10 Dec 2020
24 Oct 2020
Under CRS – similar to the Foreign Account Tax Compliance Act introduced by the US to tackle tax evasion and target sources of undeclared wealth – foreign financial institutions (FFIs) will be required to report financial information to local tax authorities and the central bank. The latter will then supply that information to the account holder’s country of tax residence. Under these strict new norms, the most prevalent question in Dubai has been what use is there for an offshore company?
To be sure, the exchange of information by government authorities is nothing new. Most countries, including those with well-established offshore structures, have already signed tax information exchange agreements.
However, what will happen under CRS is that the information exchange will become automatic, and thereby lead to an increase in cost of compliance on behalf of the banks. While these costs will most likely pass on to the customer (which is unfortunate), what is already happening in the case of some of the banks in the UAE is that they will simply stop providing services to non-residents, includingoff shore companies.
This has added to the confusion regarding the formation of offshore companies. It is clear that there will be more stringent compliance requirements for disclosure as authorities seek to weed out tax evasion. However, lawful tax avoidance, the ease of conducting business, anonymity of asset ownership, ease of asset ownership (as in the case of Dubai freehold assets) will continue to be alive and well, and even continue to thrive, once the initial period of uncertainty surrounding CRS mitigates.
It is highly recommended that expert legal advice be sought at the initiation, as considerable planning will have to be in place going forward. Given the new stringent requirements, it is apparent that documents and intent will have to stand up to scrutiny. It is clear that ignorance of the law can never be considered an excuse.