19/10/21

INTERNATIONAL TAX: Global tax deal to hurt Indians who moved trusts to the UAE.

As published on economictimes.indiatimes.com, Tuesday 19 October, 2021.

Several rich Indians who moved family trusts and holding entities to Dubai and Abu Dhabi amid the Covid-19 pandemic are now reaching out to their advisers fearing additional taxes, following the new global tax deal of the Organisation for Economic Co-operation and Development (OECD) and UAE's plans to introduce more taxes.

After all major countries including the UAE signed OECD's global tax deal, the fear is that the country will introduce corporate tax of at least 15% across the board that will even apply to income of holding trusts and entities.

Many businessmen had created intermediary companies based in these countries so that the operations could be handled from there, and they could avail of tax benefits due to UAE's liberal tax regime.

Some of them had even started "creating fact patterns" so that they don't get stuck with tax and other regulatory issues. These fact patterns, highlighting historical transactions and structures, are aimed at demonstrating that the move was not undertaken to save taxes but due to other genuine reasons.

"Many Indian families had moved their holding companies and trusts to Dubai in the last two years either completely or partially. Now with the OECD global tax deal, the fear is that there could be a 15% tax in the UAE even on these entities that would eventually wipe out a large part of the tax arbitrage," said Girish Vanvari, founder of tax advisory firm Transaction Square.

The OECD last week brought together 136 countries to accept a deal to ensure that large multinationals pay a minimum tax of 15% on their global income from 2023 and those with profit above a threshold pay taxes in the markets where they conduct business. While the OECD deal as of now is only applicable to around 100 multinationals that have a particular size, this is set to create tax complications for other companies and entities that are present in countries such as the UAE, say tax experts.

"This is mainly because countries which have low or no corporate tax may be increasing or introducing corporate tax at 15% across the board at some point in next one or two years and that will then also impact the trusts or holding entities in these countries," said Ajay Rotti, partner at tax advisory firm Dhruva Advisors.

Countries such as the Emirates were preferred for setting up certain holding entities or trusts as it did not have any income tax or other direct taxes up until now.

People who have advised their clients on such matters said several businessmen, especially in the commodity businesses, had moved to or moved part of their operations or wealth to the Arab nation after restructuring their holding entities.

A few companies also created structures under which some of the key decision-makers moved to these holding or intermediary companies outside India. Going ahead, these companies would end up holding global operations including the Indian business.