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  • With a New VAT, is the UAE Still the "Place to Be"?

    Commensurate with its Gulf Cooperation Council (GCC) obligations, the United Arab Emirates (UAE) will fully-implement the Federal-level imposition of a Value Added Tax (VAT) of 5% on most goods and services, and associated registration and reporting requirements, along with Excise Taxes on certain goods (50% on "fizzy drinks" & 100% on energy drinks and tobacco products), effective January 1, 2018.

    Some industries are exempt from responsibility for VAT by statute, such as certain transportation services and basic healthcare providers.  Real estate transactions within the first three years (thus far) of the law's enforcement are also exempt from VAT in the UAE.

    Companies doing business in any of the Emirates who are not in an exempted industry and whose turnover exceeds the statutory threshold (AED 375,000 over a period of 12 months) were required to register for VAT by December 4, 2017, or face a penalty.  In future, companies whose turnover does not yet exceed the statutory threshold will have to become compliant within one month of achieveing such turnover during a 12 month period.  Companies who are not yet required to register and report for VAT may apply to do so voluntarily, provided their 12 month turnover exceeds AED 175,500.  If a company anticipates exceeding the mandatory threshold in the future, then voluntary registration may be advisable so that a future 30 day deadline will not present potential difficulties.

    Initial estimates are that approximately 350,000 companies will have registered for VAT in the UAE by the statutorily stipulated date.  An exact figure is not yet available.

    Reporting/ filing of returns will be performed on a quarterly basis.  This may precipitate retaining Registered Tax Agents (and, JHI recommends that reporting companies retain such professional services). 

    Naturally, being a new law, regulations, clarifications and other factors affecting implementation of and compliance with the new laws (UAE Federal Laws 7, 8 & 13 of 2017) remain subject to change at this stage.  The UAE Ministry of Finance provides this page to provide basic information, timely updates and a starting point for researching and tracking the new tax regime:

    https://www.mof.gov.ae/En/budget/Pages/VATQuestions.aspx 

    One issue that begs for near-term clarification is the question of taxability of Free Zone entities. At the time of this writing, the responsibility for actual payment of VAT by entities established in Free Zones, including "Financial Free Zones" (such as the Dubai International Financial Centre, or DIFC; or, the Abu Dhabi Global Market, or ADGM), remains somewhat unclear.  For example, following current guidance from the Federal Tax Authority (FTA), the agency with primary responsibility for the enforcement of VAT, such entities should be registered for VAT if their turnover exceeds the mandatory threshold. On the other hand, by Emiri decree (issued under a recent Constitutional provision), a 50 Year Tax Holiday has been established for the ADGM (measured from the effective date of the underlying law).

    The UAE Cabinet has not yet issued its decision identifying any "Designated Zone" (wherein established entities may receive at least some partial or limited form of exemption from VAT) as the law empowers it to do, and the issue of responsibility for payment by companies in Financial Free Zones involves something of a Constitutional question. However, as stated above, it is hoped that additional clarifications may be issued by the relevant authorities in the near future.  It is also worth noting that the FTA's determinations/ decisions can be challenged through the courts, provided there is a credible legal basis for such a challenge.

    Being a brand new area of law, such gray areas are to be expected.  The drafters of the new laws concerning VAT certainly seem to have expected this, as certain mechanisms - such as the ability to challenge FTA policy decisions in court - are built into the new tax regime to ensure transparency and fairness (important factors in any healthy business environment) as and when important issues are sorted.

    Thinking more globally, one wonders what this may do to the famously business-friendly reputation the UAE has enjoyed for decades.  After all, "the (tax-free) UAE is the Place to Be" in the Gulf region.  JHI believes that the imposition of the VAT, in and of itself, will not severly impact the UAE's positive business environment. 

    The imposition of VAT is a GCC-wide program, agreed upon by the member states.  The level of tax will be 5% across the board, and goods and services exempt from the tax will be similar almost to the point of being mirrored from jurisdiction to jurisdiction.  Compliance steps and associated costs should be roughly equal in each of the member states.  And, the timing of full VAT implementation in the member states should coincide (the Kingdom of Saudi Arabia, for example, is also introducing its new VAT in January of 2018).  So, this should not significantly reduce the attractiveness of the UAE for investors, nor does it seem likely to impact the UAE's role as a gateway into the other GCC economies (such as Saudi Arabia - the largest economy in the GCC).

    As a GCC member state, the UAE has agreed, and is obligated, to impose VAT. With recent fluctuations in the price of oil and the recent military build-up, in addition to the maintenance of basic services, additional revenues are needed to keep the national debt at a sustainable level.

    The broadening of the UAE's economy in recent years has provided an opportune situation wherein the imposition of VAT (as opposed to other taxes and/ or fees) makes sense.  On paper, it seems the best available method of helping to keep the UAE's fiscal ship steady.  Although it will contribute an additional layer of expense onto the costs of living and doing business in the UAE, the UAE enforces no other tax and the compliance costs associated with the UAE's regulatory environment are among the least burdensome in the world.  As to the pre-VAT cost of living and doing business in the UAE (such as real estate, some services and many goods), much of this is due to high demand brought about by a decades-long strong international interest in participating in the UAE market.

    Further, the UAE, with a low-cost regulatory environment and a mere 5% VAT, seems poised to remain the gateway to one of the fastest growing regional economies in the world.  JHI believes that for businesses who view the GCC as an attractive area for investment, the UAE will continue to flourish as a "starting-off" or set-up point for such investment, and at a time when the economies of the GCC may be poised for potentially explosive growth during a revolutionary time of profound reforms throughout the region, particularly in Kingdom of Saudi Arabia.

    JHI will continue to monitor the situation, and track legal developments concerning the implementation of the VAT, in the UAE and throughout the GCC.

    Jason Huf, Principal, JHI, Law Firm, NYC, KSA, Jeddah, Saudi Arabia, UAE, VAT, Excise, Tax, Finance, International, Middle East, Law, Legal   (Mr. Huf gratefully acknowledges the contributions to this brief note by his good friend Sreekumar Radikrishnan of Goodwins Law Corporation's Abu Dhabi office. Mr. Huf calls Prof. Radhakrishnan his "top Go-To guy" in the UAE - especially on new tax matters:  http://www.goodwinslaw.ae/about-us/our-team/sreekumar-radhakrishnan

    This website and its contents - taken in whole or in part - are a law firm advertisement.  As with all other entries in the blog section of JHI's website, this article is intended to contribute to public discussion and is published for and distributed to a rather general audience.  This article is not legal advice and should not be mistaken for such.

    In the event legal advice is needed on the subject of VAT in the UAE, Mr. Huf & JHI will be happy to introduce and refer any such client to Prof. Radhakrishnan & Goodwins for his personal attention.

    Finally, Mr. Huf also wishes to make clear that any opinions expressed herein are solely those of Jason Huf & JHI.)

  • Ramadan Mubarak

    To all of our friends around the world who observe the Holy Month, we at JHI hope that you and your families enjoy a meaningful period of dedication to fasting, reflection and prayer during these historically challenging times.  May your loved ones take this holiday as an opportunity grow closer to each other, your neighbors, the less fortunate and the whole of humanity.

    We wish you good health in the year ahead.  Ramadan Mubarak!

    Sunset, Abu Dhabi, Corniche, Ramadan, Holy Month
  • Saudi Banking Market to Open Up?

    During King Salman's recent visit to Washington, DC, members of the Saudi delegation issued several announcements concerning planned commercial reforms and other developments that could prove significant to Foreign Direct Investment (FDI) in Saudi Arabia (KSA) as the Kingdom looks to broaden its economy at a time when low oil prices are projected to be the norm for the medium term.  We will highlight some of the more significant announcements in this and subsequent notes.

    While Saudi Arabia remains committed to continuing its current record-setting output of light sweet crude (one of the major factors contributing to low oil prices), the KSA is now facing projections of massive budget deficits and rapidly depleting cash reserves.  Increased FDI, particularly from the United States, appears to be critical to the KSA's strategy for coping with the downsides of consistently low oil prices. 

    Reforms in the Arab world often begin with teasers that function as "trial balloons".  This note will reference such a trial balloon floated by a Saudi official associated with the Deputy Crown Prince.  In a closed door meeting with business leaders in DC, this official announced that the Kingdom is considering opening the Saudi banking market to permit entry of additional foreign banks - especially American ones - wishing to do business in the Kingdom.  In additional to financing major projects, it is hoped that such banks would also cater to small businesses and individual depositors.

    Even with the recent entry of a branch of a bank based in fellow Gulf Cooperation Council (GCC) Member State Qatar, Saudi Arabia is still seen as, perhaps, the most "under-banked" market in the world.  To attract additional FDI, which has been in slight decline in recent years, some see the entry of additional Foreign banks and the capital they bring as critical.  Entry by foreign banks based elsewhere in the GCC has been helpful, but it will take the power of additional American and other western banks to take a more broad-based growth to the next level.

    Not stated, but understood, in this announcement is Saudi Arabia's desire that western powers continue to see that they have a stake in the stability of the Kindgom vis-a-vis its continuing conflict with Iran and, increasingly, Russia.

    Of course, the devil is in the details: What will be required to gain entry? And, once in the market, how secure is a bank's investment in the Kingom and how will such a bank be regulated and taxed?  How might such a venture impact an investing bank's legal and regulatory position at home?

    JHI will continue to track the flight path of this trial balloon and let you know where it lands...
  • Ramadan Mubarak

    To all of our friends around the world who observe the Holy Month, we at JHI hope that you and your families enjoy, and gain real value from, the meaningful aspects of an entire month dedicated to fasting, reflection and prayer - especially during these somewhat unsettled times.  May your loved ones take this holiday as an opportunity grow closer to each other, and humanity generally.  We wish you good health in the year ahead.

    Ramadan Mubarak!

  • Ramadan Mubarak

    To all of our friends around the world who observe the Holy Month, we at JHI hope that you and your families enjoy and gain value from the meaningful aspects of an entire month dedicated to prayer and fasting.  May your loved ones grow closer to each other, and humanity generally, during this time.  We wish you good health in the year ahead.

    Ramadan Mubarak!

    - Jason Huf