bedered depending on the business model. There can be situations where shareholders are different from the board of directors. In such cases, the place where the shareholders are residing is not relevant in determining the place of effective management. If the shareholders are part of the board, yes, it matters. Here, the person who has the power to take the business/commercial decisions is more important and is closer to management and control of the business concept.

Now, let us come back to the Corporate Tax implication for residents under UAE Corporate Law. A foreign entity that has a place of effective management in the UAE is considered a resident for the Corporate Tax purposes and taxed like other resident companies. Such foreign companies shall register the companies and obtain the Corporate Tax Registration Number (TRN) before the prescribed deadline and file the Corporate Tax return before the prescribed deadline.

The foreign entities that are managed and controlled by the UAE are considered residents, and such entities will be eligible for all the benefits and reliefs under the UAE Corporate Tax including Small Business Reliefs.

Conclusion

Controlled Foreign Company (CFC) rules are designed to prevent people from using offshore companies to avoid paying taxes. These rules ensure that income earned by foreign companies, which are controlled by residents of a country, is still taxed. In the UAE, CFC rules apply to stop profits from being shifted to places with low or no taxes. If a company in the British Virgin Islands (BVI) or the Cayman Islands is owned by UAE residents, it might be taxed under these rules. This could include income like dividends, interest, and royalties earned by the offshore company.

The key point to consider while dealing with foreign company issues

As per Article 66 of UAE Corporate Tax, if any provisions of UAE Corporate Tax Law have a conflict with the Double Taxation Treaties signed by UAE, the clauses of Double Taxation Treaties prevail over UAE Corporate Tax Law. This gives a clear idea that before making any judgment on foreign income or business-related matters, the Double Taxation Treaty clause shall be considered along with the UAE Corporate Tax Law.

To learn more about Foreign Offshore Companies are Taxed in the UAE Corporate Tax Regime, book a free consultation with one of the Flyingcolour team advisors.

Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.