Last month’s column on offshore companies led to a storm of requests seeking clarifications on a number of issues, particularly with those related to reporting. This is because the Common Reporting Standards (CRS) comes into effect by the end of this year.
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.
From a Dubai perspective, what is heartening to note is that both in the case of arbitration centers as well as mainland and DIFC courts, there is precedence that the judicial system is enforcing both for offshore companies and free zone ones. This gives both the investor as well as the developer (in the case of real estate litigation) comfort, as well as serves notice that there is no escaping contractual law if the asset is housed in offshore companies.
In a sequence of recent rulings, the Dubai courts have made it clear that the doctrine of apparent authority extends to arbitration agreements regardless of the jurisdiction of company formation. Specific to real estate disputes between the developer and investor regarding the validity of refund claims for off-plan investments in offshore jurisdictions, both courts as well as arbitration centers have ruled in favour of the investor.
This is despite the developer; s contentions that a different set off standards be applied given the offshore jurisdiction. It is the protection extended by the judiciary to these disputes that is a compelling reason for the perpetuation of such offshore structures.
What is clear is the following: a) there is considerable debate surrounding the validity of offshore structures in light of the new CRS regulations and 2) the considerable debate attests to the substantial demand (both current as well as potential) for these types of companies.
As the world of offshore company formation has become increasingly nuanced, it is highly advisable that investors seek legal advice for any sort of planning that they need to implement across their menu of needs to avoid complications that may arise later.