Global Law Experts Roundtable Interview on Tax Law

This is our tax round table and we have Marina Madridu from Germany and Preju Dominique from the UAE joining us. So just by means of introduction, my name is Jenny Brash. I am South African but and I’m actually a chartered accountant and I’ve been working in the capacity as journalist for global law experts for the past year. Molina, would you like to introduce yourself?

>> Yes, of course. So my name is Melina Mafredo. I am the managing partner of Mavaru. Mavaro is a firm based in Germany, Disseldorf. and we are specialized on international tax for cross-border clients like companies and also high netw worth individuals and we are mainly advising clients in the advisory field and not doing so much compliance work as it is usually the you the usual case in Germany.

Exactly. >> Thank you Molina. So lovely that you are joining us today. over to you. >> Thank you. It’s a pleasure to be part of this round table. I am PJ Dominic. I’m the founding partner of Dominican partners ched accountants based in the UA where we work extensively with businesses on auditing nationals direct and indirect taxes and cross-border structuring and other related regulatory compliances. so from a UA perspective we are currently witnessing a significant transition from what was traditionally seen as a low tax or a

zero tax jurisdiction to one that’s increasingly aligned with global tax standards and with a strong emphasis on transparency substance and documentation. So in our work we advise a wide range of clients frommemes to international groups particularly on how to structure their operations in a way that balances tax efficiency with commercial reality and long-term sustainability. So what we seeing here on the ground is that we the real challenge today is no longer just tax optimization but ensuring that the structures can withstand regulatory

scrutiny multiple jurisdictions. so I look forward to sharing some practical insights from you and learning from this discussion. >> Thank you so much Bru. So I’m going to start with question number one. So the topic for today is tax restructuring and cross-border investment. We’re looking at navigating risk compliance and opportunity in emerging and established markets. So the question number one that I’m going to pose is where are you currently seeing the most significant sources of tax risk and enforcement pressure for businesses operating in

your jurisdiction and what is driving that scrutiny? Start with you Molina. I think that’s really an opinion because every company has its own challenge but what I’ve what I’m seeing in practice with my clients is that most companies at the moment have like other business challenges to to face and they are not really I’m not really focusing on the tax risk but the main tax risk that I’m seeing is that most companies are avoiding is transparing because this

is a topic that is very very important in Germany in terms of tax audits and it’s always I mean companies with international trans transactions are always in the focus of the tax audit and the the transactions are always audit audited by the tax authority. So, the the pricing between those transactions are always in the in I mean in the middle of everything. and this is something that most clients think okay yeah we can have our business transactions and

then we will maybe document if if the the tax audit asks about that. But then it’s a bit too late. and then of course the companies cannot really structure the the transactions between between cross border subsidiaries. So it’s kind of it’s a bit ignored because in Germany it has a big tax impact in terms of money.

it’s not and this is an important issue that I wish that the clients would focus more on. >> just to add so as mentioned u UI transitioned from a zero or a low tax perception economy to a compliance driven and a substance focus jurisdiction. So this shift is where the most of the risk and opportunities are emerging. So corporate tax just got introduced in UA from 2023 June and we still see many entities struggling on correct adherence and implementation.

So the the the silver lining in UA is that the biggest risk is not the tax rate and rather it is adhering to the compliance documentation and ensuring the substance itself. so just to mention the corporate tax rate in UA is just only 9% and enforcement is ever increasing. So there’s a heavy focus on adhering to the transprising guidelines and preparation of TQ TP documentations like the master files or local files and other relevant benchmarking. and this is becoming all the more difficult for many

different clients because it’s they’ve never been used to this and also there’s a very new concept called the qualifying free zone person which is made in UA. So the thing is that if someone is a QFCP or a qualifying prison person for the qualifying income what they have they have to pay still pay 0%. So the adherence to the QFCP conditions and substantiating the documentary evidence is remains very very vital. another tax risk which I see from my practice here in the UA is the pawn the place of

effective management. a lot of clients who’ve come from across the globe who’ve created companies over here. But the thing is that probably they must be managing it effectively from some other country and such kind of companies definitely do risk being taxed by the other foreign jurisdictions where the ultimate beneficial owner or the management resides. actually over here in Dubai the federal tax authority is conducting tax audits and they’re trying to strictly ensure that the rules are adhered by everyone. So what I see today is in the UA today the risk is no

longer whether you pay tax but it’s getting all about whether you can defend how you structured your businesses around. >> Thank you for that overview Dominique. >> Thank you. We’re going to move on to question number two. In cross-border restructurings, which tax missteps or overlooked compliance obligations most frequently lead to material financial or reputational exposure? Molina.

>> I think most restructurings are focused on avoiding taxes overall to to conduct the restructuring in a tax neutral way which is of course the main focus. But in Germany there are several like formal steps to consider to apply for a tax neutral restructuring. And the main risk or main yeah main risk I see is that we have some holding periods that within seven years the the once the restructuring is done within seven years the shares and so on cannot be

changed because otherwise the tax neutral effect will be will be change again to a a taxable event. So and this is the main issue that if there are companies doing restructuring backto back and they are for forgetting about the first restructuring and they are planning the second restructuring that the second restructuring might have an impact on the first one because of this this requirement.

of holding periods and so on. So I I think this is the main the main risk on that. and what I see in practice is that also the clients because of maybe change in staff they do not have the right information of the past restructuring. So it’s kind of difficult to get all the documentation at hand and I think this is an overall tax risk that the documentation is not not at hand on on it’s usually aligned with a person and not

with with a company with a company’s yeah how you call it the company’s responsibilities as as a process and not yeah so this is the main thing that I see that can have an a big effect on the final tax bill of restructurings. So my take on it is that instructors often fail not because they are wrong but because they are undocumented or are commercially weak. over here in the

UA some of the key missteps what I’ve seen are terms of the lack of the proper impact assessment and study. especially with this QFCP assessments and the and the like of assessments which one should have made. if they haven’t done it, we see a lot of companies u losing another four years of any kind of tax benefit. so another one is typically ignoring the transfer pricing guidelines or the other formalities from day one. So when they try to fix it in between then again

comes a lot of other problems. we have found that the intercompany agreements or improper valuations during the restructuring overlooking the permanent establishment risk and another most important thing is the exit taxes in other jurisdictions not being overlooked. So there are many many others like using UA entities without real substance and the likes. So all these things are typically the kind of the kind of risk or missteps what we typically see on a regular basis. and I strongly believe the biggest

mistake I’ve witnessed is treating restructuring as a legal exercise. Actually it’s a tax valuation and substance exercise combined. So if someone looks it into that fashion, I believe all these missteps can be eliminated as well. >> Thank you for that great overview. We’re going to move on to question number three. So, what structuring approaches are proving most effective in balancing tax efficiency with regulatory transparency, commercial substance, and long-term credibility? Molina, >> I think restructurings I mean from from a German tax perspective, if they are tax neutral, it is the best way to

structure it. But of course there are not always like tax tax issues. there are also financial or economic reasons to not go with the tax neutral restructurings restructuring approach. and and then it’s it’s reorg the reorganization of the company itself. Like for example, okay, you might merge some companies in some subsidiaries to maybe have a simpler structure in the the in the comp in the group. but then the second thing that is most

important is how you would like to structure also the business the business behind that merger for example. it’s not like I mean like Dominic also mentioned it’s where’s the PE where is the effective place of management will what about the employees I mean what will be done with them have do do they have to relocate or to to move to the other other company what would be their functions in the future what will be the future

function of the company once merged for example. So this is kind of the the business decision that also impacts the tax side but I mean really impacts the tax side and needs also to be reviewed not only from a project perspective but also in terms of future how how how do you want to structure your company for the future? So this is the main thing I would say from a German perspective.

>> I believe the sustainable structures are those that align tax substance and commercial logic. so from a UA perspective what that works shall be like substance backed UA holding companies QFCP structures with real operational activity.

clear functional analysis as to who does what and identifying where the value is created advanced planning of TP policies and its timely implementation then I always believe in simple structures overly layered ones because those old-fashions multiple layering is not going to work. So essentially to sum up I say today the most efficient structure in UA is not the lowest tax structure but it is the one that can survive regulatory audit 5 years down the line.

>> We’re going to move on to question number four. So in real estate and asset ba assetbased investments, where do investors most commonly underestimate tax risk across the life cycle of an investment from acquisition through exit? Molina, >> yeah, real estate structures can be very complicated in Germany, but can also be handled in a in a simple simple way.

I think what I mean most most of those investments are focusing on the on the purchase of such a real estate in a most efficient way which is also the way to go because you have to think about real estate transfer tax and to choose the best structure to avoid this real estate transfer tax if possible. of course and then to to choose a structure that has that won’t be changed in the future to not trigger real estate transfer tax again.

so I think most people or most clients are focusing on that which is of course right way to do but then there are of course also exit tax imp implementations because most of the double tax treaties are also having some some some regulations on real estate companies and what what country has the taxation right for real estate focused companies. So this is something also to focus on. and of course there are also at least from a

German perspective there are also a kind of discussions whether foreign companies investing in German real estates form also part of a permanent establishment. So there’s also some kind of evaluation to be made on that because there’s the possibility to avoid actually a big part of taxes in Germany when choosing the right path. yeah, I I I would say the these are the three main main points to consider from a German tax perspective. the real estate is a very interesting topic

as far as UI is concerned. in UEI I’ve seen many investors focusing only on the entry price but tax risk lies in the life cycle of such investments and designing a structure with the exit in mind is of paramount importance. I’ve seen many missing the risk at various stages. So let’s say in the acquisition stage the VA recoverability is misunderstood in in most of the cases so often properties were acquired under incorrect structuring. So where for instance where an individual ownership can be done versus

the using an entity to hold the properties that massively changes the tax applicability. Now under the holding stage they make incorrect classification of income. at times the deemed income not charged from the usage of property by the related parties have been seen. then related party leasing without proper GP support. Then in terms of depreciating the total value which includes a substantial land value those kind of errors also have been seen during the holiday period and most importantly on the exit stage the

capital gains exposure especially from a close border perspective being overlooked withholding taxes which may be applicable in other jurisdictions are also seen to be overlooked. again the substance versus the shell structures which are holding the properties where another issues which we have seen across our practice. So real estate investors often optimize the purchase but tax risk actually crystallizes at exit and not at the entry. So it’s extremely extremely important the real estate investors do a very balanced approach in terms of

designing these kind of structures at least here in the UAE. some interesting points. Thank you for sharing, Dominique. We’re on to our last question number five. So, looking ahead, which structural or policy shifts, domestic or international are likely to most significantly reshape tax strategy and cross-border investment planning over the next five years. Lina, >> I think from from a German perspective and also from an international perspective, the question because especially in terms of the double tax treaties, they are mainly focused on

where the physical work is done. So it’s it’s the focus lies with a physical performance of a company with the physical performance of of individuals and I think in in a world where we are most mostly digital now and increasingly digital this this way of approaching things in terms of taxation and taxation rights. will will have to change in a way because it’s more it gets more and more difficult to yeah to find like

like a solution when you consider both countries or even more than two countries. So I guess this is this might be in future a tax challenge for every country to to find a solution or to align the tax regulations with the digital age. especially in the UA amidst this transitioning phase itself I I see that the tax is becoming a real time datadriven and interconnected especially with the implementation of the pillar two and e invoicing and the digital reporting coming coming in

UA very soon data sharing between the jurisdictions and increasing importance of substance transparency and audit trail The UAE is moving towards more compliance enforcement and more of economic alignment with global stand tax standards. I believe the future of tax in the UAE is about not planning after the fact and rather it’s about designing transactions correctly before they happen. without exception across the globe we are entering a phase where tax is no longer a back office function. it’s becoming a

strategic pillar of business decision making especially in closed border investments. the winners will be those who integrate tax into the business design and not those who react to it later. so that’s my my take on it.

>> Thank you so much. Thank you both so much for just your very clear, very insightful, very articulate answers. really appreciate your time. Is there anything you would like to add further to the discussion or perhaps if there’s something you you know you’d like to say to each other or a little closing thought please feel free. Yeah, I think I might have maybe a question to Dominique because I’ve heard that in the UA because the tax rule is is in its early stage the tax

authority is also in its early stage and you kind the tax authorities and the advisers need to kind of learn how to to manage the rules which according to my understanding are are not that implemented in full like in other countries with a with a with a tax system. I mean it might be my information might be wrong but maybe you can say something on that. Sure as you correctly said for RAS it’s it’s very new for the clients it’s very new

but there was a perception that even for the tax authority it could be new but what we have found out is the tax authorities have taken very very experienced tax professionals from across the globe even our firm was given options to recommend employees who may wish to join the federal tax authority. So there were a lot of people from different big four experiences across various countries have have joined the FDA and it’s not very easy with their tax audits.

Initial perception even for us we thought they would be a little bit more lenient but we haven’t seen that. they’ve been extremely extremely strict as what I mentioned they’ve been ever enforcing all the written rules what they have so that kind of leeway we haven’t seen and I don’t think we should expect that in the future too u so I think we should go by the book by the article by the line I think going between the lines is not going to help

us >> thank you for sharing So, thank you both. I look forward to seeing you. I look forward to interviewing you in the coming weeks. Dominique, >> thank you. I appreciate your time. Thank you. >> Thank you, Jenny. And thank you, Melina.

You’ve as far as we are concerned, you guys are from a higher level of tax practice compared to the Ger I mean obviously being the German side. So, thank you and thank you for sharing your insights. >> Thank you too. Have a nice day.

>> Pleasure. Bye. Bye. See you. Bye-bye.