United Arab Emirates (UAE) has always been an attractive destination for businesses due to its strategic location, business-friendly environment, world-class infrastructure and a tax-free country. The country has recently introduced a new tax law known as the Federal Corporate Tax (“Corporate Tax Law”). This law aims to establish a legal framework for the collection and management of taxes in UAE.
The introduction of corporate tax (CT) has been seen as a positive step towards enhancing the UAE’s economic stability and promoting a more sustainable business environment. However, it has also raised concerns among some businesses, particularly those that have relied on the UAE’s tax-free status as a competitive advantage. However, the introduction of corporate tax in the UAE is a significant change and marks a shift towards diversifying the country’s sources of revenue.
Prior to the introduction of the Corporate Tax Law, the UAE did not have a federal tax system. Instead, individual emirates had their own tax-free policies, which attracted many businesses and expatriates to the country. The absence of taxes made the UAE an attractive destination for foreign investment and boosted its economy.
Purpose behind introducing CT
- In the past few years, the UAE experienced significant tax changes with a view to streamline its tax system and bring it in line with international best practices, whilst also diversifying its state revenue. Starting with the implementation of Value Added Tax (VAT) in January 2018, followed by the introduction of Economic Substance Regulations (ESR) as well as Country-by-Country Reporting (CbCR) regulations in April 2019, the UAE has been through a series of tax reforms in the last few years to align itself with international markets and diversify its revenue.
- Federal Government under the aegis of Ministry of Finance has indicated that the purpose of introducing such landscape changes in UAE Tax Ecosystem is visioned with strategic planning, objectives, transparent taxation system, promoting and stimulating economic growth with expansion in Green field and Brown field projects through Overseas Direct Investments (ODI) and/or Foreign Direct Investments (FDI), and to minimise revenue leakages by making disclosures and reporting applicable to Business Entities affected by such ecosystem, ushering in positive economically sustainable growth with minimum and reasonable corporate tax rate of 9% as compared to anywhere in the globe.
- The introduction of corporate tax in the UAE was driven by a number of factors. One of the main reasons for introducing the tax was to diversify the country’s sources of revenue and reduce its reliance on oil revenues and adverse impact of the COVID-19 pandemic. The UAE has historically relied heavily on oil exports to fuel its economy, but the recent decline in oil prices and the global shift towards renewable energy has prompted the government to explore new sources of revenue.
- The introduction of corporate tax is also in line with the UAE’s efforts to align its tax system with international best practices and promote a more transparent and stable business environment. [CRJ1] The UAE has been working to enhance its regulatory framework and improve its business climate in order to attract more foreign investment, and the introduction of corporate tax is seen as a step towards achieving these goals.
- Furthermore, the implementation of corporate tax is part of a wider Gulf Cooperation Council (GCC) initiative to introduce a unified VAT and corporate tax system. The GCC countries are working towards implementing these changes in a phased manner, with each country setting its own timeline.
The UAE Tax regime
On 31 January 2022, the Ministry of Finance (MOF) of UAE confirmed that the UAE will introduce federal corporate tax (CT) for financial years starting on or after 1 June 2023. On 28th April 2022, the Ministry of Finance, UAE released its public consultation paper to provide insights on the proposed corporate tax (CT) regime. Given that corporate tax is new in UAE, it is essential for businesses to understand the concept and few other aspects as follow
- Corporate tax is a form of direct tax levied on the net income or profit of corporations and other business entities. It is also commonly known as ‘Corporate Income Tax’ or ‘Business Profits Tax’.
- The authorities released the corporate tax law on 9th December 2020. The UAE corporate tax is made available through a ‘Federal Decree-Law no. 47 of 2022 on their official website. While the CT law has not yet been issued, the MOF has publicly communicated key elements of CT policy and design through a Frequently Asked Questions (FAQs) document. The date of implementing the corporate tax is effective from the financial year starting on or after 1st June, 2023.
- All businesses with taxable profit over 375,000 AED are subject to a 9% corporate tax on their net profit, but small businesses and start-ups with a net profit of up to 375,000 AED are exempt from paying corporate tax. Below is the list of companies or income exempt from corporate tax:
· Individuals will not be subject to corporate tax. As a result, any income from employment, real estate, investments in shares, and other personal income unrelated to a trade or business in the UAE will be exempt from corporate tax
· Not applicable to foreign investors who do not carry on business in UAE
· Corporate tax incentives are currently being offered to free zone businesses that comply with all regulatory requirements, will continue.
· Capital gains and dividends received by UAE businesses from its qualifying shareholdings are exempt from corporate tax
· Not applicable on qualifying intragroup transactions and restructurings
Relevant Transfer Pricing (TP) provisions in CT
As we understand, UAE CT has been introduced by the Federal Government and if it was not introduced, UAE would have lost the benefits as envisaged in the light of recent developments under International Taxation getting implemented through DTAA (Double Taxation Avoidance Agreements), MLI (Multi-Lateral Instruments), BEPS (Base Erosion and Profit Shifting) Plan 1 & 2 initiatives in general.
The UAE, in line with most of the developed countries, has stood by the BEPS program and the adoption of the OECD rules for TP (Transfer Pricing) has been a logical move as part of the introduction of CT. The OECD Transfer Pricing Rules shall now be applicable in the UAE. The DIFC law also includes transfer pricing provisions, which aim to prevent companies from shifting profits between their subsidiaries in different jurisdictions to avoid paying taxes. This is a game changer as intercompany transactions would need to be undertaken at arm’s length and generally should be supported by appropriate documentation. Businesses would need to evaluate their current arrangements and assess the impact on both cross-border as well as domestic transactions.
The CT Law introduces a comprehensive TP regime which is broadly in line with the OECD TP Guidelines (OECD TPG). The CT Law provides more details in relation to the TP rules, specifically on the following items:
· Article 34 – The Arm’s Length Principle;
· Article 35 – Related Parties and Control;
· Article 36 – Payments to Connected Persons; and
· Article 55 – Transfer Pricing Documentation.
Typically, TP rules apply to cross-border arrangements entered between related parties. However, a key observation from the UAE TP regime is that it appears to apply broadly to any arrangements between related parties and connected persons. These rules should apply to all taxpayers, including corporations, partnerships, trusts, and any other taxpayer. In addition, the rules apply equally to foreign owned enterprises and domestically owned enterprises regardless of the tax regime they may fall such as the mainland or under a Free Zone considering the benefits derived by each of such enterprises.
Once the detailed TP requirements are issued by the Federal Tax Authority (FTA), businesses must undertake an optimization exercise to align existing TP policies with the OECD guidelines followed by implementation of the revised TP policies, as appropriate, by amending policy documents and contracts. Upon successful implementation, businesses must focus on the compliance aspect and prepare & maintain necessary documentation, wherever applicable. TP documentation that the entities should consider are as follows:
· Regarding their transactions with Related Parties and Connected Persons along with their tax return.
· Certain businesses may be requested to maintain a master file and a local file.
· The FTA may seek a taxpayer to provide a copy of their Master File or Local File or any information to support the arm’s length nature at any time by issuing a notice of not less than 30 days.
· Threshold and format of the master file and a local file to be prescribed by the FTA.
· The FAQs state that businesses which claim small business relief will not have to comply with the transfer pricing documentation rules.
Ramifications of CT in UAE
The introduction of the CT Law is expected to have a significant impact on businesses operating in UAE. Some businesses may decide to relocate to other tax-free jurisdictions, while others may need to adjust their pricing strategies to ensure compliance with the transfer pricing provisions. Additionally, the introduction of corporate tax is likely to lead to an increase in the cost of doing business in UAE, which may reduce the country’s attractiveness as a destination for foreign investment.
- Theoretically, all businesses will be within the scope of the transfer pricing rules however, in practice, the major effects of the TP regime will be felt by the multinational companies that are involved in transferring goods or services between group establishments. These businesses, in all likelihood, will be required to maintain the records stipulated by the OECD including the preparation of additional annual reports demanded by the FTA.
- One-time transactions e.g., sale of high-value assets may also come under the TP rules and may need to be critically reviewed for evaluating TP implications even if the businesses generally don’t undertake intra-group transactions that come under the TP rules.
- Family businesses in the UAE providing financial support to each other may be under greater scrutiny and may need to review their TP policies and adapt some of their practices to comply with the TP regulations.
- Free zone businesses may need to take into account certain TP considerations and may need to make some additional assessments accordingly. The applicability of the arm’s length principle to such free zone businesses would need to be analyzed once the detailed TP rules are available to address situations where the Free Zones based companies carry out business with mainland UAE entities.
How can BCL help?
BCL hosts a team of adept and proficient Chartered Accountants, providing under one roof, services in the field of Accounting, Compliances, International Taxation, Transfer Pricing, Management Consultancy & on various other matters. To align you with the newly introduced CT in UAE, we aim to provide the following services in a timely and cost efficient manner:
· Provides extensive range of transfer pricing services include provision of transfer pricing planning services, advisory services, and its related compliances, making it fully compliant with all the regulations of Transfer Pricing in the UAE
· Help in developing and implementing efficient Transfer Pricing policies with a view to optimize tax planning.
· To make an assessment of MNC’s current position and current transfer pricing policy, and suggest business in fulfilling and complying with the process, procedures, and submissions, as applicable.
· Assist in developing tax-efficient arrangements that maximize compliance with laws and regulations while meeting all of your transfer pricing requirements, along with filing requirements of Master file and CbCR reporting.
· Conducting exhaustive FAR (Functions, Assets & Risks) analysis and Economic analysis, in determining the value of Transfer Price
· Comprehensive Assessment of the Corporate tax and its impact for UAE Corporates. Our expertise can make you take best decisions with smoother transition to newly introduced Corporate Tax.
Read more about Transfer Pricing Services at https://bcl.ae/transfer-pricing-services/
Read more about Corporate Tax Services at https://bcl.ae/corporate-tax-advisory-services/