GCC Tax Int'l Tax & Transfer Pricing

Overview Draft KSA Income Tax Law and Draft Tax Procedures Law

Overview Draft KSA Income Tax Law and Draft Tax Procedures Law

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On 25 October 2023, the Zakat, Tax and Customs Authority (“ZATCA”) in the Kingdom of Saudi Arabia (“KSA”) published the Income Tax Law Draft (“proposed Law” or “new ITL”) in the Istitlaa Portal, which aims to update the KSA’s income tax system, currently governed by the Income Tax Law (Royal Decree No. M/1 dated 1/15/1425 AH) (“current Law”). At the same time, ZATCA also published a draft of the Zakat and Tax Procedural Law on the same platform (“draft Procedural Law”).

ZATCA proposes replacing the existing Income Tax Law with a new draft that aligns with the KSA’s evolving tax landscape, embraces global best practices to stimulate investment, and streamlines compliance and transparency. In addition, it implements defensive measures against transactions with tax havens. We summarise below the main changes to the application of corporate income tax in KSA if the proposed Law comes into force.


Tax haven blacklist

The proposed Law provides several provisions aimed at tackling profit shifting and tax avoidance. The proposed Law introduces the concept of a preferential tax regime, which is not present in the current Law. According to the proposed Article 10(2), any transaction involving a resident or permanent establishment in a jurisdiction that employs a preferential tax regime will have special provisions applicable, which are less favourable than the normal regime. These special provisions pertain to how expenses, depreciation, WHT rates, and TP regulations are applied.

A tax regime qualifies as preferential if it meets one of the conditions outlined in the proposed Article 10(3). Likely, the most prominent situation is the one where a country applies a statutory income tax rate of less than 15%. Further, a country will also be considered to have a Preferential Tax Regime if it has no information exchange agreement or if it does not have substance requirements applicable in its jurisdiction.

The jurisdictions that fall under this preferential tax regime will be determined through a decision made jointly by the ZATCA Board and the Ministry of Foreign Affairs. In other words, they will draw up a blacklist. In the region, these provisions will impact UAE, Bahrain, Qatar and Kuwait, all countries that either tax below 15% or exempt GCC-held businesses. KSA may essentially be blacklisting those countries, and policy responses will be expected from those countries.

The WHT rate for payments to such preferential regimes will always be 20%, irrespective of the type of payment. Where there is no Double Tax Treaty (“DTT”) available with the residency country, this impact is profound. In the GCC, KSA currently only has a DTT with the UAE, although negotiations for a DTT with Qatar are underway.

Other consequences include that the participation exemption may not apply when the investee is in a jurisdiction regarded as a preferential tax regime. Further, the deductibility of expenses for payments made to preferential tax regimes may be impaired, and depreciation may not be available for the purchases of assets from preferential tax regimes.


Withholding taxes

The proposed Law makes a clearer division for the application of withholding taxes. Withholding taxes will be applicable for the following payments:

  • Dividends, rental payments, and interest payments: 5%
  • Payments for Services: 10%
  • Royalties: 15%

Currently, a more detailed analysis of the nature of the services is required to identify the applicable WHT rate. The amendment is a surprise given that a recent reform has already taken place. Since 12 September 2023, the WHT rate for technical and consultancy services between related parties was reduced to 5% from 15%. The draft Law would now bring all services to 10%. This is not a positive evolution, given the expansion of the economy and current interactions with non-resident suppliers. Companies in jurisdictions that have DTTs with KSA may seek shelter under those treaties unless they have a Permanent Establishment in KSA.


Special incentives

Article 33 of the proposed Law foresees that special tax regulations may apply. This prefaces different tax regulations related to the SEZs in KSA, the ILBZ and potentially for the RHQ in accordance with the Regional Head Quarter Regime and other potential regimes.

In the same vein, there will be deductions for R&D and incentives for Green Investments. The design of those deductions and incentives may be in line with a Qualifying Refundable Tax Credit under the Pillar Two rules. Further, the creation of an investment reserve will encourage investment in assets.


Updated Residency rules and Service Permanent Establishment

In comparison to the current Law, the residency Article in the proposed Law (Article 2) gives extended details to the residence criteria of the natural person and sets rules to count the days in this regard. According to the Article, less time is required for natural persons to meet the residency criteria. Most crucial is that a natural person will be a tax resident for Income Tax purposes where they conduct business-related activities, and their length of stay exceeds 90 days during a tax year and 270 days over the course of three years.

In relation to the concept of Permanent Establishment (“PE”), the current Law provides two forms of PE: the Fixed PE and Agency PE. However, since the KSA, in practice, has also been enforcing a Services PE based on its sourcing rules, the proposed Law explicitly adds the Service PE in Article 6(3) with a threshold period of 30 days in any 12 months. This is a low threshold, which is likely easily to be crossed. The OECD’s Model Tax Convention has no Services PE, and the UN Model Tax Convention which puts the threshold at 183 days in any 12 months. Where KSA has DTT’s, the provisions of the DTT will prevail.


Binding nature of rulings and guide and Zakat penalties

 Amongst others, the draft Procedural Law imposes penalties on non-compliant Zakat payers. It also would bind ZATCA to its own administrative guidance and rulings. This removes any ambiguity for all taxpayers as they are assured they can place reliance on the Law when in force.


Non-GCC national resident persons clarified to be in scope

 These provisions have caused some concern amongst expats in KSA. It was already part of the law but has been clarified. It does not constitute Personal Income Tax but rather a business tax applicable to non-GCC nationals conducting a business in KSA.


Adoption BEPS standards

 In the proposed Law, Article 19 includes interest deductibility limitations different from the current rules. As per these proposed rules, the net loan charges are tax-deductible only in the tax year they arise and are capped at a maximum of 30% of the adjusted earnings. This approach is considered best practice by the OECD, recommended under BEPS Action 4 and is in line with numerous other jurisdictions.

Further, the proposed Law tackles the issue of the hybrid mismatch of financial instruments between the KSA and other jurisdictions. It rejects any discounts or tax exemptions on the financial instrument if the tax is not appropriately imposed in the other country due to varying tax treatments between the KSA and that other country. Therefore, the application of such instruments will depend on the tax regime in the corresponding country. This provision is an implementation of the recommended norms under BEPS Action 2.

Further, KSA domestically also adopts a Principal Purpose Test, a norm prescribed under BEPS Action 6.


Consistency terms and clarifications

To ensure that the proposed Law is interpreted consistently and in a unified manner, the Law provides detailed definitions for existing terms in the current Law and consolidates them into one article rather than adding them to different articles in the proposed Law.

Furthermore, the proposed Law took a further step and included interpretation rules for undefined terms in the Law, where it has a hierarchy for different legal references starting with the meaning included in the Income Tax By-Laws through to the Accounting Standard adopted in the KSA that do not contradict to the proposed Law. There are a range of other provisions also included where their impact under the current Law is unclear.


Other provisions

The proposed Law treats the Partnership as fiscally non-transparent (opaque) for Tax purposes. In the current Law, the unlimited Partnership is treated as fiscally transparent.

The proposed Law explicitly states that expenses related to Real Estate Transactions Tax (“RETT”) and non-deductible VAT paid by the taxpayer will be deductible, provided these expenses are for the purpose of generating taxable income.

In this regard, it also states that any payments to a Related Person that is not at arm’s length will exclude the excess payment from being permitted as a deduction for the purpose of the proposed Law.

The statute of limitation for audits and refunds would further become five years instead of the currently applicable three years. Exit taxes apply for removing assets from KSA.


Pillar Two and entry into force

Currently, there are no Pillar 2 rules on the Global Minimum Tax detailed in the Draft ITL, even though many large GCC-held businesses may have an ETR below 15%, considering the application of Zakat. When they have constituent entities in other jurisdictions that implement Pillar 2, these businesses may be impacted as of 1 January 2024.

The Entry into force is foreseen for 90 days after publication in the Official Gazette. The Regulations are aimed to be issued by the ZATCA Board 180 days after issuance of the Law and would immediately enter into force after publication. Given the timelines on the public consultation, this means that the Law will likely not enter into force and be applicable before Q2 2024.

UAE Corporate Income Tax UAE Tax

UAE’s Corporate Tax Framework: Understanding Participation Exemption

UAE’s Corporate Tax Framework: Understanding Participation Exemption

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The UAE Ministry of Finance recently issued Ministerial Decision no. 116 of 2023, which provides new clarity, especially regarding the Participation Exemption in the UAE Corporate Tax (CT) landscape.

We dissected the recent Ministerial Decision and highlighted key application conditions for the UAE CIT Participation Exemption, the ‘equivalence requirement’, and ‘subject-to-tax requirement.’

MD 116 of 2023 also provides further details as regards Islamic financial instruments, debt instruments and exchanges of Participating Interests.

Check below to learn more.

Tax Updates UAE Corporate Income Tax UAE Tax

30 Highlights about CIT Guide for Non-Resident Persons

30 Highlights about CIT Guide for Non-Resident Persons

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On 9 October 2023, the UAE Federal Tax Authority (FTA) released a Corporate Tax Guide for Non-Resident Persons.

In this document, the UAE FTA provides general guidance to natural persons or juridical persons who are not considered Resident Persons for UAE Corporate Income Tax (CIT) purposes and who derive income from the UAE to help them understand whether they are subject to tax in the UAE as Non-Resident Persons.

The Corporate Tax Guide explains when a Non-Resident Person must register for UAE CIT purposes and which types of income are liable to UAE CIT.

Practical explanations and examples are also provided to help clarify key concepts such as “Permanent Establishment” (PE), “State Source Income”, and “Nexus in the UAE”.

Aurifer has singled out the 30 most relevant clarifications in the Corporate Guide for Non-Resident Persons.

Check out the 30 highlights extrapolated from the Corporate Tax Guide for Non-Resident Persons:

1. State Sourced Income vs. PE

State Sourced Income and income attributable to a PE in the UAE are not necessarily mutually exclusive. This is because State Sourced Income can be attributable to a PE.

2. State Sourced Income vs. UAE Nexus

State Sourced Income and income from a nexus in the UAE are not necessarily mutually exclusive. This is because State Sourced Income includes income from a nexus in the UAE.

3. Non-Resident Person and Small Business Relief

 Small Business Relief under Article 21 of UAE CIT Law (Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses) is only available to Resident Persons. Instead, Non-Resident Persons are not eligible for Small Business Relief under UAE CIT Law.

4. UAE CIT Residence and Double Tax Treaties

Being a Resident Person under UAE CIT Law does not automatically mean that a Resident Person is also a UAE tax resident where a double tax treaty (DTT) between the UAE and a foreign country applies. This is the case of an individual spending less than 183 days in the UAE in a calendar year where the relevant DTT requires physical presence of at least 183 days for an individual to be considered a resident in a Contracting State.

 5. Irrelevant Factors for PE Purposes

The determination of whether a Non-Resident Person has a PE in the UAE cannot only be based on the following factors:

  • Ownership of a place of business in the UAE since even rented premises can constitute a PE.
  • Formal legal right to use a particular place since even effective control although illegally made over such location suffices.
  • Exclusive right over a place if a Non-Resident Person conducts business through a specific location belonging to another person or used by several other persons to perform their own business activities at the common location.

6. Fixed Place of Business for PE Purposes

A fixed place of business does not have to be actually fixed to the soil if there is a clear link between the place of business and a specific geographical location in the UAE. For example, a floating restaurant, attached to a hot air balloon and supported by a crane that makes the restaurant mobile, is a fixed place of business and may constitute a PE for a Non-Resident Person.

7. Multiple Locations for PE Purposes

If part of a cohesive project, business activities such as construction/installation projects performed at various locations can constitute a fixed place of business and therefore a PE for a Non-Resident Person.

8. Premises at Disposal for PE Purposes

A Non-Resident Company has a PE in the UAE if its employees in the UAE have relatively free access to a client’s premises through long-term access cards or desk assignments over an extended period.

9. Hotel Rooms and PE

 A Non-Resident Company has a PE in the UAE if its employees work from hotel rooms and the company does not have formal office space in the UAE since the hotel premises are essential at their disposal.

 10. Home Office PE

 A Non-Resident Company does not have a PE in the UAE if its employees work from home occasionally. This applies even if the company provides its employees with a laptop and other connectivity instruments such as a data card or remote connectivity, where, among other things, home office is merely an option given by the company to its employees.

11. Manager Travelling to the UAE for Meetings

 A manager of a foreign company, authorized to make management decisions, on a business trip to the UAE to meet some clients and discuss potential business opportunities does not necessarily create a fixed PE if his duties do not relate to the day-to-day management of the foreign company.

12. Land in the UAE and PE

 A foreign company, providing engineering/consulting services, which acquires and leases real estate in the UAE to an unrelated event management company to organize various conferences, does not have a PE in the UAE. However, the foreign company would have a nexus in the UAE and hence would be subject to UAE CIT on the taxable income attributable to the immovable property.

13. Exploration/Extraction Activities and PE

Exploration and extraction activities can constitute a fixed PE for a Non-Resident Person. Exploration activities include the case of vessels used for the prospection of natural resources offshore and the extraction of natural resources through a mine, oil or gas well, quarry, or any other place of extraction. Extraction activities must be interpreted broadly to include, for example, all oil and gas extraction places, whether onshore or offshore.

14. Automatic Equipment and PE

 A PE may also exist if the business of a Non-Resident Person is carried on mainly through automatic equipment, and the activities of the personnel are restricted to setting up, operating, controlling, and maintaining such equipment. Instead, a PE does not exist if the Non-Resident Person merely sets up the machines (e.g., gaming and vending machines) and then leases them to other enterprises.

15. Splitting of Contracts and Construction PE

 A construction PE exists in the UAE also in case of splitting-up of contracts regarding a building site or a construction project, some or all of which are carried on for less than 6 months (also counting preparatory works) at different locations. This is the case of:

  • Artificial splitting up of a contract relating to the same project.
  • A contract split between related parties.
  • Activities performed by subcontractors on the building site or construction project.

The General Anti-Abuse Rule under Article 50 of UAE CT Law (Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses) can address these splitting practices. No splitting-up of contracts occurs in the case of the execution of multiple and simultaneous contracts by a foreign company.

16. Storage/Delivery of Spare Parts

 A foreign company maintaining a place of business in the UAE for storage and delivery of spare parts to its customers has a PE in the UAE if maintenance and repair of appliances is also offered at that location. This is because such an activity goes beyond solely storage and delivery, being a core activity for the foreign company.

17. Warehouse in the UAE

 A foreign company maintaining a very large warehouse in the UAE for online selling of goods to UAE customers has a PE in the UAE. This is because the storage and delivery activities performed through the UAE warehouse represent an important part of the foreign company’s sale/distribution business.

18. Warehouse Operated by Logistics Company

A logistics company operating a warehouse in the UAE on behalf of a Non-Resident Person to which the logistics company is not related does not create a PE for the Non-Resident Person unless the latter has unlimited access to a separate part of the warehouse for the purposes of inspecting and maintaining the goods or merchandise stored therein.

19. Preparatory/Auxiliary Activities and Purchasing Office

A foreign company purchasing goods (e.g., cars and other vehicles) for clients through a purchasing office in the UAE has a PE in the UAE since the purchasing office represents an essential and significant part of the foreign company’s business, so these activities cannot be considered preparatory or auxiliary.

20. Preparatory/Auxiliary Activities Performed for a Third Party

Preparatory or auxiliary activities refer to activities carried on by an enterprise solely for itself (e.g., employee training). Instead, if a Non-Resident Person performs activities traditionally of a preparatory or auxiliary nature for another person (e.g., advertising for other persons), the same would constitute a PE for the Non-Resident Person as it is not solely conducting such activities for itself.

21. UAE Subsidiary as PE for the Parent

The existence of a subsidiary company in the UAE does not, by itself, create a PE of its foreign parent company since a subsidiary is an independent legal entity. Even though the business carried on by the subsidiary is managed/overseen by the parent company, that does not automatically imply that the subsidiary company is a PE of the parent company. Only when the subsidiary is acting as an agent or has been incorporated to artificially split/dissect cohesive business activities of the foreign parent may it constitute a PE.

22. Digital Nomad and PE

An individual working remotely (e.g., a “digital nomad”) from the UAE for a foreign employer does not create a PE for a Non-Resident Person if the individual performs activities that do not have a core role in the Non-Resident Person’s business. This is the case of activities performed by an internal accountant. However, if the activities performed by an individual have central importance in generating income for the Non-Resident Person, a fixed PE may exist.

 23. Physical Presence in the UAE: Travel Restrictions

An individual does not create a PE for a Non-Resident if he is present in the UAE due to an unpredictable temporary and exceptional situation beyond his control (e.g., a pandemic), which occurred while the individual was already in the UAE. This clause does not apply if an individual travels to the UAE knowing that he would likely be unable to travel outside due to imminent travel restrictions.

24. Physical Presence in the UAE: Act of War

An individual does not create a PE for a Non-Resident if he is present in the UAE due to an unpredictable temporary and exceptional situation beyond his control (e.g., an act of war) that occurred while the individual was already in the UAE. This clause does not apply if an individual travels to the UAE because of a war commenced before the individual decided to travel in the UAE.

25. Agency PE: Company Representatives

 An individual creates an agency PE for a Non-Resident Person if he regularly concludes contracts in the UAE on behalf of the Non-Resident Person or negotiates contracts in the UAE on its behalf and the Non-Resident Person concludes such contracts without any material modification to the terms of the contracts. This is not the case for representatives of a pharmaceutical company who actively promote medicines produced by that pharmaceutical company by contacting doctors in the UAE who subsequently prescribe these medicines to their patients.

26. Agency PE: Subsidiary

The activity of a subsidiary can give rise to an agency PE in the UAE for the parent company even though the subsidiary does not have the authority to conclude contracts on behalf of the parent company with UAE customers. This is the case of a distribution company working exclusively for a foreign pharmaceutical company to help it conclude contracts with potential customers in the UAE, even if the contracts are concluded and executed directly by the foreign company.

 27. Agency PE: Independent Agent

 A Non-Resident Person does not have an agency PE in the UAE if the person acting on behalf of the Non-Resident Person is an independent agent and performs activities for the Non-Resident Person in the ordinary course of business. This applies to a company acting as a distributor of goods/services of a foreign company that it procures on its own account from that company. In this case, the distributor is neither acting on behalf of the foreign company nor selling property that the foreign company owns, but the property sold to the end customers is owned by the distributor.

28. State Sourced Income: Income Generated Due to a Contract

 UAE CiT applies to income accruing in, or derived from, the UAE (State Source Income). Income generated due to a contract is an example of State Source Income. This is the income earned by a foreign company that transfers the work of executing a contract to build a government facility in the UAE to another foreign company for a fee.

 29. Nexus in the UAE: ATMs

UAE CIT is imposed on juridical Non-Resident Persons who have a nexus in the UAE. A juridical Non-Resident Person is considered to have a nexus in the UAE if it derives income from any immovable property in the UAE. This is the case of a foreign bank operating and maintaining ATMs in various malls, hotels, and movie theatres in the UAE, from which it earns service fees. The ATMs would also constitute a PE for the Non-Resident Person since they are used to carry on the foreign bank’s business in the UAE on a regular/recurrent basis.

30. Nexus in the UAE: Wind Turbines

UAE CIT is imposed on juridical Non-Resident Persons who have a nexus in the UAE. A juridical Non-Resident Person is considered to have a nexus in the UAE if it derives income from any immovable property in the UAE. This is the case of a company installing a wind turbine fixed on the seabed in a location that falls within the UAE’s territorial waters and deriving income from the power generated by the turbine. The wind turbines would also be considered to have a PE for the Non-Resident Person since they would be regarded as an installation to exploit renewable energy.


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