#TaxmannPPT | Overview of the UAE Corporate Tax with Recent Developments | FAME Advisory

Corporate Tax in UAE – Beginning of a new era

Need to introduce CT in the UAE

Commitment to meeting International Standards for Tax transparency

Preventing harmful tax practices

Main Objectives

Basis to implement Pillar 2 of BEPS OECD

UAE intends to cement its position as a leading global hub for businesses and investment.

CT Rates

*To be specified in a Cabinet Decision in due course

CT Rates in GCC

Effective Dates

The CT Law will apply to businesses on tax periods on or after 1st June, 2023

Taxable Persons

Resident

s

 Legal persons incorporated or established in the UAE, including Free Zones

 Natural persons who conduct a business or business activity in the UAE

 Foreign entities effectively managed and controlled in the UAE

NonResidents

Foreign entities

 Having a Permanent Establishment

(PE) in the UAE

 Earning State sourced income

 Having a nexus in the UAE

Basis of Taxation

Residence based CT regime

UAE Residents will be taxable on their worldwide income.

However, for a natural person, the scope will be limited to the income earned from their business or business activity (to be specified in the Cabinet decision)

Non-residents will be taxable on-

 Income attributable to their PE in the UAE, or

 State-sourced income not attributable to a PE

 Income attributable to the nexus of the Non-resident.

Taxation for Individuals in UAE

Individuals who conducts a business or business activity in the UAE Salary, interest etc. earned in personal capacity not taxable

will be taxable on income.

However, for a natural person, the scope will be limited to the income earned from their business or business activity (to be specified in the Cabinet decision)

Categories of business or business activity to be specified in a Cabinet decision

Non-residents will be taxable on-

Wide definition of Business “any activity conducted regularly, on an ongoing and independent basis by any Person

 Income attributable to their PE in the UAE, or

 State-sourced income not attributable to a PE

 Income attributable to the nexus of the Non-resident.

•Income derived from the UAE or from outside the UAE insofar as it relates to the Business or Business activity conducted by the individual in the UAE

Taxation- Others

•Unincorporated Partnership

 To be treated as fiscally transparent

 Partners to be considered as conducting business

 Partnership can elect to be considered as a Taxable Person

Family Foundations

 Can apply to be treated as Unincorporated Partnership upon meeting certain conditions

PE Concept

Branch, office, factory, building site, construction project where activities are carried on for over 6 months etc.

Exclude : Preparatory or Auxiliary activities

Person having and habitually exercising authority for concluding or negotiating contracts

Any other form of nexus in UAE as may be specified

Fixed place

Dependent Agent

UAE Sourced Income

1 2 3 4

Income derived from UAE resident Person

Income derived from a Non-resident Person where it attributable to PE

Income accrued or derived from activities performed in UAE, assets located, capital invested, rights used, or services performed or benefitted from in UAE.

Miscellaneous other categories (sale of goods in UAE, provision of services rendered/utilized/benefitted in UAE, right to use IP in UAE, insured assets located in UAE, the borrower is UAE resident, etc.)

Exemption List

 THE UAE Federal/ Emirate Government Entity and their department, agencies, authorities, or other public institutions

 Entity wholly owned and controlled Government-owned UAE company that is listed in a Cabinet Decision

 Businesses engaged in the extraction of UAE natural resources and related non-extractive activities

 Public Benefit Entities that are listed in a Cabinet Decision;

 Investment Funds that meet the prescribed conditions;

 Public or private pension or social security funds that meet certain conditions; and

 UAE juridical persons that are wholly-owned and controlled by certain exempted entities after meeting certain conditions.

Applicability to Free Zone Companies

 CT Applicable to companies and branches that are registered in a Free Zone (referred to as ‘Free zone persons’)

 “Qualifying Free Zone Persons” will be subject to UAE CT at the following rates:

 0% on Qualifying Income ( to be as specified in the Cabinet decision)

 9% on Taxable Income that does not meet the Qualifying Income definition

 “Qualifying Free Zone Persons” should meet all of the following conditions :

 Maintain adequate substance in UAE

 Derives Qualifying income

 Has not elected to be subject to Corporate Tax

 Complies with Transfer pricing provisions and documentation

be required

Calculation of Taxable Income

Any unrealized gains or loss

Accounting net profit /loss as per Standalone FS adjusted for the following:

Reliefs (intragroup transfer/ business restructuri ng)

Exempt Income

Deduction s

Tax loss relief

Any other adjustmen

As specified in a decision issued by the Cabinet at the suggestion of the Minister

Exempt Income and Deductions

Less : Exempt income

 Dividends and other profit distributions received from domestic companies

 Dividends and other profit distributions received from foreign companies subject to Participating Interest

 Capital gains from Participating interest

Participating interest conditions -

• Minimum 5% shareholding

• Holding period 12 months

• 9% taxation of investee

 Income from Foreign Permanent Establishment

 Income earned from operating or leasing aircraft or ships used in international transportation by a non-resident subject to conditions

Add : Non-Deductible Expenditure

 Fines and penalties

 Donations to non-qualifying public benefit entity

 Interest expense in excess of 30% of EBITDA (carry forward for 10 years)

 50% of entertainment expenditure

 Unrealised gain/losses on capital items

 Expenditure for earning exempt income

 Recoverable VAT

Tax Grouping

 A UAE group of companies can elect to form a Tax group and be treated as a single taxable person (all conditions of at least 95% shareholding, voting rights, and profit entitlement, directly or indirectly, are to be satisfied)

 Applicable to Resident Parent companies and subsidiaries

 Exempt person and Qualifying Free Zone person cannot be a group member

 All group members must follow the same financial year and same accounting standards

 Taxable income of the Tax Group shall be determined at a consolidated level, eliminating transactions between the members of the Tax Group.

 Parent company responsible for filing of tax return and payment of CT on behalf of the tax group

 Only a single tax return will be required to be filed

Illustration

Individual Company’s tax liability can be lower than the Tax Group as they have the benefit of availing separate exemption threshold whereas in case of a Tax Group, the benefit of threshold exemption is available once as a whole

Illustration

Tax Grouping can be beneficial in case where individual Companies are loss making

Tax Losses

 Losses incurred allowed to be set off against taxable income in subsequent financial periods

 Maximum loss to be set off capped to 75% of the taxable income

 Excess losses allowed to be carried forward indefinitely provided the same shareholder owns at least 50% of the share capital

 If there is a change in ownership of more than 50%, tax losses may still be available for carry forward provided the new owners carry out same/similar business.

The following losses will not be available for set off-

 Incurred before effective date CIT

 Incurred before person becomes tax payer for UAE CT

 Incurred from activities/assets which generate exempt income

Transfer of Losses and Regrouping Relief

Special provision for transfer of losses

 Both taxable persons are resident juridical persons

 Either taxable person has a direct or indirect ownership interest of at least 75% in the other, or a third person has a direct or indirect ownership interest of at least 75% in each of the taxable person

 The common ownership must exist from the start of the tax period in which the tax loss is incurred to the end of the tax period in which the other taxable person offsets the tax loss transferred against its taxable income

 None of the persons are an exempt person nor a Qualifying Free Zone Person

 Should follow same financial year and same accounting standards

Group Relief

 Intra-group transfer relief will be available for transfers of assets and liabilities between UAE resident companies (condition of 75% shareholdings and 2 years).

 Restructuring or Re-organizing (e.g., merger) will be considered tax neutral on fulfillment of certain conditions (condition of 2 years).

Transfer Pricing

 The CT regime will have transfer pricing rules applicable to domestic as well as international transactions between “Related Parties” and “Connected Persons’’

 Businesses will need to comply with transfer pricing rules and arm’s length principle as set out in the OECD Transfer Pricing Guidelines

Meaning of Arm’s length principle (ALP)-

 In order for a transaction or arrangement between Related Parties or Connected Persons to meet arm’s length standard, the results of the transaction or arrangement must be consistent with what the results would have been if they had been between parties that are not related to each other

Examples

 CT in UAE – 9%

 CT in BVI – 0

 Transfer of profits from Company A to Company B

 Transaction Value = AED 100 MN

 Arm’s length Value = AED 75 MN

 Post CT implementation = AED 75 MN will be allowed as a deduction to Company A

 Remuneration to Director = AED 2 MN

 Arm’s length Value= AED 1 MN

 Post CT implementation = AED 1 MN will be allowed as a deduction to Company A

Related Parties

Two or more are individuals related

 Related to the fourth degree of kinship or affiliation, including by adoption or guardianship

 Individual alone or together with a related persons directly or indirectly owns 50% or more of share capital or control

Two or more legal entities are related

 One Legal entity together with related parties directly or indirectly owns 50% or more of shares in other entity or its controls

 Any person alone, or with a related party, directly or indirectly owns a 50% share of each or controls them

 Branch or Permanent Establishment (PE)

 Two or more Partners in the same unincorporated partnership

 Trustee, founder, settlor, or beneficiary of trust/foundation and its related parties

Individual Spouse of Individual

First Degree Relative Parent Child

Wide definition of “Control”

Second Degree Relative Grandparent

Sibling, i.e., individual’s Brother/Sister Grandchild

Third Degree Relative Great Grandparent Uncle/Aunt Niece/Nephew Great Grandchild

Fourth Degree Relative Great Great Grandparent

Great Niece/ Nephew/Cousin Great Great Grandchild

Ability to influence -

 50% Voting rights

50% Board of Directors

 50% Profits

Exercise significant control

Connected Persons

Connected Persons to Taxable persons

Company B

Ownership Directorship Partners

Individual has ownership interest or control

Director or Officer

+ +

Related Party of the owner

Related Party of the director or officer

Other partner in the same partnership

Related Party of the partner +

Transfer Pricing Methods

Comparable

Uncontrolled

Price (CUP)

Method

Transaction Methods

Cost Plus Method

Transfer

Pricing Methods

Profit Methods

Resale price

Method

Transactional Net Margin Method (TNMM)

Any other TP method may be applied where none of these methods can be reasonably applied to determine ALP.

Transactional Profit Split

Method

Transfer Pricing Documentation

 Business to submit a disclosure along with the Tax return relating to transactions with related parties and connected persons

 Business to maintain the following transfer pricing documentation regarding their related party and connected persons transactions (conditions to be specified in due course)

–

 Local file –Detailed information on all relevant material intercompany transactions of a particular group entity in each country, similar to TP documentation

 Master File – Global information about a multinational group, including specific information on intangibles and financial activities that is to be made available to all relevant country tax administrations

 Documentation to be submitted with 30 days or any other later date as specified when requested by the Authority

 Opening Balance sheet to be prepared taking into consideration

General Anti-Abuse Rules (GAAR)

Case 1: No tax planning

UAE Co

1

Total Income = 600K

Total CT liability= 9%(600-375) =~20K

Case 2: Tax planning by splitting business

 Applicable to a transaction or an arrangement entered

 not a valid commercial or other non-fiscal reason which reflects economic reality and

2 UAE Co

UAE Co

1

Total Income = 375K

Total CT liability= 0 as below threshold

Total Income = 225K

Total CT liability= 0 as below threshold

Will GAAR provisions apply

 Main purpose or one of the main purposes is to obtain a Corporate Tax Advantage

 FTA may determine to counteract or adjust the CT advantages obtained as a result of the transaction/arrangement

 GAAR provisions to apply even for the transition period from the time of law becomes published and till it becomes effective

 No threshold prescribed

Calculation of CT Liability

*Implementation of 'Pillar Two' of the OECD BEPS for UAE to be announced in due course. Under ‘Pillar Two’ Multinational Corporates having a turnover of 750 million Euros and above will be taxed at a different rate

Tax Credits

Foreign Tax Credit

 Tax paid in a foreign jurisdiction shall be allowed as a tax credit against UAE CT liability

 The maximum foreign tax credit available will be lower of :

 The amount of tax paid in the foreign jurisdiction

 The UAE CT payable on the foreign sourced income

 Any utilized foreign tax credit will not be allowed to be carried forward or carried back

Withholding Tax

 Withholding tax is a tax collected at source by the payer on behalf of the recipient of the income

 0% withholding taxes to apply on domestic and cross-border payments of any nature

 Following income shall be subject to 0% withholding rate

 State sourced income earned by Non-resident persons not attributable to PE

 Any other income as may be specified in Cabinet decision

 There will be no obligation to file withholding tax return

Illustration

 Income from UAE=800

 Income from Country A=200

 Donation paid to unapproved charity =200

 Penalty =100

 Withholding tax in Country A= 15%

Tax Compliance - Procedure

Registration

Obtain Tax Registration Number (TRN) separately within prescribed time from Federal Tax Authority (FTA).

Return One tax return filing requirement.

•Return to be filed within 9 months of relevant tax period.

Payment of tax

Tax to be paid before filing of tax return.

Assessment Tax Procedures Law and decisions issued in the implementation to be followed.

Payment of tax Assessment

Fines and penalties to be determined based on above.

Other aspects

 A Taxable person (including an exempt person) will be required to maintain all records and documents for 7 years

 Requirement to maintain audited or certified financial statements will be specified in a separate decision

 Option to file Clarification by way of filing application with FTA-

 Regarding application of the CT Law;

 Conclusion of Advance Pricing Agreements (APAs)

Form and manner of filing the applications would be provided in due course

 Simplified compliance obligation for businesses available based on Revenue under Small Business Relief (threshold yet to be specified)

While the intent is to keep compliance simple and provide relief to small businesses, some of the provisions, if implemented as it is, e.g., domestic transfer pricing, PE determination, etc., could be more cumbersome and prone to litigation.

Observations

Its very positive that there are minimum adjustment between book and tax profits however, there should have been a basic consistency in adoption of accounting policy.

The Law introduces GAAR and the GAAR provisions will be applied if any taxable person has tried to alter its transaction or business model during transition period to obtain only tax benefit.

Some of the important details are still awaited in the Implementing Regulations only.

Action Points for Compliance with Corporate Tax

Undertake a high-level assessment of how the draft law could potentially impact the businesses

Review of existing business structure and evaluate alternatives to restructure to optimize tax and compliance cost

Adopt changes to compensation mechanism for shareholders/directors/ foreign affiliates to be consistent from CT Perspective

Prepare to have sufficient information available to meet TP documentation and compliance which are mandatory

Training of in-house teams on the developments, and changes that may be required from an IT system perspective to collate all information

CT –Comparison between India and UAE

Any financial year followed for financial statements can be adopted as tax year

Tax Rate

Corporates -30/25/22/15 % (excluding surcharge and cess)

Individuals - different slab rates

0% on Qualifying Income

9% is applicable on Corporates and Individuals if the taxable Income exceeds threshold limit of 375,000 AED. CT will apply to individuals only if they conduct a business/business activity Free Zones Deduction based on export turnover

9% on non-Qualifying Income

Advance Tax applicable

Advance Tax not applicable

Advance Tax and Withholding Tax

Withholding Tax provisions applicable for both residents and non-residents

Withholding Tax not applicable for residents. In case of non-residents - 0%

CT –Comparison between India and UAE

Particulars

Interest Expenses

Deduction

Interest expense deduction on payment to nonresident associated enterprise is capped to 30% of EBITDA (threshold of INR 1 crore)

Applicable to cross-border as well as specified domestic transactions

Concept of Associated enterprises -26% ownership or control

Transfer Pricing Regulations

General Anti-Avoidance Rule (GAAR)

Definition of “relative” considers upto second degree of kinship

No concept of Connected Persons

Net Interest expense deduction will be capped to 30% of EBITDA -whether paid to related party or to any other party (threshold to be specified in due course)

Applicable to cross-border as well as domestic transactions

Concept of Related Parties -50% ownership or control

Definition of “relative” considers upto fourth degree of kinship

Also includes concept of Connected Persons

Threshold of INR 3 Crores specified

No threshold limit prescribed for applicability of GAAR.

Us

Please note that our views mentioned above are based on current prevailing regulatory regime in UAE and refers specifically to Federal Decree Law No. 47 of 2022. Our views or advise does not cover implications under any other laws or regulations that may govern the situation and are limited to the taxability consequences in UAE alone. For any other implications, we would recommend to obtain specific advice in that connection.

Thank You