Embedding real estate assets within corporate structures has been practiced for years for a variety of reasons.
Whether it is to shield assets from the owner`s private sphere and thus contain i.e. liability risks, whether it is to pass on assets to certain persons or legal bodies possibly bypassing succession laws; reasons are diverse and go well beyond the regularly-cited tax evasion.
In this article I will highlight the possibilities as well as the limitations of purchasing and holding Dubai real estate through corporate vehicles.
JAFZA – The Funnel to Corporate Ownership in Dubai
In January 2011, Dubai Land Department implemented a regulatory change barring all offshore companies except those registered with the Jebel Ali Freezone Authority (JAFZA) from registering title deeds with the Dubai Land Department (DLD).
This implies that any investor electing to own his or her property by means of a company would now have to open such an offshore entity within JAFZA. The shares in this company can either be held by an individual or – as is often the case – by another company, usually residing in a common law jurisdiction.
Corporate Property Holding – What It Can Do For You
Besides the possibility to structure ownership within the holding company or on a higher level as granularly as required, corporate ownership of real estate has the further advantage of shielding investors from the application of local Scharia laws to be applied in an instance of demise of the owner(s).
For the sake of completeness it is to be noted that such legal effect can only be counted on if the JAFZA offshore vehicle is owned by another corporate shareholder from an i.e. common law jurisdiction.
Furthermore, as of late there is also the possibility of registering a suitable will within the Dubai International Financial Centre (DIFC, common law jurisdiction) to prevent the application of Scharia law in cases of succession – even without corporate ownership of the property.
Changes in property ownership can be achieved through divesting the property itself or shares in the offshore company or its parent company. While the latter is generally an easier process, it is not a suitable strategy to circumvent the Dubai Land Department`s transfer fees as evidence of beneficial ownership is to be furnished to JAFZA and the Dubai Land Department from time to time.
Properties initially owned by natural persons can be contributed to a corporation by way of a grant, inducing greatly reduced transfer fees of only 0,125% of the property`s value (vis-a-vis 4% fees in a purchase transaction), provided that the ultimate beneficiaries in the corporation are identical to the ones shown on the initial title deed.
Tax Considerations
The move made by the GCC-countries in 2017 to implement Value Added Tax (VAT) may be a start for the adoption of other tax schemes further down the line. In this environment, the use of dedicated offshore companies can make increased sense as it guarantees tax exemption of all generated proceeds for 50 years, thus shielding the investor from possible UAE-levied future taxation.
Furthermore, from a taxation point of view, property holding by means of a corporate structure can make sense for investors who are domiciled/taxable in countries where the cash-flow principle is applied with regards to proceeds from dividends (i.e. Germany). Under such a regime, simply withholding or reallocating the proceeds within the corporate structure can defer the emergence of tax liabilities.
What a Corporate Structure Does Not Do
Even though the freezone authorities do not publish or exchange shareholder data freely (nor does the DLD), one should be aware that the implementation of an offshore structure does not inherently guarantee privacy.
First of all, this is due to the fact that the DLD will always demand full disclosure of all involved parties, including higher-level legal entities, their directors and ultimate beneficiaries. Secondly, once a bank account within the UAE is required (i.e. for cheque transfers or other financial transactions), it is highly likely that the offshore company would be classified as a passive Non-Financial Entity (NFE), thereby triggering an automatic exchange of information as per the regulations of FATCA or CRS.
With the international pressure exerted on low-tax jurisdictions like the UAE to constantly increase the transparency of substantial asset transactions and holdings, investors who seek to effectively segregate their property from their personally held assets will want to consider to use a foundation as an entity having ownership in the JAFZA offshore company.
Conclusion
Even though JAFZA offshore companies are reasonably simple and affordable with respect to their implementation and ongoing costs, in times of FATCA and CRS they are by no means a free ticket to tax-free proceeds from Dubai properties for overseas investors.
In fact however, they do offer a host of options with regards to many aspects of property ownership. Whether it is the possibility to opt for certain jurisdictions, customize one`s estate planning or optimize the emergence of tax burdens: Corporate ownership remains an essential prerequisite in order to pursue all of these goals that are paramount to most, if not all, wealthy clients.
Without a doubt, equally essential is the consultation of experienced tax and law experts specialised in international wealth and estate planning.
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The author advises institutional investors about property transactions and handles property portfolios in Dubai since the year 2007. Should you have comments or inquiries, please contact the author on author@property-blog-dubai.com.
