The Link Between UBO Rules and Tax Transparency

Unmasking Ownership: The Critical Link Between UBO Rules and Tax Transparency

In the global financial system, anonymity has long been a tool for those seeking to obscure the proceeds of crime or evade taxes. Complex legal structures, shell companies, and nominee directorships have been used to create a maze of corporate ownership, making it nearly impossible to determine who truly benefits from a company’s profits. In response, a global movement towards radical transparency has gained unstoppable momentum. At the heart of this movement are two interconnected pillars: Ultimate Beneficial Ownership (UBO) regulations and the drive for tax transparency.

The UAE, as a major international business hub, is fully committed to these global standards. For businesses operating here, understanding UBO is no longer a niche compliance task; it is a fundamental requirement with profound implications for tax obligations. The ability of the Federal Tax Authority (FTA) to correctly assess Corporate Tax, scrutinize transactions, and exchange information with other countries hinges on one critical question: who is the real, natural person pulling the strings and reaping the rewards? This guide explores the inextricable link between UBO disclosure and tax transparency, explaining why compliance is not just about avoiding fines, but about operating legitimately in the new global economic order.

Part 1: Defining the Pillars – UBO and Tax Transparency

To understand the link, we must first be clear on the definitions of these two core concepts.

What is an Ultimate Beneficial Owner (UBO)?

A UBO is always a natural person (an individual) who ultimately owns or controls a legal entity, either directly or indirectly. The law looks past corporate shareholders and nominee directors to find the real human being at the end of the chain.

According to UAE Cabinet Resolution No. (58) of 2020, a person is considered a UBO if they meet one of the following conditions:

• Ownership Threshold: They own or control, directly or indirectly, 25% or more of the company’s shares or capital.
• Voting Rights Threshold: They hold 25% or more of the company’s voting rights.
• Control by Other Means: They have the power to appoint or dismiss the majority of the company’s directors or otherwise exercise significant influence or control.

If no natural person meets these conditions, the UBO is considered to be the natural person who holds the position of a senior management official (e.g., the CEO or General Manager). This ensures there is always an accountable individual.

What is Tax Transparency?

Tax transparency is the principle that tax authorities should have access to the information needed to enforce their laws effectively. It is the opposite of financial secrecy. It ensures that governments can see who is earning what, and where, to ensure the correct amount of tax is paid in the correct jurisdiction. Key global initiatives driving this include:

• Automatic Exchange of Information (AEOI): Under frameworks like the Common Reporting Standard (CRS), financial institutions in one country automatically report information on accounts held by tax residents of other countries to their respective tax authorities.
• Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT): International standards set by bodies like the Financial Action Task Force (FATF) require countries to have robust measures to prevent the misuse of their financial systems, with transparency of ownership being a cornerstone.

Part 2: The Symbiotic Relationship – How UBO Fuels Tax Transparency

UBO rules and tax transparency are not parallel concepts; they are intrinsically linked. UBO data is the raw material that makes meaningful tax transparency possible.

1. Dismantling Shell Companies for Tax Evasion

Historically, an individual could create a company in one jurisdiction, which was in turn owned by another company in a second jurisdiction, and so on. This chain of corporate ownership, often ending in a secretive jurisdiction, made it impossible for tax authorities in the individual’s home country to know that they were the ultimate recipient of the profits. UBO regulations dismantle this structure by forcing a declaration of the end-of-the-line individual, making tax evasion schemes significantly harder to hide.

2. Enabling Effective Exchange of Information (AEOI/CRS)

The CRS requires banks and other financial institutions to report on accounts held by foreign tax residents. But what if the account is held not by an individual, but by a company? The CRS rules require the financial institution to “look through” the company and identify the “Controlling Persons”—which are defined by reference to the UBO concept. Without UBO rules, a person could simply open a bank account in the name of a shell company to circumvent CRS reporting. UBO disclosure makes this impossible.

3. Enforcing Corporate Tax and Transfer Pricing Rules

The introduction of UAE Corporate Tax makes UBO data more critical than ever for domestic tax purposes.

• Identifying Related Parties: The Corporate Tax Law has strict rules for transactions between “Related Parties” (e.g., two companies controlled by the same person). To enforce these rules, the FTA must first know who the ultimate owners are. UBO data provides this map of control.
• Scrutinizing Transfer Pricing: Transactions between Related Parties must be conducted at “arm’s length.” UBO information allows the FTA to identify these transactions and apply scrutiny to ensure profits are not being artificially shifted out of the UAE. A lack of transparency here is a major audit red flag.

4. Supporting Tax Group Applications

Companies wishing to form a Tax Group must prove a parent-subsidiary relationship with specific ownership thresholds. UBO information helps verify these ultimate ownership structures, ensuring that only legitimately connected groups can benefit from consolidated filing.

Part 3: The Practical Mandate – UBO Compliance for Your Business

Compliance is not optional. The UAE has put in place a clear framework that all registered businesses must follow.

Key Obligations:

1. Create and Maintain a UBO Register: Every company must create and maintain an internal register of its Ultimate Beneficial Owners. This register must contain details like full name, nationality, date of birth, passport number, and the basis on which they are a UBO.
2. Create and Maintain a Register of Shareholders/Partners: A separate register detailing the immediate owners of the company must also be kept.
3. Submit UBO Data: Companies must submit the information from their UBO register to their relevant Registrar (e.g., Department of Economic Development, a specific Free Zone Authority).
4. Update Information: Any changes to the UBO information or the details in the registers must be updated and reported to the Registrar within 15 days of the change.

Proper record-keeping is the backbone of this compliance. This is where a robust accounting and document management system becomes invaluable, a service we support through our accounting system implementation expertise.