While the tax regime of the UAE has evolved since the introduction of VAT in 2018, many businesses cast a much longer shadow. It is a testament to the country’s commercial stickiness that so many have remained here and become part of the remarkable development of the nation.
We live in a greatly evolved country, whose corporate environment is elevated.
Today, I want to delve into an area that many organisations may need to review and possibly overhaul, particularly in the UAE corporate tax universe.
Entity formation and renewal has traditionally been the remit of your public relations officer. Their services form part of a broader range of activities called company secretarial duties. In the western world, it is often an appointment of the board of directors.
Due to specific federal or emirate requirements, some businesses may have formed additional juridical entities across the country. Sometimes these trade licences act only as part of the quotation process, any contract awarded being signed by the original company licensed in another place.
For this reason, many of these – let’s call them shell companies – do not trade. They would not have reached the turnover threshold level required to register for VAT. To avoid complications, it may have been decided not to group these entities for VAT purposes. This was 2017 and 2018, five or six years ago.
Branch entities are sometimes used, in others, it’s not sufficient for the required purpose and a full trade licence is acquired.
With regard to branches, it’s worth remembering the words of a senior advisory team member from the Federal Tax Authority at a seminar recently. Think of branch entities as the pockets of a fully licensed entity. For that reason, branches do not need to register for corporate tax or VAT.
Sales functions will continue to use these shells for quotation purposes and PROs will continue to renew them. The costs are likely to be absorbed under the heading of regulatory costs by the original trading entity, those processing the costs potentially unaware of the implications from a corporate tax perspective.
UAE corporate tax: What you need to know
The finance department then reports their trading position to the board of directors. If a particular group entity doesn’t trade, they will not necessarily know it exists. Finance, five or six years after VAT, may have also forgotten about them.
Let’s look at a real-world example highlighting why, for some entities, it may have been sometime since a light was shone on them.
It is late 2017 and I’m sitting with a large client supporting their developing VAT environment. Establishing all the legal entities that exist is often one of the first tasks conducted. Then you dive in and find out what each one does, identify, train and implement compliance protocols.
As the conversation moved along, it became obvious that there was a gap between the trade licences provided and what business was being conducted. When nudged, another three licences were found.
The client did not understand that each of these were also distinct legal entities. They had almost the same names but were issued from varying licensing authorities and with different trade licence numbers. They had been set up and maintained on an ongoing basis for a specific compliance purpose but never traded.
Remember, all legal entities, what the tax law calls juridical entities, must register for corporate tax. Each must report for corporate tax. There will be penalties levied if this does not happen. Are there exemptions? Yes, mostly government-related.
Can they, like VAT, be grouped? Yes. Is this the best solution? That decision might be very unique to your organisation. If you are unsure, you likely need external support. At a minimum, it is time to have a good old fashioned entity spring cleaning.
To conclude, let’s look at what your value-adding PRO should be doing today.
They should advice on, organise and complete all governance related matters. These tasks should be documented, adopted formally by the board of directors and reviewed intermittently.
Any changes in shareholding, named regulated management positions, power of attorney or delegation of authority should be prepared, completed and filed internally and externally.
All periodic external filings should be made to formal bodies, both governmental and non-governmental.
There must be facilitation of internal board meetings and any shareholder meetings, if required. Preparation and communication of required documentation should be in place ahead of meetings ... and keeping of the arising minutes.
Other tasks include ensuring external communication is conducted using correct organisational information across all mediums; securing the safe ongoing storage and timely retrieval of all legal documents, developing policies to manage the same; and embracing ongoing education and being the point of contact for all external legislation that might impact the legal form of the organisation.
Finally, the responsibility falls with the company secretary, not the PRO.
David Daly is a partner at the Gulf Tax Accounting Group in the UAE
