The Middle Eastern leg of the Tiberghien world tour showed some interesting developments in tax legislation of this region. These (expected) changes will undoubtedly have a big impact on MNE’s investing or considering to invest in the Middle East. In the GCC countries (Bahrain, Kuwait, Oman, Qatar, Saudi-Arabia and the UAE), a lot has happened in the last few years and more significant changes are expected, in the field of direct taxation, as well as indirect taxation.
Direct taxation
Over the last years, there was a shift in outlook in the Middle East. More and more countries decided to introduce a corporate tax regime and thus reduced their ‘tax haven’ status. Currently, four countries of the GCC already have a fully applicable corporate tax regime, with Bahrain and the UAE only levying a corporate income tax in certain specific industries.1 Rumour has it that this may change in the near future and that UAE and Bahrain will extend the corporate tax regime to all companies and industries. No official statements or proposals would be available at this moment, but some anticipate that the UAE in particular would install a fully functioning corporate tax regime as early as 2023.
Despite only having a limited corporate tax regime, Bahrain and the UAE, recently ‘woke up’ and decided to introduce several OECD ‘best practices’. The reason for this was, especially for the UAE, that they were blacklisted by the EU. In particular the following regulations were introduced, as a result of which they are no longer blacklisted:
- In 2019, the UAE introduced a country-by-country reporting obligation (CbCR), followed by Bahrain at the beginning of this year. The CbCR-regulations only apply to MNE groups headquartered in the UAE, respectively Bahrain. Belgian MNE’s only having a subsidiary or branch in the region are therefore out of scope.
- In 2020, the UAE and Bahrain installed an ultimate beneficial owner regime. All UAE and Bahrain companies, on- and offshore, have the obligation to report and have registered their ultimate beneficial owners.
- Another key change for the UAE and Bahrain was the introduction of an economic substance regulation, making the countries more tax transparent. Entities performing one of the listed activities, such as holding- , shipping- or financing activities, have an obligation to submit an annual notification and file an annual economic substance report. The other four countries of the GCC did not feel the need to introduce such regulation, as they were not blacklisted and already have generally applicable corporate tax regimes in place.
Finally, the UAE lifted one of the biggest restrictions to investments in the UAE. From June 1, 2021 onwards, 100% foreign ownership of onshore companies is permitted in the UAE. Therefore, it is no longer required to have a shareholder that is a UAE national. However, foreign ownership limitations remain applicable to certain companies carrying out activities of strategic importance. What these activities are, is still to be determined by the Council of Ministers.
Indirect taxation
Regarding indirect taxes, things are changing as well. Historically, there was no VAT-legislation in the GCC countries. In 2016, the GCC countries however signed a Framework Agreement on VAT. Nowadays, four of the six countries already introduced their VAT regime: UAE and Saudi Arabia (2018), Bahrain (2019) and finally Oman in 2020. The latter only having gone live in April 2021. Qatar and Kuwait have not introduced a VAT regime (yet), but Qatar would implement its VAT regime in the course of 2022. Kuwait previously stated to introduce VAT in 2021, but no communications seem to have been released to date.
The VAT-rate in all four countries that already have a VAT regime was set at 5%. Saudi Arabia increased the VAT-rate to 15% in July 2020, which was presented as a temporary measure. As is often the case, only time will tell how long ‘temporary’ is and how long the 15% rate will effectively apply.
Where the rates are rather low from a European / Belgian point of view, penalties are high. In the UAE and Saudi Arabia for example, the penalties go up to 300% of the tax amount, even in the absence of fraud or bad faith. Therefore, it is very important to be mindful when it comes to VAT compliance in the region. Recently, UAE reduced its penalties to approximately 30% and introduced an amnesty scheme for penalties incurred in the second half of 2021.
Conclusion
This brief overview shows that a lot is happening in the GCC countries. The common thread is a movement towards more OECD compliance in the field of corporate taxation, as well as an evolution towards more corporate taxes and VAT. MNE’s that are active in the region, should indeed follow up on these developments.
Jacob Huyzentruyt - Associate (jacob.huyzentruyt@tiberghien.com)
1The UAE corporate tax only applies to companies in the oil industry and branches of foreign banks.
The Bahraini corporate tax regime only applies to companies operating in the oil sector.
Tiberghien’s international tax team will continue to monitor these and other tax developments relevant for Belgium / Luxembourg based multinational enterprises. Our editorial board consists of:
- Koen Morbée (International and EU corporate tax, koen.morbee@tiberghien.com);
- Michiel Boeren (International and EU corporate tax, michiel.boeren@tiberghien.com);
- Katrien Bollen (HR tax and global mobility, katrien.bollen@tiberghien.com);
- Ben Plessers (Transfer Pricing and Valuations, ben.plessers@tiberghien.com);
- Gert Vranckx (VAT, customs, excises and other indirect taxes, gert.vranckx@tiberghien.com);
- Rik Smet (International and EU corporate tax, rik.smet@tiberghien.com).
In case you have further questions on this publication or want to discuss a tax query, please do not hesitate to contact the author(s) or one of the members of the editorial board.
This newsflash is for information purposes only and cannot be relied upon as legal advice.
