The BEPS Action 6 (Treaty Abuse) states:
“A guiding principle is that the benefits of a DTC (Double Tax Convention) should not be available where the main purpose for entering into certain transactions or arrangements was to secure a more favourable tax position, and obtaining that more favourable treatment would be contrary to the object and purpose of the relevant provisions”.
The “beneficial ownership” requirement is an anti-avoidance clause which is normally included in double tax treaties, especially for what concerns the passive income. According to the new policy, no agents can qualify as beneficial owners of received income.
It is undeniable that if an entity does not have economic substance, it will not achieve the intended tax benefits. Essentially substance is actually necessary to reject the argument that an entity or structure is set up for tax-avoidance purposes.
Operating in a Dubai free zone, as known, allows you to get total tax and customs exemptions, and it has no restrictions in repatriating incomes. By this way, a presence can be established in the UAE by incorporating a free zone entity.
Furthermore, IT infrastructures in Dubai provide a lots of non-tax arguments to set up a permanent establishment (PE). ADSL has now mostly been replaced by 40Mbps fiber optic connections. It allows a wealthy business for operating an e-commerce server from the UAE. In addition, whether the PE proves its specific functions in the Country, it will justify the local allocation of revenues.
More than that, it is possible to set up any other double corporate structure provided by the UAE company law. The only problem is to find out the best solution according to each own business, and come along pursuant the jurisdiction rules.
Anyway, the UAE have concluded approximately 80 double tax treaties, many of these with OECD countries: some are not very attractive because of the limitation of benefits rules, the inclusion of tax liability clauses, and the uncertainty as to whether UAE residents are liable to tax in the context of the treaty. However, there are several double tax treaties of UAE that are favourable, including the treaties with New Zealand, Austria and the Netherlands. None of these has a liable to tax requirement.
For instance, the UAE real estate gains and the income from a UAE permanent establishment are exempt from tax in the Netherlands. In particular, gains and dividends derived from an UAE subsidiary are exempt under domestic legislation in the Netherlands, provided that they do not result as passive income.
Another country that can be beneficially used for inward investment into the UAE is Cyprus. This Country also has a tax treaty with the UAE, but Cyprus has an even more favourable participation exemption system.
The UAE are particularly well located to cope with the increasing pressure from OECD’s Countries Tax Authorities, in order to show a real economic substance.
To sum up, despite the new rules laid down by the OECD into the BEPS Action 6, by taking advantage of the UAE law, there are still many opportunities, even for small companies, for doing business in Dubai.