Shadows of Power and Twist of Fate -Navigating the maze of Real Beneficiary [“UBO”] in Tax Groups of UAE’s VAT Law and Corporate Tax Law

The origin of this article finds its nemesis in ‘Any Other Means’ of Control. A Real beneficiary is one who either owns a certain % threshold in ‘equity or shares’ or controls through ‘any other means’ of a legal person.

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[A] Real Beneficiary [UBO]

Yes, control over a legal entity can be exerted through various means beyond formal agreements and the power to appoint or dismiss the majority of the board of directors. These "other means" of control are designed to capture the myriad ways in which an individual or entity can have significant influence over the decisions, operations, or financial management of a legal entity. Here are some more examples of control through "any other means":

1.????? Contractual Arrangements

• Exclusive Supplier or Customer Agreements: An individual or entity could control a company by being its sole or major supplier or customer under terms that give significant influence over the company’s business decisions.

2.????? Financial Control

• Significant Financing Providers: Lenders or financiers who provide a substantial portion of a company's financing or hold significant debt instruments may have terms and conditions that grant them considerable control over the company's financial and operational decisions.

3.????? Operational Influence

• Operational Agreements: Agreements that give an individual or entity control over key aspects of a business's operation, such as licensing of critical technology or intellectual property, can also confer significant control.

4.????? Economic Dependence

• Economic Dependence: An entity might be economically dependent on another party to such an extent that the latter has effective control over the entity’s decisions, even without formal voting rights or ownership.

5.????? Family Relationships

• Family Ties and Influence: In closely held companies, family relationships can confer control, where family members who do not have formal positions or significant direct ownership can still exert considerable influence over business decisions.

6.????? Shadow Directors

• Shadow or De Facto Directors: Individuals who are not formally appointed as directors but act in the capacity of a director or whose directions are customarily followed by the actual directors of the company.

7.????? Legal Arrangements

• Trusts and Foundations: The terms of trusts or foundations can be structured to give trustees or beneficiaries control over the entities held within these vehicles, without direct ownership or board positions.

8.????? Cross-Company Alliances

• Strategic Alliances or Joint Ventures: Participation in strategic alliances or joint ventures where the terms grant significant influence over the business practices or strategic direction of another entity.

9.????? Use of Intermediaries

• Control Through Intermediaries: Utilizing intermediaries or nominees to exercise control on behalf of the real controlling party, masking the identity of the individual or entity actually exerting the control.

10.? Voting Arrangements

• Voting Trusts: Where shareholders transfer their stock to a trustee in a voting trust agreement, granting the trustee voting rights and control over the company.

These examples illustrate the breadth of mechanisms that can be employed to exert control over a company. The concept of control "through any other means" is intentionally broad to capture the diverse ways in which influence can be exerted, reflecting the complexities of modern corporate structures and arrangements. This broad definition ensures that regulatory frameworks can adapt to evolving business practices and are not circumvented through novel arrangements.

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UAE’s VAT Legislation

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Now, let’s bring in the element of Related Parties from UAE’s VAT Legislation to the party of ‘any other means’ and see what inferences or corroboration can be drawn from this.

“Two or more Persons shall be considered Related Parties if they are associated in economic, financial, and regulatory aspects, taking into account the following:

a. Economic practices, which shall include at least one of the following:

1) Achieving a common commercial objective;

2) One Person’s Business benefiting another Person’s Business;

3) Supplying of Goods or Services by different Businesses to the same customers.

?b. Financial practices, which shall include at least one of the following:

1) Financial support given by one Person’s Business to another Person’s Business.

2) One Person’s Business not being financially viable without another Person’s Business.

3) Common financial interest in the proceeds.

?c. Regulatory practices, which shall include any of the following:

1) Common management.

2) Common employees whether or not jointly employed.

3) Common shareholders or economic ownership.

The provisions under UAE VAT Law related to Tax Group formation for VAT purposes, focusing on the association of parties in economic, financial, and regulatory aspects, indeed echo the broader principles of control and influence discussed in the context of identifying real beneficiaries and exercising control through “any other means." These VAT Law provisions are designed to recognize and regulate the interconnectedness of entities that, while legally distinct, operate in a closely integrated manner that affects their VAT obligations and entitlements.

How These Provisions Reflect Control "Through Any Other Means"

The VAT Law’s criteria for Tax Group formation capture a nuanced understanding of how entities can be interconnected and exert control over each other beyond direct ownership or board composition. This approach is particularly relevant in the context of VAT, where the flow of goods, services, and financial transactions between closely related entities can significantly impact tax liabilities and entitlements.

The emphasis on economic, financial, and regulatory associations ensures that the VAT system accounts for the complexities of modern business practices, where control and influence may be diffused through a network of interrelated entities, each contributing to a common economic objective. By considering these broader aspects of association, the VAT Law provisions align with the principles seen in the control definitions under anti-money laundering, corporate governance, and tax laws, which seek to uncover the real operational and financial dynamics within groups of entities.

Let's evaluate how they resonate with the examples of control through ‘any other means’:

Economic Practices

• Common Commercial Objectives, Mutual Business Benefit, and Serving the Same Customers: These criteria mirror the notion of operational influence and economic dependence seen in control definitions. Entities that align their operations to achieve shared goals or benefit mutually from their business activities demonstrate a level of integration and control that extends beyond mere ownership or direct managerial control. This integration is akin to contractual arrangements or operational agreements that grant significant influence over a company’s decisions.

Financial Practices

• Financial Support, Dependency, and Shared Financial Interests: Similar to significant financing providers or economic dependence examples, these criteria recognize financial interconnections as a form of control. Providing critical financial support or sharing in the financial outcomes of another entity implies a degree of financial integration and influence that can affect decisions and operations, indicating a control mechanism that VAT law aims to capture within Tax Group considerations.

Regulatory Practices

• Common Management, Employees, and Ownership: Reflecting direct control mechanisms such as common management or shadow directors, these provisions directly align with traditional control definitions. Shared management or employees, and common shareholders or ownership, are clear indicators of a unified operational and decision-making structure, which is central to both VAT Tax Group formation and the broader concept of identifying control through any other means.

In summary, the VAT Law provisions for Tax Group formation in the UAE resonate with the broader concepts of control and influence, capturing the various ways entities can be interconnected. This alignment ensures that the VAT system is responsive to complex business structures, enhancing compliance and administrative efficiency for both businesses and the tax authority.

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[C] UAE’s Corporate Tax Law

?Again, how does the requirement of Tax Group conditions under UAE Corporate Tax Law weigh against Real Beneficiary identification provisions under UBO Law.

?Tax Group under UAE Corporate Tax Law has these relevant conditions in this context:

?b. The Parent Company owns at least 95% (ninety-five percent) of the share capital of the Subsidiary, either directly or indirectly through one or more Subsidiaries.

c. The Parent Company holds at least 95% (ninety-five percent) of the voting rights in the Subsidiary, either directly or indirectly through one or more Subsidiaries.

d. The Parent Company is entitled to at least 95% (ninety-five percent) of the Subsidiary's profits and net assets, either directly or indirectly through one or more Subsidiaries.

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The requirement for forming a Tax Group under the UAE Corporate Tax Law introduces a high threshold for ownership, control, and entitlements (95%) within a group structure. This requirement has implications for identifying real beneficiaries, particularly in the context of tax planning and compliance. Here’s how it weighs against the concept of a real beneficiary:

Direct and Indirect Ownership

• The criteria for a Tax Group highlight direct and indirect ownership paths, similar to the identification of real beneficiaries. However, the significantly higher threshold (95%) for share capital ownership, voting rights, and profit/net asset entitlement underscores a deeper level of control and integration within the group than the typically lower threshold (often around 25%) used for real beneficiary identification.

Control and Influence

• The control and influence aspect is emphasized in both contexts but with different intentions. For real beneficiary identification, the focus is on uncovering the natural persons who ultimately control or benefit from the entity, regardless of the complexity of the ownership structure. In contrast, the Tax Group criteria aim to establish a high level of unified control and economic entitlement, facilitating consolidated tax reporting and possibly tax efficiency within the group.

Economic Entitlement

• The requirement that the parent company is entitled to at least 95% of the subsidiary's profits and net assets aligns with identifying entities that operate almost as a single economic unit for tax purposes. While this does not directly impact the identification of real beneficiaries, it highlights the economic bonds within the group, which could further clarify the ultimate economic beneficiaries of the group’s activities.

Impact on Real Beneficiary Analysis

• The stringent requirements for forming a Tax Group under UAE Corporate Tax Law might not directly affect the process of identifying real beneficiaries, as the latter is more about transparency and legal compliance concerning ownership and control. However, understanding the ownership and control structure to meet the Tax Group criteria can indirectly assist in delineating the flow of benefits and control within a group, potentially making it clearer who the real beneficiaries are, especially in complex structures.

Strategic Considerations

• For entities considering forming a Tax Group, understanding their real beneficiaries becomes crucial, not only for compliance with anti-money laundering and counter-terrorism financing laws but also for navigating the tax implications of such a group structure under UAE Corporate Tax Law. The alignment of economic interests and control within the group could influence tax planning strategies and compliance obligations.

In summary, while the Tax Group requirements under UAE Corporate Tax Law and the identification of real beneficiaries serve different purposes, both demand a thorough understanding of the ownership and control structure of entities. The Tax Group criteria, with its high threshold for control and economic entitlement, can offer insights into the economic dynamics within a group that may also influence the analysis of real beneficiaries, especially in the context of corporate governance and tax planning.

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To enrich the discussion on how the requirements for forming a Tax Group under UAE Corporate Tax Law intersect with the concept of real beneficiaries, let's delve into a hypothetical example and consider additional points that highlight the contrast and implications of these requirements.

Examples:

Let's consider a conglomerate, "GlobeTech Group," headquartered in the UAE, with several subsidiaries operating in technology, manufacturing, and services sectors. GlobeTech Holdings, the parent company, directly owns 96% of GlobeTech Tech, a leading technology firm, and indirectly (through GlobeTech Tech) owns 95% of GlobeTech Manufacturing.

Tax Group Formation: Under UAE Corporate Tax Law, GlobeTech Holdings can form a Tax Group with GlobeTech Tech and GlobeTech Manufacturing because it meets the threshold for share capital ownership, voting rights, and profit/net asset entitlements directly and indirectly.

Real Beneficiary Analysis: Assuming the ultimate ownership of GlobeTech Holdings traces back to a family trust, with several members having equal stakes, the real beneficiaries in terms of regulatory compliance are the individuals in the trust. Despite the operational and financial integration for tax purposes, the law aims to peel back corporate layers to reveal natural persons at the end.

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[D] Additional Points and Considerations

• Operational Independence vs. Tax Efficiency: The example illustrates how a group may maintain operational independence among subsidiaries while achieving tax efficiency through consolidation. The Tax Group concept promotes fiscal unity but does not diminish the requirement to disclose real beneficiaries, maintaining transparency and compliance with AML/CFT regulations.
• Impact on Corporate Strategy: The strategic decision to form a Tax Group under the high control and economic entitlement thresholds of UAE Corporate Tax Law might necessitate restructuring to meet these criteria. This restructuring could influence the identification and reporting of real beneficiaries, especially if it involves changing ownership stakes or control mechanisms to align with tax optimization goals.
• Regulatory Navigation: Entities must navigate between optimizing tax positions and adhering to laws requiring disclosure of real beneficiaries. This balancing act involves legal, financial, and strategic considerations, highlighting the importance of comprehensive governance and compliance frameworks.
• Case Study Consideration: Looking at real-world applications, consider a multinational with a complex structure that underwent restructuring to qualify for Tax Group benefits in the UAE. This restructuring might have involved consolidating ownership or altering control mechanisms, which would also necessitate a reevaluation of who qualifies as a real beneficiary under both local and international standards. Such case studies, although specific and confidential in nature, shed light on the practical challenges and considerations companies face.

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The relationship between forming a Tax Group for corporate tax purposes and identifying real beneficiaries reflects the intricate balance between financial optimization and regulatory compliance. Through hypothetical examples and considering additional points like operational independence, impact on corporate strategy, and the importance of regulatory navigation, we can appreciate the nuanced landscape companies navigate. These considerations emphasize the importance of a holistic approach to corporate governance, where strategic decisions are made with an understanding of their broader legal and regulatory implications.

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[E] Specific Real-Life cases

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Discussing specific real-life cases involving the intricacies of tax group structures and the identification of real beneficiaries can be challenging due to the confidential nature of financial and corporate structures. However, there are notable instances in the public domain as follows:

1. The Panama Papers and The Paradise Papers: Not directly related to tax groups, but these leaks revealed complex global financial structures, showing how entities manage ownership and control to optimize confidentiality and tax efficiency. They underscore the importance of understanding beneficial ownership in combating tax evasion and money laundering.
2. Alphabet Inc. (Google) European Tax Investigations: Google and other tech giants have faced scrutiny in various jurisdictions for their tax practices, including how they structure their European operations to benefit from favorable tax regimes. These cases often explore the relationships between parent companies and subsidiaries, similar to tax group considerations.
3. Starbucks in the Netherlands: Starbucks' tax arrangements with the Dutch government were investigated by the European Commission, focusing on how royalty payments between subsidiaries and parents can affect tax obligations, reflecting the complexities of corporate tax structures.
4. Apple Inc. and Ireland Tax Case: The European Commission concluded that Ireland granted undue tax benefits to Apple, which amounted to illegal state aid. This case delved into how profit allocations to different subsidiaries within a group can significantly impact tax liabilities.
5. Amazon's EU Operations: Similar to Apple, Amazon has been under investigation for its tax practices in Europe, especially how it allocates profits among its subsidiaries. These investigations often reveal the complex structures multinational corporations use to minimize their tax burdens.

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[F] Conclusion

Navigating the interplay between UAE's Tax Group criteria and UBO regulations, this piece illuminates the intricate dance of ownership and control within corporate and VAT law. Through the lens of "any other means," it underscores the pivotal role of economic, financial, and regulatory ties in defining related parties and tax group eligibility. The deliberation here reveals the delicate balance entities must maintain between regulatory compliance and financial optimization, guiding through the complexity with practical examples and strategic insights.

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