Customs & Trade Int'l Tax & Transfer Pricing Tax Updates UAE VAT

Understanding the Business Response to the OECD/G20’s Pillar Two Initiative: A Survey Analysis

UAE publishes long awaited Cabinet Decisions on Free Zones and Medical Supplies

Understanding the Business Response to the OECD/G20’s Pillar Two Initiative: A Survey Analysis

Our business survey shows how ready businesses are about the OECD/G20’s Pillar Two Initiative.

Aurifer Middle East had the privilege of representing the business community at the UNCTAD’s 8th World Investment Forum held in Abu Dhabi, a reason it conducted a survey for MNE’s operating in the UAE and the Gulf to gauge where businesses stand and their readiness to adapt to the impending changes of the OECD/G20’s Pillar Two Initiative. The data and sentiments captured in this survey were shared in the forum, bringing the GCC business perspective to a global stage.

 Read our survey.

Tax Updates UAE Corporate Income Tax UAE Tax

Venture Capital Funds and Corporate Taxation: Finding the Winning Formula

Venture Capital Funds and Corporate Taxation: Finding the Winning Formula

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In recent years, the United Arab Emirates (“UAE”) has emerged as a recognized hub for technology and innovation. One of the pivotal drivers of this transformation has been the increase in venture capital (“VC”) activity in the UAE. VC is a form of private equity funding used as a viable alternative to traditional bank financing for new businesses.

VC investments are crucial in nurturing start-ups to scale their operations and promote innovation in key technologies. Although VC funds may well stimulate innovation and growth in the economy, the core mandate of these investment vehicles (like all others) is ultimately to produce satisfactory returns for its underlying investors.

The recent introduction of corporate income tax (“CIT”) in the UAE may significantly impact persons involved in VC funds, both investors looking to deploy capital strategically and maximize returns and entrepreneurs seeking funding for the ‘next big thing’. Due to the international structure of modern investment strategies, it is also important that VC fund stakeholders are sufficiently aware of the international tax implications associated with their investments.

In this article, we discuss some of the nuances VC fund investors must consider going forward as part of the new UAE CIT and international tax landscape.

UAE CIT Law Overview

Broadly, the UAE Federal Corporate Tax Law (“UAE CIT Law”)[1] identifies two types of partnerships, namely:

  1. Incorporated Partnerships: these include limited liability partnerships (“LLP”), partnerships limited by shares, and other types of partnerships where none of the partners have unlimited liability, and
  2. Unincorporated Partnerships: these essentially involve a contractual relationship between two or more persons. The main feature of an unincorporated partnership is that the partners have unlimited liability for the debts and obligations of the unincorporated partnership and its business. Examples include general partnerships (“GP”) and joint ventures (“JV”). We have previously commented on applying this regime for law and professional services firms[2].

A VC fund is typically structured as a partnership, with a general partner responsible for managing the fund’s investments and limited partners providing the capital (the so-called classic GP-LP structure). Limited partners tend to be passive investors who have limited liability, while the general partner is actively involved in managing the fund. Below, we have included a diagram of the common VC fund structure.

Unincorporated Partnership and Fiscal Transparency

As discussed above, one of the primary considerations in characterizing a partnership for UAE CIT purposes is the concept of limited or unlimited liability. In this regard, an incorporated partnership where all partners have a limited liability is relatively straightforward from a UAE CIT perspective. Given the limited liability status of the partnership, it is considered to have a separate legal personality and taxable status, similar to a limited liability company or other juridical person. It is ultimately treated as a juridical person and taxed accordingly under the UAE CIT Law.

More complex is the UAE CIT treatment of unincorporated partnerships (which may involve an incorporated entity where partners have unlimited liability). A partner in an unincorporated partnership is regarded as conducting the partnership’s business as if it were his own, and he is jointly or severally liable for the obligations resulting from being in such arrangement.[3] For this reason, this type of partnership lacks independent legal personality[4] and is considered “transparent” for UAE CIT purposes.

According to Article 16 of the UAE CIT Law, any income derived by a tax-transparent vehicle shall be treated as earned by the underlying investor(s). In this regard, depending on the tax profile (natural persons vs. juridical persons) and tax residence status of the underlying investors, they may be subject to UAE CIT on the income derived from a tax-transparent entity. For example, a corporate investor in a UAE tax-transparent vehicle is subject to UAE CIT on the income to which that corporate investor is entitled. Conversely, a UAE tax resident natural person not conducting a business activity would not be subject to UAE CIT on their portion of the profit earned from the tax transparent entity, in so far as the activities of the unincorporated partnership do not bring a natural person within the scope of UAE CIT[5].

Each partner of an unincorporated partnership would need to assess whether they are within the scope of UAE CIT and, if so, register, prepare, and file annual UAE CIT returns accordingly, based on their portion of the income generated from the partnership. This causes important administrative obligations.

Another significant drawback of a transparent vehicle such as an unincorporated partnership is that they generally cannot claim any benefits under a double tax treaty (“DTT”) in so far as those vehicles do not meet the “liable to tax” criterion under Articles 1(2) and 4 of the OECD Model Tax Convention (“MTC”)[6].

As outlined above, VC structures typically have partners with both limited and unlimited liability. This potentially creates a so-called “partially tax-transparent entity” for UAE CIT purposes since the partnership is only considered transparent with respect to the income attributable to the partners with unlimited liability.

VC Funds and Taxable Person Election

To avoid some of the abovementioned administrative complexities associated with being a ‘transparent’ or ‘partially transparent’ investment vehicle, a VC fund may opt to be treated as a fully taxable person under the UAE CIT Law.[7] One of the benefits of this approach would be that the taxable person would be able to make a substantial claim to the application of rights under a DTT, given that it would be liable to tax. Additionally, this would reduce the compliance burden on individual partners, particularly where they are within the scope of the UAE CIT regime.

While, at first view, this option may seem inefficient from a tax perspective, as it would ensure the full partnership is within the scope of UAE CIT, several potential exemptions are available to a VC fund, as discussed below.

Qualifying Investment Fund

In the first instance, a VC fund may submit an application before the UAE Federal Tax Authority (“FTA”) to be considered exempt from UAE CIT as a Qualifying Investment Fund (“QIF”) where all of the following conditions are met:[8]

  1. The investment fund or the investment fund’s manager is subject to the regulatory oversight of a competent authority in the State, or a foreign competent authority recognized for the purposes of this Article. 
  2. Interests in the investment fund are traded on a Recognized Stock Exchange, or are marketed and made available sufficiently widely to investors. 
  3. The main or principal purpose of the investment fund is not to avoid CIT. 
  4. Any other conditions as may be prescribed in a decision issued by Cabinet at the suggestion of the Minister.

As regards the fourth condition above, we note that a Cabinet Decision was issued[9] (no. 81 of 2023) containing other requirements to be considered a QIF, namely: 

  1. The main business or business activities conducted by the investment fund are investment business activities, and any other business or business activities conducted by the investment fund are ancillary or incidental.
  2. A single investor and its related parties do not own the following: 
    – More than 30% of the ownership interests in the investment fund, where the investment fund has less than ten investors. 
    – More than 50% of the ownership interests in the investment fund, where the investment fund has ten or more investors.
  3. The investment fund is managed or advised by an Investment Manager that has a minimum of three investment professionals.
  4. The investors shall not have control over the day-to-day management of the investment fund.

This exemption is likely to apply to many VC fund structures. However, some criteria (particularly the related party/ownership structure requirements from the Cabinet Decision) may be a potential tension point for certain funds. 

Qualifying Free Zone Person

For those VC funds that may not meet the criteria for a QIF but are established in any of the UAE economic free zones (“FZs”), there is also the possibility to qualify for the 0% beneficial rate available to Qualifying Free Zone Persons (“QFZP”).

Given the continuing discussion regarding the QFZP regime and the prospect of upcoming modifications due to the public consultation on the UAE FZ CIT regime closed last August, we will only briefly summarize the key requirements below. Notably, a FZ person is considered a QFZP for UAE CIT purposes where it meets the following conditions[10]:

  1. It derives Qualifying Income.
  2. Its Non-Qualifying Income does not exceed the prescribed de-minimis requirements.
  3. It is compliant with the arm’s length principle and transfer pricing (“TP”) documentation requirements.
  4. It maintains adequate substance in the UAE.
  5. It does not elect to be subject to CIT (at 9%).
  6. It prepares and maintains audited financial statements.

Important in the context of VC funds is that the income generated from these vehicles will likely meet the definition of income derived from a “Qualifying Activity”[11] (i.e., it would be considered “Qualifying Income”). This is because the “Qualifying Activities” list includes, amongst others, the holding of shares and other securities.[12]

However, another important consideration and potentially critical point for a VC fund is that a QFZP must be a juridical person under the UAE CIT law.[13] Hence, the qualification for the QFZP regime depends on how the VC fund is structured, including assessing whether it has a separate legal personality for tax purposes.

International Tax Considerations

The UAE has more than 140 DTTs with partner jurisdictions[14]. This makes the UAE an appealing destination for VC funds to establish operations and engage in international investment opportunities. As such, it is also very important to consider the implications of the domestic tax treatment of a VC fund from an international tax perspective, particularly whether the VC fund can access benefits under a DTT.

A person can only claim treaty benefits under a DTT when he resides in one of the two Contracting States. One of the key criteria under Article 4 of the OECD MTC for tax residence is that the person is “liable to tax” in the Contracting State. We mentioned previously that a tax-transparent partnership is typically not eligible to claim treaty relief due to non-fulfillment of the “liable to tax” criteria.

For partially or fully tax-transparent entities, it is possible that the underlying investors may be considered tax residents in the UAE (provided they meet the relevant conditions in the DTT) and, therefore, be entitled to treaty benefits. However, tax treaty residence eligibility is subject to complex assessments for the VC fund and its investors.

The difficulty in accessing treaty benefits for tax-transparent entities is one of the key reasons a VC fund may elect to be a taxable person under the UAE CIT Law. However, there is also an argument that a QIF or QFZP would not meet the “liable to tax criteria”. The OECD Commentary on the MTC effectively leaves the interpretation of whether an entity satisfies the “liable to tax” criterion at the discretion of the source jurisdiction.

From our experience, ZATCA in the Kingdom of Saudi Arabia (“KSA”) has historically sometimes rejected claims by UAE FZ entities under the KSA-UAE DTT because they are not liable to tax in the UAE and, therefore, do not meet the residency criteria. Where the VC fund is not considered resident in the UAE, it could result in foreign withholding tax being applied on the payments received at gross, with no domestic credit available, as the VC fund is exempt from UAE CIT or is subject to tax at 0%.

Nevertheless, it is important to consider each DTT and transaction or arrangement on a standalone basis, as in some jurisdictions, a person is considered liable to comprehensive taxation even if the Contracting State does not actually levy any income tax.[15] As such, there may be scenarios where a VC fund can elect to be considered a taxable person and qualify as either a QIF or QFZP such that there is no domestic UAE CIT while maintaining access to treaty benefits.


This article has outlined some potential intricacies that VC funds must consider when determining their “winning formula” under UAE CIT Law. This decision requires a critical evaluation by VC funds of the different options available (transparent vs. opaque, QIF, QFZP, etc.). VC funds must also evaluate the extent of their international portfolio, as well as the tax profile and residency of underlying investors, if they want to continue maximizing investor returns in the changing world of taxation in the UAE.

Summary Table



[1] Federal Decree Law No. 47 of 2022 on the Taxation of Corporations and Businesses (“UAE CIT Law”).

[2] T. Vanhee, “Impact of UAE Corporate Tax on Law Firms and Professional Services Firms“,, accessed on 2 October 2023.

[3] Article 16(9), UAE CIT Law; Clause 8.2, Corporate Tax General Guide issued on 11 September 2023.

[4] Clause 8.2, Corporate Tax General Guide issued on 11 September 2023.

[5] This is determined by Article 11(6), UAE CIT Law, for which the UAE Federal Cabinet issued Cabinet Decision No. (49) of 2023 On Specifying the Categories of Businesses or Business Activities Conducted by a Resident or Non-Resident Natural Person that are Subject to Corporate Tax. This Cabinet Decision determines that for resident and non-resident natural persons, wages, personal investment income, and real estate investment income are not subject to UAE CIT. For more details on the application of UAE CIT to natural persons, please refer to our previous articles: T. VANHEE, “Tax Implications for Resident and Foreign Investors in the UAE Real Estate”,, accessed on 2 October 2023; T. VANHEE., “CIT in the UAE: The PE Clause for Individuals”,, accessed on 2 October 2023.

[6] See Paragraph 8.3., OECD Commentary to the OECD Model Tax Convention (“MTC”) on Article 4, which states the following: “Where a State disregards a partnership for tax purposes and treats it as fiscally transparent, taxing the partners on their share of the partnership income, the partnership itself is not liable to tax and may not, therefore, be considered to be a resident of that State”. This reflects the idea of when a person is covered and is entitled to the benefit of a double tax convention (“DTT”) as specified in Article 1(2) of the OECD MTC (as updated in 2017) as regards wholly or partly transparent entities. Some treaties will, however, specifically note that a partnership is a resident. See Article 4(1)(b) of the DTT between the United States and Luxembourg or Article 4(1) of the DTT between Belgium and Luxembourg

[7] Article 16(8), UAE CIT Law. 

[8] Article 10(1), UAE CIT Law.

[9] Cabinet Decision No. 81 of 2023 On Conditions for Qualifying Investment Funds for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses.

[10] For more details on the QFZP regime, see L. Purcell, “To Qualify or not to Qualify: Analysis and Tax Advisory on the UAE Free Zone Regime, Interaction with Pillar Two, and Beyond”,, accessed on 2 October 2023. See also UAE Corporate Tax on Qualifying Free Zone Persons,, accessed on 2 October 2023.

[11] Ministerial Decision No. 139 of 2023 Regarding Qualifying Activities and Excluded Activities for the Purposes of Federal Decree Law No. 47 of 2022 on the Taxation of Corporations and Businesses. 

[12] Article 2(1)(c), Ministerial Decision No. 139 of 2023. It should be noted, however, that both management services and wealth and investment management services must be subject to the regulatory oversight of the competent authority in the State.

[13] Article 11(3)(a), UAE CIT Law.

[14] UAE Ministry of Finance (MoF), “Avoidance of Double Taxation Agreements”, accessed on 2 October 2023.

[15] Paragraph 8.6, OECD Commentary to the OECD MTC on Article 4.

GCC Tax Tax Updates

Aurifer’s submission for Pillar one – Amount B

Aurifer’s submission for Pillar one – Amount B

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Pillar One – Amount B Submission

In the first instance, we would like to express our admiration towards the ongoing technical work undertaken by the OECD and the Inclusive Framework on the BEPS initiatives to address the difficulties which arise regarding the taxation of the digital economy. The tax challenges of the digital economy are extensive and difficult to address.

Our firm is incorporated in KSA and UAE, with a representation in Brussels. We have a strong focus on tax policy matters in the Gulf Cooperation Council (“GCC”).

Although it is an oversimplification, in a general sense, the GCC has been slow in the adoption of the principles of international taxation which has perhaps led it to being an under-represented region relative to its growing economic influence. Historically therefore, GCC countries have not participated much in international forums in the same way as other countries may have.

Much of the GCC has also only known only strong economic development towards the second half of the 20th century, and therefore have only started to assert themselves more recently on an international level.

This submission aims to contribute constructively to the discourse, drawing from our experience and insights in the GCC region, and to collectively shape a future where international tax frameworks harmonize with the evolving dynamics of the global economy. In the subsequent sections, we provide our observations and recommendations in relation to the proposed scoping and pricing mechanism for Pillar One – Amount B. At the outset, we would like to express our endorsement for any initiative which seeks to improve legal certainty for tax payers and tax authority alike.

  1. GCC Perspective

The GCC region is composed of six sovereign nations, each of which have their own individual tax legislation. However, the commonality in the GCC is that each of the countries remain in a relatively early stage in the development of their domestic tax systems and policies. This is certainly the case for transfer pricing. In this regard, the Kingdom of Saudi Arabia (“KSA”) was the first to introduce formal transfer pricing rules in February 2019 and currently only KSA, Qatar and the UAE have introduced full transfer pricing rules.

As such, the concept of transfer pricing remains relatively novel amongst the majority of taxpayers in the region. Indeed, the tax authorities in the region also have relatively limited experience with transfer pricing compared to other parts of the world.

Although perhaps not in an economic sense it appears clear that the GCC region would be considered a low-capacity jurisdiction in terms of experience and capacity. While the region continues to evolve and modernize rapidly, it will take several years to build up capacity, knowledge, knowhow, and expertise.

On this basis, the introduction of a simplified regime to promote tax certainty in the future would be most welcomed in the region. In this context, we have provided our comments on the current proposal below.

2. Scope

In the GCC, the distribution of goods (i.e. commercial agencies) is often only a privilege of companies held by GCC nationals. As such, distributors for products manufactured outside of the GCC are often unrelated parties and on that basis the pricing is generally inherently arm’s length.

Notwithstanding the above, there remains sufficient intergroup distribution activities to warrant the introduction of Amount B in the region. In relation to the transactions in scope, we broadly agree with the current proposal.

The exclusion of the distribution of services and commodities is in our view appropriate given the difference in functional and risk profile associated with these transactions. The UAE may have benefited from including distribution of services given it has a higher concentration of businesses performing these activities. Notwithstanding this, we agree in principle with these exclusions. The allowance of a de minimis threshold for retail sales is also helpful for some distributors in the region which are often part of large conglomerates undertaking a very wide range of activities.

However, given the difference in functional profile and remuneration structures of sales agent and commissionaire models as compared to buy-sell distribution activities, it may also be worth considering the exclusion of such transactions from the scope of Amount B. Alternatively, allowing for more flexibility in the pricing mechanism for such transactions may be sufficient.

In terms of the introduction of scoping criteria for “non-baseline” contributions, it is our opinion that the tax authorities in the GCC will benefit from the additional qualitative scoping criterion to assist in the effective implementation of Amount B. As alluded to in the public consultation, the accurate delineation of a transaction for transfer pricing purposes requires a qualitative assessment of the controlled transaction meaning that there should not be significant incremental effort associated with this approach.

Given the current lack of expertise in the region, the inclusion of guidance in how to navigate the qualitative components of the analysis for application of Amount B would be beneficial.

  3. Transfer Pricing Methodology

We agree that the transactional net margin method is the most appropriate methodology for buy-sell distribution transactions in scope of Amount B. Similarly, the flexibility to elect to use the internal CUP method is seen as welcome and aligns with the existing OECD Guidelines.

We note there is currently a “cap and collar” corroborative mechanism embedded in the pricing matrix. The inclusion of a corroborative mechanism does not appear aligned with the objective of adopting a simplified approach and in our view may create unnecessary additional compliance for taxpayers. It appears that the intention behind such a mechanism is to safeguard against potential distortions in functional profiles between certain types of entities in scope namely sales agents/commissionaires versus buy-sell distributors.

As mentioned previously, it may be preferred to simply remove sales agents or commissionaires from the scope of Amount B. Alternatively, given the fundamental differences between these entities it may be preferable to allow for the Berry Ratio to be used as the primary method for sales agent and commissionaire type arrangements rather than as corroborative. Although this would involve developing a separate pricing matrices, the use of the Berry Ratio as the appropriate method may better align with the functional and remuneration profiles of such entities.

4. Pricing Matrix

In general, there is a lack of comparable data of companies in the GCC. This information is often close guarded, and there is currently no project to make such data publicly available. The traditional transfer pricing databases have some data, albeit limited.

As such, tax authorities in the region tend to allow for a wider geographic scope to be applied when searching for comparables, beyond just the GCC or MENA region. As such, the data availability mechanism will likely be applicable for GCC countries to the extent that they fall within the scope of “qualifying jurisdictions”.

We note that there is an option for a local data set to be produced by the local tax authority where there is a potentially material data availability gap in the global dataset owing to lack of country coverage. In this regard, we would have reservations about this option as it would impose an additional burden for the local tax administrations in the GCC as well as reduce the taxpayer’s input in what the appropriate range would be for their own circumstances. This may defeat the purpose of the exercise.

As outlined previously, the tax administrations in the GCC are at the early stages of their understanding of transfer pricing and will take some time to build up the relevant expertise. In our experience, the approach taken by tax administrations in developing their own ranges during disputes usually has the sole objective to increase profit levels in the GCC.

Furthermore, in the context of the GCC a lot of businesses are either directly controlled or receive support from sovereign wealth funds which may potentially distort the results of a local data if not appropriately accounted for. Additionally, a lack of transparency in available company data would also limit the taxpayers’ ability to contest or dispute the ranges produced.

As such, we would suggest that a high-level of transparency is available to taxpayers in relation to the selection criteria applied for such internally developed comparables. Alternatively, further guidance on what constitutes a “qualifying” local data set or the level of involvement from the OECD in supporting the local tax administration to develop these sets would be appreciated to allay any taxpayer fears of the tax administrations developing an unrealistic range of results.

5. Tax Certainty

Currently, the majority of transfer pricing disputes in the region are largely concentrated in KSA. In this regard, the tax authority in KSA has recently introduced an Advance Pricing Agreement (“APA”) regime in an effort to reduce such disputes. The UAE has also included an APA regime as part of its new corporate income tax regime.

We note that the current consultation acknowledges that existing bi-lateral or multi-lateral APAs should be respected following the introduction of the simplified and streamlined approach. We support this approach and would also recommend that the option remains for tax authorities to agree APAs on a go-forward basis in relation to transactions in-scope.

Unfortunately, the tax treaty network of the GCC countries is not always as extensive as other developed nations (except for UAE and Qatar). As such, reliance on mutual agreement procedure under the terms of the OECD model tax convention may not be available for transactions with certain counter-party jurisdictions. As such, we would recommend mandatory binding arbitration to Amount B in order to ensure that disputes are resolved in a timely manner.

Int'l Tax & Transfer Pricing

Outcome statement from the OECD’s Inclusive Framework on BEPS

Outcome statement from the OECD’s Inclusive Framework on BEPS

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An update was published by the OECD on 12 July 2023 in relation to the status of the BEPS 2.0 project following the conclusion of the 15th meeting of the OECD/G20 Inclusive Framework. With so much of the focus seemingly on Pillar Two over the last number of months, the Outcome Statement provides some important, albeit brief, updates in relation to Pillar One as well as the Subject to Tax Rule (STTR) from Pillar Two. We have summarized these below for reference: 

Pillar One – Amount A  

Text has been developed for the multilateral convention (“MLC”) on Pillar One’s Amount A. The objective of the MLC is to allow jurisdictions to exercise a domestic taxing right on a portion of residual profit of in scope MNE’s which have a defined nexus in the respective market jurisdictions, subject to the specified revenue and profitability thresholds. The MLC shall be accompanied by an Explanatory Statement setting out the common understanding and will include key features necessary for it to be prepared for signature including but not limited to:

  • Scope and operation of taxing right, 
  • Mechanism for relief of double taxation, 
  • Process for ensuring tax certainty, 
  • Conditions for the removal of existing DSTs. 

The Outcome Statement outlined that some jurisdictions have raised concerns about specific items in the MLC and efforts are underway to resolve these issues. According to the Outcome Statement, the MLC will be opened for signature in the second half of 2023 and a signing ceremony will be arranged by year-end. The objective is for the MLC to enter into force in 2025.

Additionally, the Outcome Statement announced that IF members have agreed to refrain from introducing new DSTs or similar measures during the period between 1 January 2024 and 31 December 2024. This agreement is subject to the condition that at least 30 jurisdictions accounting for at least 60% of the Ultimate Parent Entities of in-scope MNEs, sign the MLC before the end of 2023. IF members have agreed to extend this pause on DSTs to 31 December 2025 provided “sufficient” progress has been made. Sufficient has not been defined. 

Pillar One – Amount B

Amount B provides a framework for the simplified and streamlined application of the arm’s length principle to in-country baseline marketing and distribution activities. Consensus has been reached on many aspects of Amount B. However, further work will be undertaken on the following aspects: 

  • Ensuring an appropriate balance between a quantitative and qualitative approach in identifying baseline distribution activities; 
  • The appropriateness of: 
    • the pricing framework, including in light of the final agreement on scope, 
    • the application of the framework to the wholesale distribution of digital goods, 
    • country uplifts within geographic markets, and 
    • the criteria to apply Amount B utilising a local database in certain jurisdictions. 

A public consultation will be launched next week (17 July 2023) on these topics, with comments due to be submitted by 01 September 2023. Following this, a final report on Amount B will be published which will then be incorporated in the OECD TP Guidelines by January 2024. The report shall include critical items such as consideration for low-capacity jurisdictions as well as timelines for transitioning to Amount B for all jurisdictions.

Pillar Two – STTR

The OECD have completed work on both an STTR model provision and commentary as well as an MLI and Explanatory Statement to facilitate implementation. These documents will be released next week (17 July 2023) and the MLI will be open for signature from 02 October 2023. 

The STTR shall apply to certain intra-group payments (including interest and royalties) between jurisdictions where the recipient’s jurisdiction of residence imposes tax on such income at a nominal rate of below nine percent and the treaty limits the rate at which the source jurisdiction can tax such income. Subject to satisfying other conditions the STTR allows the source jurisdiction to tax the income at a rate up to the difference between nine percent and the rate imposed at the resident jurisdiction. The STTR is subject to certain exclusions, a materiality threshold, and a mark-up threshold, and is administered through an ex-post annualised charge. 

There should be a G20 meeting next week discussing the same topics, and providing further endorsement of the work so far. The Inclusive Framework meanwhile notes that over 50 jurisdictions have already taken steps towards the implementation of Pillar Two. 

Read our previous analysis on the impact of Pillar Two on the GCC here:


To Qualify or not to Qualify: Analysis and Tax Advisory on the UAE Free Zone Regime, Interaction with Pillar Two, and Beyond

To Qualify or not to Qualify: Analysis and Tax Advisory on the UAE Free Zone Regime, Interaction with Pillar Two, and Beyond


On 31 January 2022, the Ministry of Finance (“MoF”) announced that the United Arab Emirates (“UAE”) will introduce a federal Corporate Income Tax (“CIT”) on business profits that will be effective for financial years starting on or after 01 June 2023. This was followed by the release of a Public Consultation Document (“PCD”) in April of 2022 before the publication of the CIT legislation on 9 December 2022.

One of the key elements addressed in the PCD and CIT legislation is with respect to the UAE’s Free Zone Regime. The UAE Free Zone Regime is a system of economic zones established in the UAE that offer favourable conditions for doing business. The Free Zones offer a range of benefits, including 100% foreign ownership, certain tax incentives (including 0% CIT) and simplified administrative procedures.

Subject to certain conditions (summarised in further detail below), “Qualifying Income” of a Qualifying Free Zone Person (“QFZP”) will remain subject to a 0% tax rate under the CIT law for the remainder of the tax incentive period, as provided for in the applicable legislation of the Free Zone in which the QFZP is registered.

As we approach the introduction of the UAE’s CIT regime, many of the burning questions for businesses operating in the UAE revolve around the UAE Free Zone Regime. In particular, the central theme of many people’s inquiries concerns the definition of “Qualifying Income”, which remains subject to a Cabinet Decision.

Given that Non-Qualifying Income shall be subject to CIT at the standard rate of 9%, it is critically important for businesses to understand this definition to appropriately forecast their future tax liability, distributable reserves and manage shareholders’ expectations regarding post-tax profitability etc.

In addition, there are many other practical considerations which taxpayers will be keen to understand going forward. Below we give a short summary of where we stand as well as our thoughts on a number of the key queries and recommendations for businesses in relation to their Free Zone operations.    

Where We Stand

According to Article 18 of UAE CT legislation, an entity operating in a Free Zone is considered a QFZP where it meets all of the following conditions:

Where all these conditions are met, a QFZP shall be subject to zero percent CIT on its Qualifying Income while being subject to tax at 9% on its non-Qualifying Income. Another condition, although not expressly provided in CIT legislation but based on Ministerial Decision No. 73 issued on 6 April 2023, is that a QFZP cannot elect for the Small Business Relief under Article 21 of UAE CT legislation, such that the two regimes are fundamentally alternative.

As discussed above, however, the most critical aspect is that a definition of Qualifying Income is not provided in the CIT legislation but remains subject to a Cabinet Decision yet to be published.

Our Thoughts

In the wait for the Cabinet Decision, one can only advance some hypotheses regarding the scope of application of CIT to QFZP. Below we have outlined some initial thoughts and considerations in relation to each of the abovementioned conditions:

Adequate Substance: We expect this condition will be linked to the Economic Substance Regulations (“ESR”) and the specific criteria used therein. This is primarily due to the Federal Tax Authority’s (“FTA”) familiarity with this approach. Moreover, many Free Zone Persons are already subject to ESR reporting requirements, so it should not cause a major additional administrative burden for the tax administration or the taxpayers. Finally, the lexicon used in the ESR reporting requirements (i.e., “Relevant Activity” and “Core Income Generating Activity”) may suggest a possible analogy between the two pieces of legislation.

Free Zone Persons that do not currently file ESR reports should familiarise themselves with the content and structure in order to best prepare for the future substance requirements.

While we expect that the substance requirement will be linked to the ESR, at the same time, one of the comments that was made by the MoF in its UAE CT Awareness Sessions was that they have so far not decided on whether the ESR regime itself will continue after the CT regime is implemented. More details on this aspect will be issued by the MoF.

Qualifying Income: As outlined above, the definition of Qualifying Income remains the most controversial issue for most businesses operating in the UAE or looking at this geographical area to expand their activities. .Although it is not definitive, the expectation is that the scope of Qualifying Income under the UAE CIT legislation will be broadly in line with the PCD.

In this regard, it is worth noting that while the PCD did not include the terms Qualifying or non-Qualifying Income, it did outline certain types of income earned by Free Zone entities that will be subject to zero percent UAE CIT. We have summarized these below:

  1. Income earned from transactions with businesses located outside of the UAE or income from trading with businesses in the same or another Free Zone.
  2. Passive income earned from UAE-mainland. Such income includes interest, royalties, dividends, and capital gains from owning shares in UAE-mainland companies.
  3. Income earned from transactions with a UAE-mainland group company. However, to maintain tax neutrality, the UAE-mainland group company will not be able to deduct the corresponding expense.
  4. Income earned from the sale of goods from Designated Zones to buyers in the UAE mainland where the buyer is the importer of record. We have written a piece explaining the nuances of the interplay between the VAT Regime and the Free Zone regime earlier on our website.


Currently, it is assumed that the above income streams would constitute Qualifying Income. However, this ultimately remains subject to the anticipated Cabinet Decision. Being a critical issue for many businesses, we expect specifications in this regard to be disclosed imminently.

Although the PCD remains our best point of reference for Qualifying Income, we note some critical divergences between the PCD and the CIT legislation. For example, reference to both Qualifying and non-Qualifying Income in the CIT legislation suggests partial qualification is available, whereas the PCD implied an “all or nothing” approach whereby any amount of other UAE-mainland sourced income would disqualify a Free Zone Person from the 0% rate in respect of all their income.


While this is a welcome change for businesses with a mix of mainland and foreign-sourced income, it does present some additional practical questions in terms of the calculation of CIT payable on the Non-Qualifying Income of a QFZP. For example:

 ·       Would the AED 375,000 income threshold before applying the 9% CIT rate be charged to the non-Qualifying Income of a QFZP, or would Qualifying Income also be taken into account for the calculation of the AED 375,000 income threshold?

·       What is the appropriate method for allocating cost between Qualifying and non-Qualifying Income to determine the final tax liability?


In relation to the first question, it would be prudent at this stage to assume that the income threshold would not apply to non-Qualifying Income of a QFZP. This is supported by the fact that the tax rates applicable for QFZPs are defined in a separate section of Article 3 of the CIT legislation. However, this should become clearer upon issuance of the Cabinet Decision.


With respect to the second question, this should be determined through a combination of appropriate management accounting, transfer pricing policies (for intercompany transactions) as well as preparation of adequate documentation to support the allocation in the event of future audits. In this regard, we expect this to be an area that the FTA will scrutinize due to the potential for manipulation and ultimate reduction of tax payable.


Election for 9%: Under the CIT legislation, QZFPs have the option to ‘elect’ to be subject to tax at the 9% standard rate. Many readers may question why anyone would elect out of such a beneficial regime, if available to them. In this regard, notwithstanding the obvious benefit of the 0% rate there are some restrictions associated with being a QFZP.


For instance, a QFZP cannot become a member of a tax group, it cannot transfer losses to related parties or offset losses from related parties where those related parties are subject to the standard 9% rate.  Furthermore, some of the benefits associated with the Free Zone Regime may be largely diminished for multi-national groups that are within scope of Pillar Two. This is discussed in further detail below.


In spite of the above, we expect the Free Zone regime to remain attractive to the large majority of taxpayers. However, our recommendation would be for businesses to perform a holistic assessment of their UAE operations to determine whether the election may be convenient for them once the Cabinet Decision is made public. This should include an assessment of the group’s entire presence in the UAE as well as a cost-benefit or financial modelling exercise to understand whether there is sufficient value in availing of the Free Zone regime.


Transfer Pricing: As part of introducing CIT legislation, the UAE shall also adopt formal Transfer Pricing (TP) regulations for the first time. TP is predicated on the arm’s length principle, which states that the commercial and financial arrangements between related parties are conducted in a manner that is consistent with arrangements between independent enterprises.


In the event that foreign-sourced related party income meets the definition of Qualifying Income, there will be additional scrutiny on payments made to QFZPs going forward from the counter-party jurisdiction. The requirement for transactions to meet the arm’s length principle aligns with the UAE’s commitment to transparency and alignment with international best practices. Additionally, it is important to note domestic transactions are also in scope of TP. As such, Free Zone entities that only transact domestically would still be required to meet this obligation.


The CIT legislation also includes a requirement for taxpayers to prepare adequate TP documentation to support the arm’s length nature of their related party transactions. The UAE’s TP documentation requirements include three components. These components are summarised in the table below:

Businesses should be pro-active in determining an appropriate operating model and transfer pricing policy for their Free Zone operations, including a policy for their transfer pricing documentation. 


Other Conditions: Currently, we are not aware of any other conditions that will be announced by the MoF. We expect that this section was included to allow the MoF and FTA some flexibility to make an assessment on whether the current criteria are fit for purpose following the introduction of CIT in the UAE. For example, additional conditions may regard the need to counter abusive arrangements, such as the artificial separation of companies or activity lines to obtain illegitimate tax benefits.

As such, businesses should remain vigilant and attentive to future announcements to ensure they remain fully compliant and can continue using the tax incentives available under the Free Zone Regime.


Pillar Two


The BEPS Pillar Two proposal aims to introduce a global minimum tax rate of fifteen percent on multinationals with annual consolidated revenue above EUR 750m (AED 3.15b). The proposal is designed to ensure that multinational companies pay a fair share of tax wherever they operate, and to prevent them from artificially shifting profits to low-tax jurisdictions.


There are prescribed rules issued by the OECD to calculate a group’s Effective Tax Rate (“ETR”) on a jurisdictional basis to determine the appropriate level of top-up tax required.


Additionally, there are prescribed charging mechanisms to collect any top-up tax payable. These include:

  • Qualified Domestic Minimum Top-Up Tax (“QDMTT”) which may be optionally applied domestically at the local entity level (for example, the minimum tax as enacted by Qatar at 15% on excess profits);
  • Income Inclusion Rule (“IIR”) where the tax is payable by the parent entities of a low-tax jurisdiction; and
  • Under-Taxed Payments Rule (“UTPR”), which acts as a back-stop mechanism where the other two options are not available or applied.


Although the UAE has not announced much in relation to its intentions regarding Pillar Two, many countries and jurisdictions have confirmed they will implement the rules by January 2024 (EU, Switzerland, the UK, South Korea etc.). However, notable nations that have not made any announcements in relation to Pillar Two include the US, India, and Saudi Arabia. We have captured in one of our earlier pieces on the steps available for GCC countries as the world gradually moves towards Pillar Two.  

Notwithstanding this, given the wide range of charging mechanisms noted above combined with the ever-growing number of jurisdictions that have announced they will implement, it is clear that the impact of Pillar Two will permeate through to the UAE regardless.

For qualifying multinationals with a QFZP, the benefit of the zero percent rate will likely be reduced through the ETR calculation and subsequent top-up tax payable. However, there may be some reprieve for entities with significant substance in the UAE due to certain measures the OECD has included as part of the Pillar Two model rules which promote substance, such as the Substance Based Income Exclusion and the Routine Profits Test Safe Harbour.


Multinationals should stay alert for future updates from the MoF and the FTA on the UAE’s intentions with Pillar Two and the possible impact on their Free Zone arrangements.


As outlined above, there remains a lot of uncertainty in relation to the UAE Free Zone Regime and how it will interact with the wider introduction of CIT in the UAE. However, it is clear that the Free Zone Regime shall remain a staple of the UAE economy and in most instances will provide a significant tax benefit to entities which qualify as a QFZP. As such, taxpayers should continue to remain attentive and prepare for the journey ahead.   


Int'l Tax & Transfer Pricing

2022 – Inflation and the Impact of Transfer Pricing for your Business

2022 – Inflation and the Impact of Transfer Pricing for your Business


In addition to the festivities so often associated with this time of year, December is also a time to reflect on the preceding 12 months and consider what the New Year may bring.

When we reflect on 2022, one of the defining features has been the marked increase in inflation across the globe. We have seen inflation impact all major economies in 2022, with key markets such as Europe, the United Kingdom and the United States recording their highest inflation rates in decades. Some of the key drivers have been the disruption in global supply chains of both food and energy due to the ongoing conflict in Europe, as well as the over stimulation of developed economies as a result of quantitative easing and other stimulus measures employed by governments to counteract the impact of the pandemic on global markets.

Due in part to the Gulf Cooperation Council’s (GCC) status as one of the world’s primary energy exporters, the impact of inflation has been relatively less severe than in other parts of the world. However, the GCC nations have not been immune to the rise in inflation. As of October 2022, the International Monetary Fund (IMF) reported the United Arab Emirates’ (UAE) average Consumer Price Inflation (CPI) rate was 5.2%, up from 0.2% in 2021. Similarly, Qatar’s CPI rate has increased considerably from 2.3% to 4.5% in the same timeframe.

Impact of Inflation

In a business context, the impact of inflation has been significant for both Small and Medium Enterprises (SME) and multinationals globally. Increased supply chain costs have put negative pressure on business margins and the rise in interest rates, employed as an effort to curb inflation, have impacted companies’ ability to obtain debt financing and subsequently affected cash flow and liquidity. 

Transfer pricing is predicated on the Arm’s Length Principle (ALP), which states that the commercial and financial arrangements between related parties are conducted in a manner that is consistent with arrangements between independent enterprises. In this regard, the abovementioned economic circumstances have had a profound affect on pricing arrangements between independent enterprises globally.

As such, it is important for multinationals to consider the impact of inflation on their existing transfer pricing arrangements and operating model, to determine whether an adjustment is required on a go-forward basis. For businesses operating in the UAE, where the introduction of formal transfer pricing rules is imminent, it will also be important to appropriately factor these changes in economic circumstances into any prospective transfer pricing policy/operating model.  

Given the pervasive impact transfer pricing can have on a multinational’s tax arrangements (taxable profit, Value Added Tax (VAT), customs duties etc.), it is important to be proactive in addressing these considerations for your business and appropriately factoring it into the 2023 planning cycle.  

Mechanical Impact

As outlined above, inflation can have a significant financial impact on businesses. The relative impact of inflation on the mechanical operation of a group’s transfer pricing policy is dependent on the nature of the intercompany arrangements, as well as the transfer pricing methodology applied. 

For example, a Limited Risk Distribution (LRD) entity that is remunerated with a fixed operating margin (operating profit/revenue) may require a manual transfer pricing adjustment at year-end to account for inflation, to ensure that the LRD’s margin remains aligned with the transfer pricing policy.

In contrast, where an entity performs contract manufacturing and is remunerated with a mark-up on its cost, any increase in the underlying cost base as a result of inflation should automatically be reflected in the contract manufacturer’s return, as the basis of remuneration (i.e., cost) correlates with the impact of inflation.

However, although a cost-plus return may not be disrupted from the perspective of the contract manufacturer, the higher cost base will impact the profit margin of the counterparty compared to forecasts. Below, we discuss the impact of inflation on the group and how to effectively manage these negative impacts.

Allocation of Risk, Reward and Downside Impact

Under the arm’s length principle, the attribution of business profit amongst group entities should be aligned with each entity’s relative contribution to the functions, assets, and risks of the business.

In this regard, group entities that perform high-value functions and/or assume, control, and have the financial capacity to bear the key market and other operational risks are rewarded with an entrepreneurial return. An entrepreneurial return is typically the residual system profit after rewarding related parties that perform routine activities with a fixed return (“routine returns”).

Under both examples discussed above, we considered how transfer pricing policies adapt to the impact of inflation from the perspective of maintaining the remuneration profile of the routine return entities. However, where the system profit is substantially reduced as a result of inflation or wider economic downturn, the question arises whether the existing remuneration policy remains fit for purpose and appropriately rewards each entity for its relative contribution to the group’s activities.

Under first principles, an entrepreneurial entity that retains any upside on the residual system profit should equally bear the downside risk associated with inflation/economic downturn on group profit. However, as often is the case in transfer pricing, nothing is ever so black and white.

For example, there may be commercial, regulatory, or capital requirements that could impact the entrepreneur (and the business as a whole) which would necessitate an adjustment to the group’s pricing policies to reflect market conditions. In these circumstances, an independent enterprise acting at arm’s length would be expected to re-negotiate existing arrangements to protect themselves from such consequences.

In this regard, there are a number of methods that could be employed to effectively spread downside risk amongst related parties while maintaining the arm’s length principle:

  • Selection of a lower point in the arm’s length range. The selection of a point within the interquartile range may be appropriate. An adjustment should be applied in accordance with the terms of the intercompany agreement and supported by robust documentation outlining the rationale for the adjustment, as it is likely to be challenged from the local tax authority of the routine entity.
  • Defer payments until a recovery in economic circumstances. This situation may be more relevant for royalty license arrangements. Rather than a complete forgiveness of a royalty payment, a licensor may allow licensees to defer payment until such time as the economic circumstances have improved. Again, consideration to the terms of the existing intercompany agreement and appropriate support documentation is required. It may be appropriate for the licensor to apply a small portion of interest, as the characterization of the arrangement may take the form of a loan or working capital balance.
  • New transfer pricing policy/benchmarking. Performance of an updated benchmarking or implementation of a new operating model may result in a more equitable distribution of profits/losses between group entities.

The appropriateness of the above options will depend on each business’s specific facts and circumstances, the risks for which each entity is responsible, the impact of inflation on system profit etc. We would advise that these points are considered and addressed pro-actively, as retrospective adjustments may be more likely to be challenged by tax authorities.

Finance Arrangements

As indicated above, one of the key measures adopted by central banks to counteract inflation has been to increase interest rates. These measures have had a seismic effect on capital markets and the liquidity of multinationals and SMEs. 

From a transfer pricing perspective, where the group’s external borrowing costs have increased significantly as a result of these measures, this should be appropriately reflected in prospective intercompany loans. It may be possible to reflect this change in economic circumstances through application of an increased rate of interest or the introduction of additional loan fees and charges (e.g., commitment fees, annual fees etc.) to ensure the lender is appropriately rewarded. In this regard, multinationals should ensure that their interest rate benchmarking analyses are up to date such that the group’s financing arrangements are reflective of the financial markets at the time a loan is entered into.

Inflation and higher interest rates may also affect a borrower’s key financial metrics. In the context of debt financing, this could impact the borrower’s credit rating and/or ability to demonstrate that the quantum of intercompany debt it has on its balance sheet is not excessive relative to ordinary market behavior. This in turn may impact the group’s ability to claim interest deductions on its existing or prospective debt. An assessment of these metrics is an important step to consider when determining the debt/equity mix for companies in 2023.

Separate to intercompany financing, rising interest rates may also affect the valuation of intellectual property and other assets when priced using an income-based approach. The underlying premise of this approach is that the value of an asset can be measured by the net present value of the economic benefit to be received over the life of the asset. The steps followed in applying this approach include estimating the expected cash flows attributable to an asset over its life and converting these cash flows to a net present value using an appropriate discount rate.

In principle, an increase in the cost of debt would lead to an overall increase in the discount rate applied. Ultimately, a higher discount rate would reduce the net present value (i.e., price) of the asset.


Finally, multinationals should be considerate of the impact of inflation and other economic shocks from a documentation and benchmarking perspective.

For example, many jurisdictions allow companies to maintain a TNMM benchmarking for up to three years (with an annual financial refresh), before a full re-performance is required. This is based on the recommendation in the OECD Guidelines on the frequency of documentation updates. However, the key caveat for this allowance is that there is no change to the operating conditions, including economic circumstances, to the controlled transaction. Any of the abovementioned factors discussed may trigger the requirement to re-perform an existing benchmarking analysis.

Additionally, we note that many jurisdictions in the GCC have a strong preference for the use of local comparables (e.g., Saudi Arabia). However, in practice it is common for a benchmarking analysis to incorporate comparables from other jurisdictions, including Africa and Eastern Europe, in an arm’s length range.

The OECD Guidelines indicate that arm’s length prices may vary across different markets even for transactions involving the same property or services. As such, in order to achieve comparability, the markets in which the independent and associated enterprises operate should not have differences that have a material effect on price. In this regard, given the relative impact of inflation and other economic and political circumstances in places such as Eastern Europe compared to the GCC, these practices may no longer be appropriate over the short-term.

However, the OECD Guidelines suggest that it may still be appropriate to rely on such comparables where appropriate adjustments can be made. Where it is not possible to completely eliminate these jurisdictions from a comparable set, appropriate adjustments to reflect the difference in inflation or other economic differences should be reflected in the transfer pricing documentation.

With the forthcoming introduction of transfer pricing in the UAE, transfer pricing continues to gain momentum in the GCC. As such, multinationals should be pro-active in determining an appropriate operating model and transfer pricing policy for the region. As part of this, companies need to make sure they consider the wider global economic circumstances in addition to their specific business strategies and plan accordingly.

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