Posts

How can economic substance rules impact business in the UAE?

There is a multitude of companies in the UAE that are owned by entities incorporated in “no or only nominal tax” jurisdictions (referred to herein as “noons”) such as the British Virgin Islands (BVI), Cayman Islands, Isle of Man, Jersey, Guernsey, Mauritius, Bahamas, Seychelles, Bermuda and the UAE (to name a few). Except for using these entities only to hold shares in UAE entities, these companies in the noons often also hold intellectual property rights and enter into licensing agreements, franchise agreements, management agreements and other similar agreements with UAE entities, aimed at reducing the perceived risks of retaining these funds in the UAE and/or to take advantage of the no or nominal tax regimes of these jurisdictions from which dividends are distributed internationally. The European Union has however, with effect from 1 January 2019 changed, the playing fields regarding the conduct of business in this way as is explained below.

What exactly are “Economic Substance Rules”

The European Union Code of Conduct Group, after assessing the tax policies of jurisdictions with no or only nominal tax, has prescribed certain criteria which need to be followed resulting in the implementation of laws by these noons for the purpose of eliminating the facilitation of corporate structures or arrangements aimed at attracting profits which do not reflect real economic activity in these jurisdictions. As a result, entities incorporated in noons which conduct certain identified business activities need to show “real economic activity” in these jurisdictions or face fines, penalties and possible de-registration by the relevant authorities in the jurisdiction in which they are incorporated. The European Union has further imposed certain measures in order to obtain cooperation from the noons which include “blacklisting” non-complying jurisdictions. In order to avoid “blacklisting”, all affected jurisdictions were required to promulgate “Economic Substance Rules” into law within their respective jurisdictions by 1 January 2019. In the UAE, economic substance regulations have been introduced by the Cabinet of Ministers Resolution No. 31 of 2019 which came into effect on 30 April 2019.

Essentially all the jurisdictions that have passed “economic substance rules” into law have followed the same criteria in that they have defined which entities are affected, which economic sectors and/or economic activities are affected and have devised certain tests to establish if an entity complies with the criteria for “economic substance” within that jurisdiction. Although all the laws passed by these noons are not exactly the same, the general criteria imposed by the European Union Code of Conduct Group have been applied by all jurisdictions.

Affected Entities

In general, all legal entities that are resident for tax purposes in accordance with the laws of the particular noon must comply with the economic substance requirements, the only exception being if the entity is resident for tax in another jurisdiction from which a tax residency certificate must be obtained to this effect. A number of the noons have also provided particular provisions relating to the determination of tax residency in their economic substance laws.

Affected Sectors & Relevant Activities

Generally, the relevant jurisdictions have made the economic substance laws applicable to the following sectors and/or activities, namely banking, insurance, shipping, fund management, financing and leasing, headquarters, equity holding entities, head offices entities, intellectual property holding and distribution and service centers.

Economic Substance Tests

To show that sufficient economic substance exists within the noon, an entity must pass the following “substance tests”, namely that the entity must from within the noon be (i) effectively directed and managed, (ii) conduct core income generating activities, and (iii) show adequacy in respect of qualified employees, expenditure and physical presence.

Directed & Managed

For an entity to be directed and managed from within the noon it will have to show that regular board meetings are held, the required quorum of directors are present at such board meetings, that the directors have adequate experience and knowledge of such responsibilities, that the minutes of the board meetings are kept, all within the noon itself.

Core Income Generating Activities

The entity must show that core income generating activities (“CIGA’s”) are conducted within the noon with due consideration to the level of income being generated by the entity’s activities. The extent of the CIGA’s may also be dependent upon the economic sector within which the entity falls and/or the economic activity of the entity as certain entities may be an equity holding company and license intellectual property in which case it must pass the test for both activities. The important feature in complying with the CIGA’s is that the income subject to tax in the noon is “appropriate” to the CIGA’s conducted in that jurisdiction.

CIGA’s for the different economic sectors and economic activities will vary. A few examples are as follows: (i) “Equity Holding Entities” would require compliance with relevant corporate filing requirements, manage the shareholdings in the various subsidiaries with adequate personnel and an appropriate premises (ii) “Intellectual Property Holding Entities” would require research and development activities to be conducted in the noon, and (iii) in respect of intangible assets such as brands and trademarks, the CIGA’s would have to include the conduct of activities such as branding, marketing and distribution.

It is possible to outsource certain CIGA’s, even to outside the noon however this would be subject to certain conditions. In the event of outsourcing, the resources of the service provider will be taken into account when determining compliance with the required CIGA’s.

Adequacy

Relating to the two criteria mentioned above, the noon entity must have sufficient qualified employees, incur sufficient expenditure and have adequate assets within the noon in order to justify the income generated by the noon entity. The employees must be physically present in the noon, although they do not need to be directly employed by the noon entity and may be employed by another entity and may be also be employed either on a temporary or permanent basis. The determination of “adequacy” will depend entirely on the particularities of the noon entity and its economic activity.

Reporting Obligations

Each noon has its own reporting mechanisms however, reporting will mostly be by the submission of a bi-annual or annual “economic substance return” specifying how the substance rules are being complied by the entity. Failure to comply with the economic substance rules of the particular noon will result in the imposition of penalties or other ramifications as determined by these laws. As the implementation date of the various economic substance laws in some of the noons was 1 January 2019, the reporting obligations relating to compliance with the economic substance rules for entities incorporated prior to 1 January 2019 is as early as 1 July 2019 in some of these noons.

As part of the filing obligations to the relevant company registration offices, the noon entity will be required to submit the following details: (i) business/income types, (ii) amount and type of gross income, (iii) amount of operating expenditure, (iv) details of premises, (v) number of qualified employees, including experience levels, employment terms, qualifications and period of employment, (vi) details of CIGA’s (for each economic activity conducted), (vii) financial statements (viii) details of outsourced CIGA’s (if applicable), (ix) business plans, especially relating to reasons for holding intellectual property in the noon, and (x) evidence of quorate board meetings and resolutions passed.

Penalties for Non-Compliance

Should the economic substance requirements not be met for each financial reporting period, the noons will impose financial penalties on the noon entities and in cases of repeated violation, the noon entity may even be de-registered or placed into liquidation by the competent authorities. The amount of the penalties are determined by the economic substance laws of the noons and are not uniform. By way of example, in the BVI the Economic Substance (Companies and Limited Partnerships) Act of 2018 provides for a penalty up to USD 20,000 for the first year of non-compliance and for repeated years up to USD 400,00 per year. The impact on a local UAE entity by a holding entity is incorporated in a noon could be that unless outstanding penalties are paid, the company registration offices of the noon entity may not issue documents such as certificates of good standing and the like, that may be required for share or property transfers in the UAE, amongst other problems that may be experienced.

De-Registration & Liquidation

In the event of repeated non-compliance with the economic substance laws of a particular noon, the noon entity may be de-registered or placed into liquidation at the instance of the relevant noon’s company registration office. Should the noon entity be de-registered, this will severely impact upon the local UAE company in that, required documentation will not be obtainable from the company registration authorities in the noon as may be required from time to time in the UAE, the transfer of shares in the UAE entity will be refused, the transfer of property owned by the local UAE entity will be blocked through the lack of documents, bank accounts of the noon entity may be blocked or even closed, the agreements between the local UAE entity and the noon entity may be unenforceable or terminated, and intellectual property rights may be seriously affected.

Action To Be Taken

Where UAE entities are owned by noon entities, the economic substance laws of the particular noon must be complied with to avoid possibly serious implications on the operations of the UAE entity. As the reporting deadlines are close in a number of noons, the necessary action should be taken immediately to establish both the necessity and thereafter the requirements of the particular noon in order to comply with the economic substance rules. In the event that the economic substance laws of the noon applicable to your business require action, immediate corrective action should be implemented to avoid unnecessary penalties. If actions have been taken, it may also be worthwhile to undergo a “health check” to ensure complete compliance.

Armanino recognised for excellence in Technology Consulting

Armanino LLP, one of the 25 largest accounting and business consulting firms in the United States, today announced it has been named a finalist for the 2019 Microsoft Dynamics 365 for Finance and Operations Partner of the Year Award and to Bob Scott’s Top 100 VARs for 2019. The firm was selected by Microsoft as one of only 164 companies to be recognised in its Partner of the Year Awards from a field of nearly 3,000 nominees across 115 countries. Bob Scott’s Top 100 VARs are chosen from organisations specialising in the sale and implementation of enterprise resource planning and accounting software based on annual revenue.

“These recognitions tell a larger story about the level of detail and client service we put into every engagement. At each level, we strive to be the most innovative and entrepreneurial firm so we can make a positive impact on our clients,” said Matt Armanino, CEO at Armanino LLP. “We are excited to be named a finalist for the 2019 Microsoft Partner of the Year honour and to Bob Scott’s Top 100 VARs, because it means that impact is being felt with results and success for clients.”

Armanino was recognised for providing outstanding solutions and services in Microsoft Dynamics 365 for Finance and Operations. As a Gold Certified Microsoft Dynamics partner, Armanino serves on the Worldwide Partner Advisory Committee and has been named a Microsoft Dynamics Inner Circle member six times since 2012. In March 2019, Armanino opened its Seattle office, providing direct access to the Microsoft ecosystem. The firm serves clients by defining digital transformation with cloud technologies and supports business process reengineering with a selection of solutions including AI, IOT and BI/Analytics created through Microsoft Business Applications.

The Microsoft Partner of the Year Awards recognise Microsoft partners that have developed and delivered exceptional Microsoft-based solutions during the past year. In addition to Microsoft Dynamics 365 for Finance and Operations, Armanino offers a host of software solutions including Microsoft Dynamics 365 for Customer Engagement, Dynamics GP, Salesforce, Sage Intacct, Adaptive Insights, Microsoft Power BI, Workiva, BlackLine and more.

About Armanino LLP

Armanino LLP is one of the 25 largest independent accounting and business consulting firms in the nation. Armanino provides an integrated set of audit, tax, business management, consulting and technology solutions to companies in the United States and globally. The firm helps clients adapt and change in every stage of business, from startup through rapid growth to the sale of a company. Armanino emphasises smart technology, leading a cloud revolution of financial, operational, sales and compliance tools that are transforming the way companies do business. The firm extends its global services to more than 100 countries through its membership in Moore Stephens International Limited, one of the world’s major accounting and consulting membership organisations. In addition to its core consulting and accounting practices, Armanino operates its division, AMF Media Group, a media and communications services agency. Its affiliate, Intersect Capital, is an independent financial planning, wealth and lifestyle management firm.

If you would like to find out more information, please visit https://www.armaninollp.com/

How overseas growth can enhance your business

Expanding overseas can play a critical role in the prosperity of many mid-market companies, so it’s no surprise that 37% of businesses expect to increase exporting in the coming year. And if companies are not considering overseas growth, they can be sure their competitors will be.

Forging New Ground

One company that is already looking at exporting well beyond Europe’s shores is Norfolk-based Centurion, which has been making protective head gear, including helmets and face screens, since the nineteenth century. To safeguard its future, CEO Jeff Ward led the business through a total rebranding and restructure when he joined three years ago.

“Centurion is a 140-year-old business and, while our history is something we’re enormously proud of, it was hindering our progress,” says Ward.

“There’s no getting away from the fact that we were stuck in the past. Yes, we’d developed our product range and, yes, we were doing OK, but we weren’t growing and our approach to business was dated. We expected new business to come to us instead of going all out to raise our profile, to network and to make the types of connections that would lead to new contracts.”

Despite being one of the leading players in its sector, Ward says Centurion lacked visibility and definition in the market. “We were too vague about our identity, about what made us stand out from our competitors. Starting from scratch and looking at every aspect of our business helped us focus our attention on who we were and on our goals – the most vital of which was expanding overseas.”

Approaching Overseas Growth

Ward worked with our advisers on several aspects of Centurion’s restart, including raising its profile locally, optimising its R&D tax relief and, more recently, overseas growth. Over the past year, its international sales have grown by 30% – from £6 million to £9 million – and Ward expects this to continue in 2019, mainly in the Middle East and the US, where the company has a new partnership.

Repositioning itself in both the domestic and international marketplace was key to Centurion’s recent growth. “Exposure, perception and connections are vital when you are trying to expand,” says Ward. “Grant Thornton elevated our profile, initially on a local level by showcasing our company and its success as one of the top 100 businesses in Norfolk, and then by advising on our overseas growth. These are still early days, but I’m happy with the opportunities that are opening up. I’m excited about the partnerships we’ve established and hope that more will follow this year.”

Is NOW the right time to expand your business Internationally?

Expanding your business Internationally is a monumental task but, if done right, can be a significant driver of growth. We are proud to say that we now have coverage in 190 countries, with a small team and no outside funding.

Invest in a scalable infrastructure

Build a platform that is designed to scale from day one. For example, we made sure that Advisory Excellence was set up with infrastructure where it was easy to add new countries, and track KPIs globally.

A focus on marketing channels that can scale, such as Google, Youtube, Pinterest and Linkedin, can also prove useful in building a strong foundation for future growth. Whatever your budget, these platforms allow you to test the waters as knowledge of your market increases. As campaign metrics demonstrate positive growth, your company can expand budgets to grow reach Internationally.

Think globally, act globally

Being in hypergrowth mode is exhilarating but there are plenty of opportunities to learn from mistakes. When you scale very quickly, there is no time to micromanage locally. Only tailor locally what has been proven to make a significant impact.

Build a small but mighty team

Crafting a small but mighty team is key to moving forward in a positive direction. Even if there are only a small number of individuals, a dynamic team can move mountains when the focus is right. Create a high passion and energetic team which is invested in the future of the business.

If you instil one motto in your team, it should be: fail fast, learn and improve. We love trying new ideas and encourage the whole team to continuously test, especially when it’s outside their comfort zone. The only requirement we set is to approach it methodically, to document the results and to share learnings with the team.

Stay community-focused

Nurture your brand ambassadors; your first and most loyal members or customers will be your strongest voices if they can be involved. We’ve been around since 2013 and have built a community that continuously stays engaged. Listen to your members or customers, speak with them every week and make changes based on your insights. As a result of listening to our members, we decided to start hosting events. There is nothing stronger than a real-life experience and it really makes us stand out from the crowd in a competitive market.

Getting more feedback from your audience can push your business to new heights. We collaborate with our members, so a lot of our content is member-generated.

Work smart

Automate time-consuming tasks. We believe we have a strong proposition for individuals around the world and (while there have been many lessons along the way!) expanding into new markets has been one of the most rewarding things we have done.

GE PHOTO

Purplebricks CEO departs, as firm scales back global expansion

Purplebricks founder and chief executive Michael Bruce has left the online estate agent as the firm announced it will exit Australia and place its US operations under review.

Mr Bruce will step down from Purplebricks with immediate effect, just months after shares in the firm tumbled when it cut annual revenue guidance and announced the departure of the bosses of its UK and US units.

Replacing him will be Vic Darvey, previously the company’s chief operating officer.

Chairman Paul Pindar thanked Mr Bruce for his contribution to the creation and development of Purplebricks, but added that the firm had got things drastically wrong over the past year.

“We are very conscious that the group’s performance has been disappointing over the last 12 months and we sincerely apologise to shareholders for that.

“With hindsight, our rate of geographic expansion was too rapid and as a result the quality of execution has suffered.

“We have also made sub-optimal decisions in allocating capital. We will learn from these errors and will not make them again.”

Purplebricks bemoaned “increasingly challenging” conditions in Australia and confessed to “execution errors”, adding that returns from the nation are “not sufficient to justify continued investment”.

It will now commence an “orderly run down” with immediate effect, pending closure.

In the US, Purplebricks has put its operations under review.

The firm said: “Whilst good progress has been made in launching our brand across the US, the board has materially cut investment in marketing and other overheads to reduce expenditure to sustainable levels and begun a strategic review.”

In February, Purplebricks warned over headwinds in the Australian housing market when it admitted that it does not expect to meet revenue forecasts for the year.

In the US, the company cautioned that there has been a “slower-than-expected response” to its marketing initiative and it also does not expect US revenue to meet expectations.

To compound matters, last month analysts downgraded the online estate agent and said it would have to raise fresh cash.

Berenberg warned in a research note that the group should either give up on its international expansion plans or raise more funding as it slashed its rating from buy to sell.

It cited a slowdown in Purplebricks’ core UK market, as well as tough conditions in Australia and the US.

Purplebricks confirmed that it expects revenue to be within the £130 million to £140 million range it guided for in February and cash balances will be no lower than £62 million.

Scottish Business PHOTO

Business Minister commends Scottish Industrial Strategy efforts

Speaking to over 50 business leaders at the Scottish Council for Development and Industry (SCDI) Annual Forum today (Friday 26 April), Lord Henley showcased how, through collaboration between UK and Scottish government, Scottish businesses and regions were “rising to the occasion” to meet some of the UK’s biggest challenges.

In particular he highlighted the importance of collaboration between the SCDI and government in supporting Scottish enterprise in recent years – with £87 million of UK government funding awarded to 163 Scottish organisations through the Industrial Strategy Challenge Fund since its launch in April 2017.

The government has also invested over £1.35 billion pounds across Scotland, as part of the City and Growth Deals, aimed at providing more power and flexibility to cities in terms of employment and skills, business support and housing.

Business Minister Lord Henley said:

From addressing the needs of an ageing society, to capitalising on the benefits of artificial intelligence, it’s brilliant to see first-hand how businesses in Scotland are thriving while tackling the UK’s grand challenges.

Through collaboration between business and the UK and Scottish governments, we can ensure that we continue to back Scottish businesses, boosting productivity and creating high quality, well paid jobs.

As part of his visit, Lord Henley met with life sciences company RoslinCT to see how £887,000 of government funding, awarded in October 2018, is being used to help develop stem cell therapies for clinical use.

He also met with scientists and academia from SynthSys, Edinburgh’s virtual centre for Synthetic Biology, to tour its flagship Genome Foundry, which is using robotics and automation to assemble DNA for medical applications.