Author: Thomas Vanhee

Navigating the New Corporate Income Tax (CIT) Landscape in the UAE: Key Compliance Requirements and Audit Obligations

Post author By Thomas Vanhee
Post date May 22, 2025

Navigating the New Corporate Income Tax (CIT) Landscape in the UAE: Key Compliance Requirements and Audit Obligations

The introduction of Corporate Income Tax (CIT) under Federal Decree-Law No. (47) of 2022 marks a significant change in the UAE’s fiscal and regulatory framework. As the country takes a significant step toward aligning with global tax practices, businesses operating in the UAE must now adapt to a more structured taxation environment.

With the first CIT return filing deadlines approaching, it is imperative for companies to understand the specific compliance requirements that apply to them. These obligations vary based on several factors, including the company’s annual turnover, legal structure, and whether the entity operates in a Mainland or Free Zone jurisdiction.

UAE Corporate Tax: Audit & Financial Reporting Overview

Category	Who is Affected?	What is Required?
Large mainland Businesses or large disqualified Free Zone Businesses	Businesses with annual turnover > AED 50 million	A key component of the CIT compliance framework is the requirement for a mandatory statutory audit for businesses with substantial revenues. According to Ministerial Decision No. 82 of 2023, any business with an annual turnover exceeding AED 50 million must have its financial statements audited. This audit must be completed prior to submitting the corporate tax return to the Federal Tax Authority (FTA). The objective is to promote accuracy and integrity in financial reporting, thereby ensuring the reliability of the financial information upon which the taxable income is calculated. Non-compliance with this requirement may lead to administrative penalties and delays in processing tax filings.
Qualifying Free Zone Businesses	Businesses in UAE Free Zones seeking 0% corporate tax rate	For entities operating within the UAE’s Free Zones, additional compliance requirements have been introduced. Businesses that seek to benefit from the 0% corporate tax rate under the Qualifying Free Zone Person (QFZP) regime must adhere to specific conditions outlined in Ministerial Decision No. 139 of 2023. One of these core requirements is the submission of audited financial statements, regardless of turnover. In addition to audited financials, Free Zone entities must also satisfy other criteria, including earning qualifying income, maintaining adequate economic substance in the UAE, and complying with transfer pricing and arm’s length principles, where applicable.
Small or Non-Qualified Free Zone Businesses	Mainland Businesses or Non-Qualified Free Zone Businesses with annual turnover of ≤ AED 50 million	In contrast, mainland businesses or non-QFZP Free Zone entities with an annual turnover of AED 50 million or less are not required to conduct a statutory audit. However, this does not exempt them from financial reporting responsibilities. Under Article 54 of Federal Decree-Law No. 47 of 2022, all taxable persons must prepare and maintain financial statements in accordance with applicable accounting standards, typically International Financial Reporting Standards (IFRS). However, Businesses with a turnover of AED 50 million or below in a tax period may use IFRS for SMEs. These financial records must be retained as part of the company’s documentation and submitted along with the CIT return. Though the audit may not be mandatory, the quality, accuracy, and consistency of these financial statements remain critical, especially as they underpin the computation of taxable income. Further, businesses with a turnover of AED 3 million or below annually may use cash basis of accounting.

In summary, whether your business is a large business, wishes to qualify for the 0% tax rate as a QFZP or is a small business, compliance with the reporting obligations is non-negotiable. It is important to note that these thresholds are applicable irrespective of any thresholds established by regulatory authorities, which may be different. The introduction of the UAE CIT regime requires companies to invest in robust financial systems, maintain detailed accounting records, and, where applicable, undergo independent audits to ensure full compliance with tax laws. By preparing early, businesses can avoid last-minute complications, mitigate risks of non-compliance, and maintain their reputation with both regulators and stakeholders. At Aurifer, we recognize the complexities introduced by the UAE’s new corporate tax framework and are committed to helping businesses navigate this evolving landscape with confidence. Our experienced team offers tailored solutions for companies across all industries and sizes, whether you require assistance with statutory audits, the preparation of IFRS-compliant financial statements, or strategic advice on Qualified Free Zone Person (QFZP) structuring and corporate tax planning. As for most businesses the first filing deadlines draw near, we encourage businesses to proactively evaluate their compliance readiness. Engaging with trusted professionals early can help mitigate risks, ensure timely submissions, and lay the foundation for long-term tax efficiency and regulatory alignment. Let our experienced professionals take the burden off your shoulders. We help you stay compliant, confident, and focused on your business growth.

Aurifer Middle East Tax Consultancy DMCC – info@aurifer.tax – +971 4 568 4282 – Website

UAE Tax

Tax Audits Overcoming Fear and Misconceptions

Post author By Thomas Vanhee
Post date April 18, 2025

Tax Audits Overcoming Fear and Misconceptions

For businesses familiar with the stringent tax penalty regime in the UAE, the term “tax audit” often invokes feelings of fear, doubt, and anxiety. While these emotions are natural, understanding the dos and don’ts of navigating a tax audit can significantly influence how a business responds to the Federal Tax Authority(FTA)and, in turn, impact the outcome of the audit.

This article is divided into three sections to achieve its purpose. First, we will clarify what “tax audit” means from a legal perspective. Next, we will discuss the rights of both the tax auditor and the person subject to the audit. Finally, I will share some helpful tips or strategies that could potentially turn the situation in your favour!

UAE Corporate Income Tax

Transitional Provisions under UAE Corporate Income Tax

Post author By Thomas Vanhee
Post date March 27, 2025

Transitional Provisions under UAE Corporate Income Tax

The introduction of Corporate Income Tax (“CIT”) in the United Arab Emirates (“UAE”) has been a pivotal moment in the country’s continuous development. Historically, the UAE operated as a jurisdiction where no federal corporate income tax (CIT) was applicable. In this regard, Aurifer published a number of articles on the topic which are available here. With the implementation of CIT, the government has introduced transitional provisions to facilitate a smooth transition for businesses adapting to the new regime.

This article examines the most significant transitional provisions under UAE CIT Law (Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses) and Ministerial Decision No. 120 of 2023, focusing on their key objectives, tax implications, and compliance requirements. By discussing both the accounting aspects and asset revaluation mechanisms, we highlight how these provisions have impacted and continue to impact businesses and the broader financial reporting environment in the UAE.

These provisions have a twofold objective. First, they ensure that financial statements accurately reflect businesses’ positions at the time CIT is introduced, requiring companies to align their balance sheets with recognized accounting principles and fair market valuations. Second, they allow businesses to lock in pre-tax period gains on specific assets, including immovable property, intellectual property, and financial assets and liabilities, preventing unintended taxation on value appreciation that occurred before CIT implementation.

Given that the Federal Tax Authority (“FTA”) very closely scrutinized transitional provisions when Value Added Tax (“VAT”) was introduced in 2018, a similar level of oversight is expected for CIT implementation. These transitional rules are critical for businesses to understand since they impact how companies report financial positions, manage tax liabilities, and plan for the future.

Below, we first consider the adjustments required for financial statements before examining the tax treatment of pre-existing assets and the options available to businesses.

Ensuring Balance Sheet Compliance with Transfer Pricing Principles

For taxpayers transitioning into the CIT regime, the opening balance sheet for tax purposes will correspond directly to the closing balance sheet of the financial year ending immediately prior to the first tax period. Consequently, entities operating on a Gregorian calendar year must utilize their closing balances as of 31 December 2023 as the opening balances for the first tax period starting 1 January 2024.

Crucially, these opening balances must comply strictly with the Arm’s Length Principle (“ALP”) from a Transfer Pricing (“TP”) perspective. This implies that taxpayers must ensure their prior year-end balances accurately reflect arm’s length values, thereby aligning the tax and accounting positions at the outset of the new CIT regime.

Moreover, it is essential that these balances also adhere to the General Anti-Avoidance Rules (“GAAR”). In practical terms, transactions that could be perceived as artificial or structured primarily to secure undue tax advantages must be revisited. Such arrangements, unless justifiable under economic and commercial rationale, could trigger the application of the GAAR provisions, potentially leading to adjustments by the FTA.

Practically, this means that if related party transactions were not previously recorded at arm’s length, the FTA expects taxpayers to make necessary adjustments in the first tax period. Adjustments may involve increasing taxable income or reducing deductible expenses, thus aligning recorded amounts with market conditions. These adjustments could also extend to subsequent tax periods, if relevant.

Additionally, recognizing that not all taxpayers, such as entities following a cash basis of accounting, were previously required to maintain formal financial statements, the FTA mandates these entities to prepare an opening balance sheet in accordance with an appropriate accounting standard, irrespective of their previous accounting basis.

Transitional Provisions offering Opportunity for Locking in Gains for Specific Assets

Under the transitional rules, Taxable Persons who hold Financial Assets or Financial Liabilities, Immovable Property, and Intangible Assets before the first Tax Period and recorded these assets on a historical cost basis may elect to adjust their Taxable Income. This adjustment allows the exclusion of gains or losses attributable to the periods preceding the introduction of the CIT. These elections are optional, implying that taxpayers are not forced to apply these provisions. However, once elected in the first Tax Period, they become irrevocable, except in exceptional cases.

The rationale behind these transitional relief rules is to ensure taxpayers are not subjected to CIT on gains or losses realized after CIT implementation that have accrued in periods before CIT was introduced. In other words, the provisions permit taxpayers to rebase or step up their asset values, locking in gains, although without creating an associated right to claim deductible depreciation or amortization expenses.

The transitional provisions bridge the gap between the pre-CIT and post-CIT eras. Considering the potential unfairness of taxing investors on gains accumulated before the implementation of CIT, particularly when these gains were not considered in long-term tax planning. In this regard, the UAE CIT Law provides transitional measures for different asset types. These include:

Financial Assets and Financial Liabilities, which allow for the exclusion of both gains and losses upon disposal.
Immovable Property and Intangible Assets, which only permit the exclusion of gains.

While taxpayers have only one method available to apply the transitional adjustment to Qualifying Intangible Assets and Qualifying Financial Assets and Liabilities, taxpayers holding Qualifying Immovable Property can select between two methods of exclusion.

The following sections will further elaborate on these transitional provisions, including the methods available, definitions of qualifying assets, and the conditions for their application. The table below provides an overview of these aspects.

For the transitional provisions to apply, the following requirements must be met:

– The asset must be owned prior to the first Tax Period.

Since the transitional provisions specifically target assets existing at the start of the first Tax Period, ownership must have commenced before this period to qualify.

– The asset was recorded on a historical cost basis.

The transitional provisions apply exclusively to assets accounted for under a historical cost basis. Taxpayers holding assets at fair market value are excluded, as their asset values have effectively already been adjusted (or rebased) prior to CIT commencement. Consequently, any future disposal of such fair-valued assets inherently excludes gains relating to pre-CIT periods, rendering transitional provisions unnecessary.

As noted previously, applying these provisions involves an elective decision by the taxpayer through the CIT return and is not compulsory.

If the market value of the asset at the start of the first tax period is below its cost basis or if the taxpayer anticipates a decline in the asset’s value, making the election would typically not offer any tax benefit.

We now discuss each asset type separately in more detail.

Qualifying Immovable Property

The UAE’s real estate sector, notably Dubai, has seen significant appreciation in recent years, making the transitional rules especially relevant for business taxpayers holding immovable properties.

Qualifying Immovable Property (“QIP”) is a unique asset class for tax purposes, as it permits taxpayers to select either the valuation method or the time apportionment method to exclude pre-CIT gains from taxable income.

Under UAE CIT regulations, immovable property includes:

Any area of land over which rights, interests, or services can be established.
Any building, structure, or engineering work permanently attached to the land or seabed.
Fixtures or equipment permanently attached to such buildings, structures, or directly to land or seabed

For the transitional provisions related to QIP to apply, specific conditions must be satisfied. Primarily, the immovable property must be disposed of, or deemed disposed of, during or after the first tax period at a value exceeding its net book value for determining taxable income.Practically, this means that the QIP is either explicitly sold or considered notionally disposed of (“deemed disposed”) to lock in the market price at the start of the CIT regime.

Under the valuation method, taxpayers exclude gains accrued before the first tax period based on the market value at the start of that tax period. Importantly, such market value must be assessed and approved by the relevant governmental authority of each Emirate, such as the Department of Municipalities and Transport (DMA) in Abu Dhabi, the Dubai Land Department (DLD) in Dubai, or corresponding authorities in other Emirates.

The transitional rules provide taxpayers with flexibility, particularly in the choice of methods available for immovable property, facilitating a smooth shift to CIT.

An example illustrating the application of the valuation method is provided below:

A company’s first Tax Period runs from 1 August 2023 to 31 July 2024. At the start of the first Tax Period (1 August 2023), the company’s opening balance sheet indicates the following in regard to an immovable property:

Original cost: AED 20,000,000
Accumulated depreciation: AED 3,000,000
Net book value: AED 17,000,000

The immovable property was purchased on 1 August 2020 at arm’s length, and the asset was recorded on a historical cost basis.

In its Tax Return for the first Tax Period, the Company makes an election for transitional relief under the valuation method. The valuation method applies as follows:-

Alternatively, under the time apportionment method, the gains attributable to the period before the first Tax Period are excluded based on the duration the asset was held. An illustrative calculation based on the same example is presented below:

Step 1: Calculate the hypothetical gain upon disposal, assuming the cost is the higher of the original cost or net book value at the beginning of the first Tax Period.
Step 2: Calculate the ratio of the number of days the QIP was owned before the first Tax Period compared to the total number of days it was owned:
Step 3: Multiply the gain calculated in Step 1 by the ratio determined in Step 2:
Step 4: The result obtained in Step 3 is the amount of gain on the QIP excluded from taxable income for the relevant Tax Period:

Calculation of Taxable Gain (Post-CIT Gain):

The transitional provisions apply individually for each QIP, allowing taxpayers to selectively apply the election on an asset by asset basis. This differs from the treatment for Qualifying Intangible Assets (“QIA”) and Qualifying Financial Assets and Liabilities (“QFAL”), where the election applies collectively to all assets within those categories.

Qualifying Intangible Assets

For CIT purposes, as stated above, intangible assets are defined according to applicable accounting standards. The FTA clarifies that intangible assets typically include goodwill, trademarks, and patents.

Transitional provisions related to QIA specifically apply when such assets are disposed of or deemed to be disposed of during or after the first Tax Period at a value exceeding their net book value. Practically, this means the QIA is either sold during the first Tax Period or notionally treated as disposed of to lock in its market value.

Only the time apportionment method is available for QIA. Under this approach, gains accrued before the start of CIT are excluded proportionally based on the duration of ownership prior to CIT implementation. In applying this method to intangible assets, a maximum ownership period of ten years prior to CIT commencement is considered.

The methodology mirrors that used for QIP, meaning gains related to periods before the introduction of CIT are proportionally excluded based on the number of days the asset was held before the first Tax Period relative to the total ownership duration.

Qualifying Financial Assets and Liabilities

As clarified by the FTA, Qualifying Financial Assets and Liabilities (“QFAL”) for CIT purposes are determined in line with applicable accounting standards. According to the FTA’s guidance, examples of QFAL typically include investments held in trading accounts, such as shareholdings that do not meet the criteria for the Participation Exemption, and financial instruments, such as loans payable or receivable.

Unlike Qualifying Immovable Property, taxpayers can only use the valuation method for Qualifying Financial Assets and Liabilities. Additionally, this election applies collectively to all qualifying financial assets and liabilities. Taxpayers cannot apply the method selectively to individual assets.

In applying the valuation method, there is no official government procedure to determine the market value. However, the FTA strongly suggests that taxpayers appoint an independent expert to carry out the valuation.

An illustrative example of applying the valuation method is as follows:

Company A holds a financial asset recorded at a historical cost of AED 70. At the start of its first Tax Period in 2024, Company A appoints an independent expert who determines the asset’s market value as AED 100. The company then elects in its CIT return to exclude the gain of AED 30 (being the difference between the market value and historical cost). In the following year, 2025, Company A sells the financial asset for AED 120. Accordingly, Company A is liable for CIT only on the gain attributable to the period after CIT implementation, amounting to AED 20 (the total accounting gain of AED 50 minus the AED 30 excluded pre-CIT gain).

Group Ownership of Assets

The transitional provisions also accommodate scenarios involving assets previously owned by another member of the same Tax Group or Qualifying Group.

In such cases, taxpayers may look through to the prior ownership period by the other group member entity, ensuring consistent and fair calculation of the excluded gain or loss.

This rule effectively acknowledges prior group ownership to accurately reflect the asset’s true holding period for transitional adjustment calculations.

Conclusion

The transitional provisions introduced under the UAE CIT are essential in safeguarding taxpayers from unintended taxation on asset gains accrued before CIT commenced, i.e. during the UAE’s tax-free environment. These rules provide taxpayers the option, although not the obligation, to adjust their taxable income to exclude pre-CIT gains or losses, thus preventing unexpected tax liabilities.

Given the elective and irrevocable nature of these provisions, it is critical for businesses to carefully consider their asset portfolios, anticipated market conditions, as well as the convenience and practical implications of each transitional method.

Consultation

E-invoicing Survey

Post author By Thomas Vanhee
Post date March 21, 2025

E-invoicing Survey

E-invoicing Survey Results Are In!

We are excited to share the results of our latest E-Invoicing Survey!

We thank all participants who contributed and provided valuable insights.

Aurifer conducted a survey to assess and understand how businesses are navigating the e-involving landscape in light of future compliance obligations in the UAE!

Curious about the readiness levels, key challenges, and opportunities businesses have identified? Dive into the full report to gain a deeper understanding of this significant shift in the taxation framework.

We hope you find this survey informative and useful!

Consultation

MOF E-Invoicing Consultation

Post author By Thomas Vanhee
Post date February 13, 2025

MOF E-Invoicing Consultation

On February 6, 2025, the UAE Ministry of Finance (MoF) launched a public consultation on the implementation of an electronic invoicing (eInvoicing) framework, which is set to go live in July 2026.

We at Aurifer give you some insights on the new MoF initiative on e-invoicing plans in the UAE here below:

CIT

UAE CIT Readiness Survey Results Are In!

Post author By Thomas Vanhee
Post date January 20, 2025

UAE CIT Readiness Survey Results Are In!

We are excited to share the results of our UAE Corporate Income Tax (CIT) Readiness Survey!

We thank all participants who contributed and provided valuable insights.

The survey sheds light on how businesses across the UAE are preparing for the new CIT landscape, revealing trends in awareness, compliance, and adaptation strategies.

Let’s navigate the UAE CIT landscape together!

GCC Tax UAE VAT

CEPAs and FTAs: Exploring New Partnership Agreements by UAE and GCC Countries

Post author By Thomas Vanhee
Post date November 15, 2024

CEPAs and FTAs: Exploring New Partnership Agreements by UAE and GCC Countries

In recent years, the United Arab Emirates (“UAE”) and the Gulf Cooperation Council (“GCC”) have concluded several Comprehensive Economic Partnership Agreements (“CEPAs”) and Free Trade Agreements (“FTAs”). This article examines the most impactful CEPAs and FTAs signed by the UAE and the GCC, focusing on their key features, economic implications, and future prospects.

By discussing the key elements and overall scope of such agreements, we highlight how these strategic partnerships are shaping the political and economic landscape of Gulf countries, paving the way for a more integrated and diversified future.

CEPAs are typically bilateral agreements. They are broad economic agreements that go beyond traditional commercial partnerships by including provisions on investments, services, intellectual property (“IP”), and economic cooperation.

FTAs, on the other hand, focus primarily on reducing or eliminating tariffs and trade barriers between countries, promoting the free flow of goods and services. Similar to CEPAs, FTAs aim to strengthen economic ties and create more resilient and competitive markets. Historically, the GCC has negotiated and signed a few FTAs collectively.

Negotiations and signatures of both CEPAs and FTAs are driven by many factors, including shifting economic dynamics, geopolitical considerations, and the need for Gulf countries to diversify their economies and move away from traditional energy commodity based revenues.

These international agreements are also pivotal for the GCC and the UAE in expanding market access, attracting foreign investments, and fostering innovation and technological exchanges. They serve to enhance trade and economic relations with various countries and regions, integrate economies more deeply into the global trade network, diversify economic bases, and create new opportunities for businesses and investors.

Below we first consider the UAE’s CEPAs to then consider the GCC’s FTAs.

UAE CEPAs

Since 2022, and therefore only fairly recently, the UAE has been proactively pursuing CEPAs, independently from the GCC, with strategic nations and large economies such as those of India and Indonesia to strengthen economic ties and position itself as a global trade hub.

While each CEPA has unique elements tailored to specific bilateral relationships, common themes emerge across agreements. For instance, the emphasis on reducing tariffs is consistent, with varying timelines and percentages. In this regard, the UAE-India CEPA includes a staggered elimination of tariffs on over 80% of goods, fostering a more competitive market environment. Similarly, the UAE-Indonesia CEPA aims for a 90% tariff reduction on goods, demonstrating the UAE’s commitment to free trade.

Another hallmark of the UAE’s CEPAs is the emphasis placed on investment facilitation. An example in this regard is the UAE-Israel CEPA, which includes provisions encouraging investments in technology and innovation, reflecting a clear interest in advancing these sectors common to the two countries. Also importantly, Article 12.3 of the UAE-Israel CEPA stipulates the establishment of a joint investment committee to monitor and promote investment flows.

Services and digital trade are also central to CEPAs. Noteworthy, all CEPAs signed by the UAE include provisions on digital trade, with an aim to reduce obstacles for UAE companies operating in the digital economy, help stimulate investment in new technologies, and accelerate the nation’s digital transformation.

Other specific sectors may be addressed. For instance, the UAE-Indonesia CEPA includes a specific chapter that commits both parties to promote the Islamic economy in the food, fashion, finance, tourism and pharmaceutical sectors, given that Indonesia is one of the top 20 global exporters of Halal products.

The UAE’s CEPA landscape keeps evolving at fast pace. Very recently, the UAE concluded negotiations with New Zealand, on September 26, 2024. Once in effect, this CEPA will remove tariffs on 98.5% of New Zealand’s exports to the UAE, rising to 99% within three years. This agreement will also open significant opportunities for New Zealand exporters towards the UAE, especially in key sectors like dairy, meat, horticulture, and industrial goods.

The UAE successfully concluded negotiations with Australia in September, followed by the signature of the CEPA earlier this month. Additionally, in October, the UAE signed CEPAs with both Jordan and Serbia. Meanwhile, the UAE has initiated negotiations with Japan to sign a CEPA aimed at facilitating investments and creating new opportunities for collaboration between the two countries.

Even more recently on 28^th October 2024, H.H. Sheikh Mohammed bin Rashid Al Maktoum, Vice President of the UAE, Prime Minister, and Ruler of Dubai, signed a CEPA with Vietnam. This agreement aims to foster promising trade and investment opportunities with the UAE’s top trading partner in Southeast Asia, supporting the growth of the UAE’s non-oil exports.

The UAE’s initiative and commitment to signing CEPAs individually could raise questions regarding its alignment with the GCC customs union, which mandates a unified trade policy and collective external tariffs for Member States. By independently negotiating tariff reductions and expanding market access, the UAE may be seen as diverging from the bloc’s unified trade strategy.

GCC FTAs

The GCC, comprising six nations (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE), has pursued FTAs to enhance its economic presence in the global market. The GCC’s trade policy is centered around increasing market access for its exports, diversifying economies away from oil, and attracting foreign investments. Over the past decades, GCC has concluded two FTAs, with notable agreements signed with Singapore in 2008 and the European Free Trade Association (“EFTA”), including Iceland, Liechtenstein, Norway, and Switzerland, in 2009.

Generally, FTAs primarily focus on the liberalization of trade in goods through two mechanisms: 1) elimination of customs duties and 2) preferential treatment of originating goods. FTAs focus on reducing tariffs on goods and providing preferential market access. FTAs also focus on liberalizing trade in services with specific commitments on market access and national treatment for specified services.

Noteworthy, both FTAs include provisions for the settlement of disputes, consisting of consultations within a joint committee or resorting to amicable solutions and arbitration. A joint committee, composed of members of partner organisations, is also entrusted with the implementation and monitoring of the bilateral agreement.

The following key elements in the FTAs concluded by the GCC can be singled out, namely:

Economic Diversification and Pro-Business Orientation: Among the primary drivers behind GCC FTAs is the diversification of their economies and the establishment of an active business environment. Historically reliant on oil and gas, GCC countries have increasingly recognized the need to develop sectors such as manufacturing, technology, and services. FTAs are used as tools to open new markets for these sectors, encouraging bilateral trade beyond the energy domain.
National Treatment and Abolition of Non-Tariff Barriers: FTAs generally ensure the same treatment for domestic businesses and those of the partner countries. Non-tariff barriers are lifted or reduced while simplified customs procedures are introduced. For instance, the GCC-EFTA FTA provides for tariff concessions on processed agricultural products for originating goods.
Investment and IP Protection: A distinctive feature of GCC FTAs, such as the GCC-EFTA, is the strong emphasis on investment protection and IP rights. This area is of particular importance to trade, especially in the fields of innovation and high-tech industries.
Government Procurement: Both FTAs concluded by the GCC include provisions regarding the liberalization of government procurement markets. Article 6.1 of the GCC-EFTA FTA and SGFTA stipulate that the parties acknowledge and ensure the effective, reciprocal, and gradual opening of their government procurement markets.
Tax Treaties Prevalence: Both GCC FTAs include a clause stating that the rights and obligations of any party under a tax treaty override provisions included in the FTAs. This might result in a less favourable tax treatment for foreign investors than domestic businesses. In tax matters, the SGFTA contains an outright ban on the levy of special taxes on cross-border trade of online digital products other than domestic taxes.

The GCC is continuing its global trade expansion through ongoing negotiations and upcoming FTA with key economic and other strategic partners. Notably, earlier in September, the GCC commenced the first round of talks with Indonesia, covering trade in goods, services, digital trade, and sanitary and phytosanitary measures. Both sides aim to establish a framework and timeline to finalize the agreement within 24 months.

Last year, in September 2023, GCC signed an FTA with the Islamic Republic of Pakistan. This FTA focuses on key sectors such as agriculture, mining, information technology, defense production, aiming to boost Pakistan’s export to the region. Additionally, on 28 December 2023, the GCC and South Korea concluded their negotiations, signing a joint statement to formalize their FTA.

Furthermore, on September 11, 2024, China expressed its desire to expedite FTA negotiations with the GCC during a meeting in Riyadh. Following ten rounds of talks since 2005, both parties now aim to finalize the agreement more swiftly.

The GCC is also in the final stages of negotiating an FTA with Malaysia, as well as with the United Kingdom (“UK”). Indeed, the Secretary General of the GCC, Mr. Jasem Mohamed Albudaiwi stated that the GCC and the UK are in the final stages of negotiations for an FTA with the aim to sign the agreement this year.

More recently on 31st October 2024, the GCC and New Zealand concluded negotiations on an FTA which will deliver duty-free access for 99% of New Zealand’s exports over 10 years when combined with the UAE-NZ.

On a larger scale, the GCC countries, along with 20 Arab nations, have entered into an Agreement to Facilitate and Develop Trade among Arab States (“GAFTA”) which fully came into force in 2005. The GAFTA covers goods and completely eliminates customs duties. On the same note, Arab nations have also established the grounds for trade in services through The Arab Framework Agreement of Liberalization of Trade in Services Among Arab Countries. This agreement came into force in 2019 and provides key benefits such as providing access to markets of non-world trade organization members of the Arab states and granting service suppliers national treatment except as stipulated in the schedules of obligations.

We highlight that the above two agreements are part of the wider Arab trade and not entered into by the GCC block as such.

Annex

UAE Comprehensive Economic Partnership Agreements (“CEPA”)
List of Countries with Signed Agreements and Current Negotiations

Sl. No.

List of Countries

CEPA Agreement

CEPA Handbook

Date of Signature

Date of Entry Into Force

India

India - UAE CEPA Agreement

India - UAE CEPA Handbook

18 February 2022

1 May 2022

Israel

Israel - UAE CEPA Agreement

Israel - UAE CEPA Handbook

31 May 2022

1 April 2023

Indonesia

Indonesia - UAE CEPA Agreement

Indonesia - UAE CEPA Handbook

1 July 2022

1 September 2023

Turkey

Turkey - UAE CEPA Agreement

Turkey - UAE CEPA Handbook

3 March 2023

1 September 2023

Cambodia

Cambodia - UAE CEPA Agreement

Cambodia - UAE CEPA Handbook

8 June 2023

31 January 2024

Georgia

Georgia - UAE CEPA Agreement

Not Available

10 October 2023

27 June 2024

Republic of Serbia

Not Available

05 October 2024*

Jordan

Not Available

06 October 2024*

Vietnam

Not Available

28 October 2024

Australia

Not Available

6 November 2024

Mid of 2025*

New Zealand

Concluded Negotiations on 26 September 2024

Japan

Start of Negotiations on 18 September 2024

Eurasian economic union (Armenia, Belarus, Kazakhstan, Kyrgyzstan, Russia)

Negotiations ongoing for economic partnership agreement.

Gulf Cooperation Council Free Trade Agreement (“FTA”)
List of Countries with Signed Agreement

Sl. No.

List of Countries

FTA Agreement

Booklet

Date of Signature

Date of Entry Into Force

Singapore

GSFTA

GSFTA Booklet

15 December 2008

1 January 2015

Pakistan

Not Available

28 September 2023

EFTA

GCC – EFTA FTA

GCC – EFTA Booklet

22 June 2009

1 July 2014

Join our Aurifer’s Webinar on CEPAs and FTAs in the UAE and GCC!

Want to know more about CEPAs and FTAs in the UAE and GCC? Join us for an in-depth webinar on 12 December 2024 at 2.00 PM (UAE Time)!

During the webinar, our Aurifer experts will discuss the latest developments in CEPAs and FTAs. Attendees will gain valuable insights into how these agreements are shaping the region’s economy and learn how to leverage them for business growth.

Don’t miss this opportunity to stay ahead in the dynamic world of international trade! Stay Tuned for further updates on the matter!

Get in touch with Nirav Rajput (nirav@aurifer.tax) and Toshin Bishnoi (toshin@aurifer.tax) to discuss your international trade matters.

UAE VAT

10 Highlights on the Updates to the UAE VAT Executive Regulations Effective 15 November 2024

Post author By Thomas Vanhee
Post date October 8, 2024

10 Highlights on the Updates to the UAE VAT Executive Regulations Effective 15 November 2024

On Friday, October 4, 2024, the Federal Tax Authority (FTA) released the English version of Cabinet Decision No. 100 of 2024, with an issuance date of 6 September 2024, amending the provisions of UAE VAT Executive Regulations (The Executive Regulation of the Federal Decree-Law No. 8 of 2017 on Value Added Tax, Cabinet Decision No. 52 of 2017 – Issued on 26 November 2017 as amended till date). The publication follows the FTA’s earlier release of an Arabic version on October 2, 2024.

The updated version of the UAE VAT Executive Regulations (UAE VAT ERs) will enter into force on November 15, 2024. In total, 35 changes have been made, covering 34 articles. Although it is not the first time that the UAE VAT ERs have been amended (the last amendment was made through Cabinet Decision No. 99 of 2022 – Issued on 21 October 2022 and Effective from 1 January 2023), such an extensive overhaul is unprecedented in UAE VAT.

Aurifer has singled out 10 highlights regarding the recent amendments to the UAE VAT ERs, promising more in-depth coverage in the coming weeks. Noteworthy, the FTA has not yet published guidance on its interpretation of the planned changes. Therefore, the following analysis needs to be read with some caution.

1. Zero Rating Exports of Goods

Article 30 UAE VAT ERs has been changed to clarify the documentation that should be retained as evidence for the direct/indirect export or customs suspension of goods.

The documents to be used as evidence may include 1) a customs declaration and commercial evidence proving the export of goods, 2) a certificate of shipment and official evidence proving the export of goods, or 3) a customs declaration proving the customs suspension situation. The article has also expanded the definitions of official evidence, commercial evidence, and certificate of shipment.

This update is essentially meant to align the documentation for proof of export of goods more closely with recent changes in UAE Excise Tax legislation. The change seems to reflect a more practical approach, compared to the strict approach the FTA had used in the past of requiring “exit certificates” in almost all cases for exports of goods.

2. Zero Rating Exports of Services

Article 31 UAE VAT ERs now lists a further condition for a supply of services to qualify for zero rating.

Notably, Article 31(1)(a)(3) UAE VAT ERs provides that “[t]he Export of Services shall be zero-rated … if … the Services are not treated as being performed in the State or in a Designated Zone under Clauses 3 to 8 of Article 30 and Article 31 of the Decree-Law”.

This update aims to clarify that a service cannot be considered provided outside the UAE and, therefore, zero-rated if it refers to a service for which special place of supply rules apply, such as restaurant and cultural services or telecommunication and electronic services. These amendments seem to be more clarifying, as this was already how the FTA was administering the provision.

3. Virtual Assets

Article 1 UAE VAT ERs provides a new definition of virtual assets, which includes any “[d]igital representation of value that can be digitally traded or converted and can be used for investment purposes”, although not including “digital representations of fiat currencies or financial securities”. This seems to include virtual assets such as NFTs and cryptocurrencies, except potentially for e-money and perhaps stablecoins because of the reference to “digital representations of fiat currencies”.

In parallel, Article 42 UAE VAT ERs has been amended with paragraph 2 listing 3 activities considered financial services: 1) “The transfer of ownership of Virtual Assets, including virtual currencies” (letter k); 2) “the conversion of Virtual Assets” (letter l); and 3) “Keeping and managing Virtual Assets and enabling control thereof” (letter m).

While the first two activities are VAT-exempt, even with retroactive effect from 1 January 2018, the VAT treatment of “Keeping and managing Virtual Assets and enabling control thereof” seems to be subject to the standard VAT rate. Therefore, fees charged for wallet and custodial services seem to follow the general rules.

There have been no changes for brokers, but the legal framework seems to have been clarified for most virtual assets. Given the dynamic behind the crypto space, this may not be the last change, and the regulatory framework often plays catch-up.

Aurifer has previously commented on the tax treatment of cryptocurrencies and associated services here, and it looks like the UAE may have drawn some inspiration from these comments.

4. Management of Investment Funds

Financial services listed in Article 42(2) UAE VAT ERs now include (letter j) “the management of investment funds”, which means ‘services provided by the fund manager independently for a consideration, to funds licensed by a competent authority in the State, including but not limited to, management of the fund’s operations, management of investments for or on behalf of the fund, monitoring and improvement of the fund’s performance’.

When the UAE introduced VAT, many UAE fund managers mistakenly interpreted this provision or omitted to charge VAT on the management fee. The extra costs often impacted returns for investment funds that did not have a full right to recover input VAT.

It often led to important disclosures for the fund managers, and there was extensive discussion on the VAT treatment of carried interest. The amended provision now makes a legal U-turn and applies a VAT exemption for UAE fund managers going forward. Fund managers will need to identify the types of income streams they have. If there are no other income streams, fund managers will need to deregister for VAT purposes, which may trigger VAT corrections.

From now on, if fund managers have no other income, they will be unable to claim input VAT. This will increase their operating costs, but funds will have less potentially non-deductible VAT at their level.

5. Input VAT Recovery on Employee Related Expenses

Article 53 UAE VAT ERs now allows a taxable person to deduct input VAT paid on medical insurance for their employees and their dependents.

Input VAT recovery is limited to health insurance for the employee’s spouse and up to three children under 18. Enhanced health insurance also becomes VAT recoverable as an exception to the general non-recoverability of employee-related expenses when it is provided at no charge and for the employee’s personal benefit.

The update clarifies the deductibility, extending an employer’s possibility of recovering input VAT relating to medical insurance for its employees and their dependents, possibly beyond the case in which a legal obligation to that effect exists.

6. Tax Deregistration to Protect the Integrity of the Tax System

Article 14(bis) UAE VAT ERs has been added, enabling the FTA’s power to issue tax deregistration decisions for taxable persons if the continuity of their tax registration may prejudice the integrity of the tax system.

The article provides various conditions for the deregistration decision to be issued, which FTA must verify before completing a taxable person’s deregistration.

This update confirms the FTA’s authority to monitor eligibility conditions and the correct application of UAE VAT legislation. It allows for the FTA to remove perhaps old and inactive VAT registrations.

7. Composite Supplies

Paragraph 1(b) has been added to Article 46 UAE VAT ERs, clarifying the VAT treatment applicable to composite supplies where no principal and ancillary components can be singled out (reference is to Article 4(3)(b) UAE VAT ERs).

The new paragraph now provides that “[i]f a single composite supply does not contain a principal component, the Tax treatment shall, generally, be applied based on the nature of the supply as a whole”.

This update aligns with the treatment provided under European VAT regarding a single composite supply consisting of components having “equal status” (CJEU, Bastova, Case C-432/15).

8. Government Buildings Exceptions

New Article 3(bis) UAE VAT ERs has been added, listing exceptions to supplies in case of transactions involving, respectively, 1) the grant or transfer of ownership or disposal of governmental buildings, real estate assets, and similar projects between governmental bodies and 2) the grant or transfer of the right to use, exploit, or utilise governmental buildings, real estate assets, and similar projects between governmental bodies.

Importantly, the new no-supply rules apply retrospectively, starting from 1 January 2023. The new article also provides a list of categories that should be considered governmental buildings, real estate assets, and other projects of a similar kind.

It is not immediately clear which specific provision under the UAE VAT Law or the GCC Agreement this new article intends to implement.

9. Exceptions Related to Deemed Supplies

As an exception to the application of provisions concerning deemed supplies, Article 5 UAE VAT ERs now provides that if the value of the supply of goods to each recipient within a 12-month period does not exceed AED 500, then it is not a deemed supply. Reference to samples or commercial gifts has been removed from the text of Article 5 UAE VAT ERs, but it is still contained in Article 12(4) of the UAE VAT Law.

A deemed supply is also not triggered for supplies where the outstanding VAT amount does not exceed AED 250,000 (equal to supplies of up to AED 5M), provided the supplier and the recipient are government bodies or charities. Any excess amount is subject to VAT.

This update implements the exceptions from deemed supplies listed in Article 12(4) and (5) of the UAE VAT Law

10. Improved input VAT recovery methods for partially exempt businesses

Article 55 UAE VAT ERs introduces more flexibility for partially exempt businesses to determine a more suitable way of determining their input VAT recovery.

Partially exempt businesses may include financial institutions, real estate companies, and local transport companies.

Notably, the UAE suggests introducing a Singapore-inspired fixed recovery ratio to determine the input VAT recovery (although not sector-based). In this way, the UAE is making additional exceptions to its general input VAT recovery method without overhauling the standard procedure.

Tags Natural Persons, UAE CIT

CIT

The UAE CIT Impact on Natural Persons

Post author By Thomas Vanhee
Post date September 4, 2024

The UAE CIT Impact on Natural Persons

Starting from financial years on or after June 1, 2023, the United Arab Emirates (UAE) has implemented a Corporate Tax (CIT) as a strategic move to help the nation’s development as well as consolidate its position as a leading jurisdiction for business and investment. The implementation, administration, collection, and enforcement of the new CIT regime have been entrusted to the UAE Cabinet, Ministry of Finance (MoF) and the Federal Tax Authority (FTA), which have issued various guidance on CIT provisions in the following months.

The UAE CIT Law (Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses) provides the legislative basis for imposing a federal tax on corporations and business profits in the UAE. The CIT rate is set at 9%, the lowest within the Gulf Cooperation Council (GCC) region. A 0% CIT rate is also available for Free Zone (FZ) Persons under certain conditions.Noteworthy, the UAE CIT applies not only to incorporated businesses but also to unincorporated businesses, including those operated by individuals, reflecting a comprehensive approach to CIT in the country.

We have already covered tax issues relating to natural persons extensively. We refer to the following resources for further information:

30 Highlights about CT Guide for Non-Resident Persons: https://aurifer.tax/30-highlights-about-ct-guide-for-non-resident-persons/
Tax Residency Criteria for Individuals: https://aurifer.tax/uae-tax-residency-criteria/
Tax Planning Strategies for Individual Business Owners in the UAE: https://aurifer.tax/tax-planning-strategies-for-individual-business-owners-in-the-uae/
CIT in the UAE: the PE Clause for Individuals: https://aurifer.tax/cit-in-the-uae-the-pe-clause-for-individuals/

This article continues the analysis focusing on the UAE CIT implications for natural persons and discusses the applicable regulatory framework and compliance requirements.

UAE CIT and Natural Persons

To ensure tax neutrality between incorporated and unincorporated forms of business in the country, the UAE CIT Law applies to both legal entities and individuals resident and carrying on a business in the UAE.

Certain types of income earned by natural persons are regarded as private (i.e., non-business) activities and, therefore, fall outside the scope of UAE CIT. These types of income are employment income, personal investment income, and real estate income, which will be discussed in more detail later in this article.

A natural person becomes a taxable person for UAE CIT purposes if the person conducts a Business or Business Activity in the UAE. More specifically, as soon as the total turnover of a natural person’s Business or Business Activity exceeds AED 1 million within a Gregorian calendar year (i.e., the solar year), the natural person is required to comply with the UAE CIT laws, register with the FTA, submit CIT returns and pay the tax due. On the other hand, if the total turnover from a business or business activities does not exceed AED 1 million, a natural person does not have to register for or pay CIT on their income.

It is important to highlight that natural persons can conduct a Business or Business Activity in the UAE via a sole establishment or a civil company. For UAE CIT purposes, these entities will be disregarded and treated as the natural person or persons owning them because of their direct relationship and control over the Business and their unlimited liability for the debts and other obligations of the Business.

Business and Business Activity under UAE CIT

As per Article 1 of UAE CIT Law, a “Business” is defined as any activity conducted regularly, on an ongoing and independent basis by any Person and in any location, such as industrial, commercial, agricultural, vocational, professional, service or excavation activities or any other activity related to the use of tangible or intangible properties. This definition has been borrowed from the UAE’s VAT law and is, therefore, broad.

Nevertheless, “ongoing” should not be understood in a way that excludes short-term activities. Short-term activities also fall within the scope of UAE CIT if they constitute a “transaction or activity, or series of transactions or series of activities”. Examples of activities by a natural person typically not considered a Business or Business Activity include lottery winnings or game show prizes. However, whether a Business is conducted on an ongoing basis needs to be assessed on a case-by-case basis.

“Business Activity” is instead a term encompassing any transaction or activity, or series of transactions or series of activities conducted by a Person in the course of its Business, as defined above, which may be carried out entirely or partially within the UAE.

By default, all activities conducted and assets used or held by companies and other juridical persons are considered activities conducted and assets used or held for the purpose of a Business or Business Activity. For natural persons, instead, it is necessary to verify whether the activities conducted and assets used or held pertain to the business or private sphere since, as explained further below, non-business activities are excluded from the scope of UAE CIT.

Income Excluded from UAE CIT

As anticipated, income from specific activities like personal investments, real estate investments, or employment is not subject to UAE CIT for a natural person even if the AED 1 million threshold is exceeded, as these income items are not considered arising from a Business or Business Activity under UAE CIT Law. We discuss those further below

Wage: As per the UAE CIT Law, salaries or any other form of remuneration received by a natural person as an employee from their employer does not fall within the scope of this tax. Therefore, if a natural person works in a company as an employee or also as a member of its board of directors (BoDs), both his salary for his executive role in the company and the fees received for attending board meetings in the company are considered as Wage and accordingly are not subject to UAE CIT.
Personal Investment Income: If a natural person derives income from personal investments that he/she conducts for their personal account, it is not considered business income and, therefore, not subject to CIT. The exception to this is where the activity is conducted through a license or requires a license or where the activity is considered a commercial business in accordance with the commercial transactions law.
Real Estate Investment Income: If a natural person derives income from real estate by directly or indirectly selling, leasing, sub-leasing and renting land or real estate property in the UAE, which does not require a License from the Licensing Authority, this income is not subject to UAE CIT. On the contrary, activities such as real estate management, construction, development, agency, and brokerage are treated as business activities that fall within the scope of UAE CIT.

UAE CIT Rate for Natural Persons

A Natural Person is subject to UAE CIT if, in a Gregorian year (i.e., the solar year), the person generates turnover exceeding AED 1 Million. As mentioned, the person is required to register for CIT purposes and subject to obligations under the UAE CIT Law. This person is then taxed on net income exceeding AED 375,000. If the Taxable Income is below AED 375,000, then the natural person will effectively be subject to a rate of 0% CIT.

A Natural Person may also be eligible for the so-called Small Business Relief (SBR) if the Revenue from the current and previous Tax Periods does not exceed AED 3 Million for each Tax Period. The Taxable Person will then be treated as having no Taxable Income in respect of each relevant Tax Period where the conditions of the SBR are satisfied. However, UAE CIT compliance obligations (e.g., filing a tax return) will still apply.

UAE CIT Deductions for Natural Persons

A natural person can deduct the following expenses for UAE CIT purposes:

Interest Deduction: If an individual is subject to CIT, the General Interest Deduction Rule may apply to him/her. This rule limits interest deductions greater than AED 12,000,000 or 30% of taxable earnings before interest, tax, depreciation, and amortization (EBITDA).
General Deduction relating to Business Expenditure: A business expenditure is deductible from UAE CIT liabilities if the expenditure incurred by the Natural Person is exclusively for the purposes of his/her business and is not capital in nature. Expenditures that are not incurred for the purposes of the Natural Person’s Business, not incurred in deriving Exempt Income and Losses that are not connected with the Natural Person’s Business are not deductible for UAE CIT purposes.

Non-Deductible Expenditure under UAE CIT

Certain expenditures cannot be deducted by a natural person for UAE CIT purposes. This includes:

Amounts withdrawn by a Natural Person from his/her business: The amounts withdrawn by a Natural Person from his/her own business, even if described as Wage or Salary, cannot be deducted for UAE CIT purposes. When a Natural Person operates a Sole Proprietorship business in UAE and withdraws money from the business and records it as Annual Salary cost, the Natural Person is not eligible for UAE CIT deduction as both the Natural Person and Sole Proprietorship are considered as the same taxable person even if the salary was deducted at arm’s length principle.
Transactions with Connected Persons to Natural Persons and Related Parties: To be deductible under UAE CIT, the transactions of a Natural Person with a Connected Person have to follow the arm’s length principle. Also, the application of the arm’s length principle requires the results of transactions or arrangements between Related Parties to be consistent with the results that would have been realised if the transactions or arrangements were conducted with Non-Related Parties. Natural Persons are also considered to be Related Parties if their Relationship is of kinship or affiliation, including by way of adoption or guardianship. A Natural Person’s relationship with a Juridical Person is based on Ownership and Control. Partners of an unincorporated partnership are considered Related Parties due to the partner’s shared control over the business of the partnership.

UAE CIT Compliance for Natural Persons

Tax Registration: All Natural Persons who are subject to UAE CIT by conducting Business or Business Activities in the UAE are required to register for UAE CIT purposes when the total turnover from conducting the Business or Business Activities exceeds the AED 1 Million threshold within a Gregorian calendar year. If a Natural Person conducts a new Business or Business Activity after their Initial Tax Registration, the same Tax Registration Number (TRN) will be utilised for the activities, and the Natural Person will not be required to register again with the FTA for UAE CIT purposes. Also, if a Natural Person who has registered for UAE CIT with FTA finds that his/her Turnover does not exceed the AED 1 million threshold, he/she will still retain their Tax Registration status, but they will not be permitted to deregister from UAE CIT unless they have ceased conducting their Business or Business Activities.
Tax Deregistration: A Natural Person can file for Tax Deregistration Application with the FTA in the case of cessation of Business or Business Activity, whether by Dissolution, Liquidation or otherwise. When a Natural Person conducting the Business or Business Activity passes away, he/she is no longer considered as a Taxable Person. All outstanding UAE CIT liabilities must be settled as per the Tax Procedures Law. Unless a clearance certificate from the FTA has been obtained, the heirs and legatees are required to settle the outstanding tax liability.
Tax Period: The Gregorian Calendar, which runs from 1 January until 31 December, is the Tax Period for which the Natural Person who conducts a Business or Business Activity is subject to UAE CIT.
Accounting Standards and Financial Statements: A Natural Person should prepare standalone Financial Statements in accordance with the International Financial Reporting Standards (IFRS). If the Turnover does not exceed AED 50 million, the Natural Person may apply the IFRS for small and medium-sized (SME) industries. If the Turnover of the Natural Person does not exceed AED 3 million, the Natural Person may prepare the Financial Statements using the Cash Basis of Accounting. If the Natural Person derives a Turnover which exceeds AED 50 million, the Natural Person must prepare and maintain audited Financial Statements for the relevant Tax Periods.
Tax Return: A Natural Person who is a Taxable Person must file his/her CIT Return to the FTA no later than 9 months from the end of the relevant Tax Period. Natural Persons are required to submit a single Tax Return for all their Business and Business Activities, which are subject to CIT.

Tags Natural Persons, UAE CIT

Tax Updates

Tax Planning Strategies for Individual Business Owners in the UAE

Post author By Thomas Vanhee
Post date August 7, 2024

Tax Planning Strategies for Individual Business Owners in the UAE

Starting June 2023, businesses in the UAE are subject to Corporate Income Tax (CIT). UAE CIT applies at the rate of 9% or 0% on Qualifying Income if businesses are Qualifying Free Zone Persons (QFZPs) and provided other criteria relating to the activity carried out are fulfilled. A UAE business may also be liable to a Top-up Tax if it qualifies as a Multinational Enterprise (MNE) under the OECD Pillar 2 Solution once a Cabinet Decision is issued to confirm the entry of force in the UAE of the GloBE rules (the Ministry of Finance (MoF) launched a Public Consultation on Implementation of Global Minimum Tax in the UAE in March-April 2024).

Natural persons, i.e., any individual endowed with legal capacity, do not generally fall into the scope of UAE CIT. This is because income from Employment (Wages), Personal Investment, and Real Estate Investment are not taken into account for UAE CIT purposes. On the other hand, when natural persons conduct Business activity, they are fully in the scope of UAE CIT, but only if they earn revenues exceeding AED 1 million (approximately a bit more than USD 270,000) during a Gregorian calendar year. Excluded income (i.e., income from employment, personal investment, and real estate investment) is disregarded for the purpose of determining the AED 1 million turnover threshold, regardless of the amount.

Differences in the scope of UAE CIT Law (Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses) for corporate and natural persons may create tax planning opportunities. For instance, untaxed income at the level of natural persons generally constitutes a taxable expense at the level of the corporation. Tax benefits may arise from the combination of deduction and non-inclusion of the same income item from the scope of UAE CIT. Nonetheless, such a tax planning strategy is open only to individual shareholders of corporations, given that they are the ones having more control over a company’s expenses.

In this article, we will discuss various tax planning strategies for individual shareholders. This description is, however, not exhaustive since many other opportunities to reduce taxable income exist which would not benefit individual shareholders. One such example is making a donation to a Qualifying Public Benefit Entity (QPBE) as defined by Article 9 of UAE CIT Law (e.g., a museum), which is tax deductible.

In the following, we will also explore the safeguards the UAE Federal Tax Authority (FTA) has put in place to counter the potential abuse of UAE CIT rules. However, we will not delve into structuring opportunities for private wealth benefiting future generations, such as (family) foundations, trusts, or other structures.

1. Salary & Bonuses

The most obvious tax planning strategy is to enter into an employment agreement with a privately held entity. The natural person who does so can derive compensation from the company in the form of wages.

In the FTA Guide on Natural Person (CTGTNP1), “wage” is defined as “the wage that is given to the employee in consideration of their services under the employment contract, whether in cash or in kind, payable annually, monthly, weekly, daily, hourly, or by piece-meal, and includes all allowances, and bonuses in addition to any other benefits provided for, in the employment contract or in accordance with the applicable legislation in the State”. To meet this definition and be considered a “wage” for UAE CIT purposes, it is therefore important that an employment contract has been concluded and a policy around additional allowances has been established.

According to the FTA, employee costs are generally considered to be wholly and exclusively incurred for Business purposes, provided they are not excessive (section 4.5.2 of the FTA Guide on Determination of Taxable Income, CTGDTI1). Employment-related expenditures also need to meet the arm’s length standard where employees are Related Parties or Connected Persons.

As such, it is not relevant whether an employee is paid wholly in cash or also receives other benefits, such as a car for personal use. In this situation, personal use should be viewed in the same way as the employee spending their cash salary on items for their personal benefit. The same applies to other benefits, such as medical insurance or a flight allowance (also for spouse and children). In other words, the cost is wholly and exclusively for Business purposes as rewarding employees is wholly a Business purpose. The rationale applied here is similar to that followed for entertainment expenditures under Article 32 of UAE CIT Law.

Based on this scenario, the UAE company would benefit from claiming a tax deduction for the salary paid and benefits granted. At the same time, for the individual, the wages received are not considered business income and, hence, neither are subject to CIT.

The value of any payments or benefits is, however, limited by the “connected person” concept, defined in Article 36(2) of the UAE CIT Law as any person affiliated with a taxable person. Shareholders, directors and managers of companies are considered connected persons, and they need to justify the market value of the payments and benefits they receive in order for them to be tax deductible. The market value is the price that can be agreed upon in an arm’s length free market transaction. A payment or benefit provided by a taxable person to a connected person is deductible only if and to the extent the payment or benefit corresponds with the market value of the benefit and is incurred for business purposes. Connected persons are the owner, a director or officer, or a related party of the owner, director or officer. A director or officer could be the Managing Director of an LLC (section 6.6.3. of the FTA’s General Corporate Tax Guide, CTGGCT1).

According to Article 35(1)(a) of the UAE CIT Law, a related party can be a natural person within the fourth degree of kinship or affiliation, including by way of adoption or guardianship (detailed provisions to calculate the degree of kinship are laid down in section 4.4.1. of the FTA’s Guide on Natural Person, CTGTNP1). Such a related party could be, for instance, the son of the LLC owner (section 6.6.3. of the FTA’s General Corporate Tax Guide, CTGGCT1).

An owner is any natural person who directly or indirectly possesses an ownership interest in the taxable person or controls such taxable person. Under Article 35(2) of the UAE CIT Law, “control” is defined as “the ability of a person, whether in their own right or by agreement or otherwise to influence another person”. In this regard, the FTA gives the example of an individual owner of an LLC (section 6.6.3. of the FTA’s General Corporate Tax Guide, CTGGCT1).

Certain exceptions apply, which are motivated by the transparency of salaries and presumed oversight by regulators or shareholders, as they are, in principle, capable of limiting the payments and benefits unduly granted. Notably, Article 36(6) of the UAE CIT Law excludes the application of the “connected persons” concept to taxable persons whose shares are traded on a recognized stock exchange (a UAE-licensed and regulated stock exchange or foreign stock exchange of equal standing), or taxable persons subject to the regulatory oversight of a competent authority in the UAE. The UAE Federal Cabinet can further provide for additional exceptions.

2. End-of-Service Benefit (“EOSB”)

This opportunity relates to the creation of provisions for the purposes of EOSB under UAE labor law. The FTA considers that if a provision is created in the financial statements and this is done in accordance with the applicable accounting standards (IFRS or IFRS for SMEs), the provision will be allowed as a deduction as long as it satisfies the overall requirements for deductibility of expenses.

UAE auditors have historically often taken the position that EOS obligations do not apply to shareholders working in companies and having an employment contract when those shareholders are expatriate employees. Labor lawyers dispute this position. Individuals can hold a dual role within the business, i.e., shareholder and employee. Where there is an employment contract, the EOS obligations apply. Thus, shareholders who have historically not accrued EOSB can do so. If this is solely an accrual, it would create an expense for the company under the principles explained above.

Further, companies may consider removing the EOS accrual from their books by paying the equivalent amount into a private pension fund as determined in Ministerial Decision No. 115 of 2023. As long as the shareholder’s contribution does not exceed 15% of the employee’s total remuneration for the tax period, the expense should be deductible from UAE CIT income. However, it is unclear whether the expense would be deductible if it related to EOS accrued before the application of UAE CIT to the corporation.

3. Director Fees

Individuals acting as directors for a company could also derive director fees from such companies, which would be tax-exempt for such individuals. Director fees received by an individual are not, in fact, considered business income but are generally treated as wages and, hence, are not subject to CIT (section 3.8.1. of the FTA’s Guide on Natural Person, CTGTNP1). On the other hand, directors are considered connected persons and also need to comply with the abovementioned principles as laid down under point 1 of this article.

4. Interest Income

Generally speaking, provided the general interest deduction limitation conditions under Article 30 of UAE CIT Law are met, the interest is tax deductible at the corporate level and goes untaxed at the level of the natural person if considered personal investment income.

In the FTA Guide on Natural Person (CTGTNP1), “personal investment” is defined as “Investment activity that a natural person conducts for their personal account that is neither conducted through a Licence or requiring a Licence from a Licensing Authority in the UAE, nor considered as a commercial business in accordance with the Federal Decree-Law No. 50 of 2022 issuing the Commercial Transactions Law”.

Notably, a company can deduct up to AED 12 million or 30% of adjusted EBITDA without limiting the interest charge. Even if the interest is not deductible, it can be carried forward for up to 10 years. When capitalizing a company for financing purposes, the shareholder can notably consider providing financing to the company through a shareholder loan rather than adding additional equity to the company (which does not generate a tax deduction). The UAE regulates financing activities. However, we assume that limited financing activities to a company owned by the shareholder would not require regulation.

5. Renting or selling commercial space to the company

As stated, “real estate investment” income is disregarded for UAE CIT purposes. In the FTA’s Guide on Natural Person (CTGTNP1), “real estate investment” is defined as “Any investment activity conducted by a natural person related to, directly or indirectly, the sale, leasing, sub-leasing, and renting of land or real estate property in the UAE that is not conducted, or does not require to be conducted through a Licence from a Licensing Authority”.

Taking such an exclusion into account, shareholders who own commercial real estate (office, warehouse, etc.) may consider renting it to their own company or the legal entity they control. The income from the rent will be untaxed in the shareholder’s hands as real estate investment income while being deductible for UAE CIT purposes at the corporate level.

In the alternative, the shareholder may consider selling commercial real estate (office, warehouse, etc.) to his own or a controlled company. The sale would go untaxed as regarded as real estate investment income, and the asset may generate a tax-deductible expense through depreciation. Capital appreciation, however, may impact the company’s future taxable profits.

6. Lease or rent any assets to the company

As long as the income from leasing or renting the assets is not higher than AED 1 million, the lease or rent would be untaxed in the hands of the natural person shareholder while constituting a tax-deductible expense in the hands of the company.

An example of that effect could be a company using trucks, which it rents from its shareholder, who is a natural person. The company will need to identify whether the operation potentially qualifies as the acquisition of an asset by the company, and, therefore, the asset needs to be depreciated rather than a deduction of expenses to be taken.

It is also possible for an individual to conduct a personal investment activity towards his own or a controlled company. For example, an individual shareholder may decide to sell or rent out an artwork to his own or controlled company. The sale or rent would be untaxed in the hands of the natural person shareholder while constituting a tax-deductible expense in the hands of the company.

It is recommended that proper documentation be prepared for the above transactions and that they be conducted at arm’s length between connected persons.

Moreover, it should be noted that all these tax planning strategies are subject to the scrutiny of the General Anti-Abuse Rule (GAAR) laid down in Article 50 of the UAE CIT Law. This GAAR endows the FTA with the power to counteract or adjust tax advantages obtained by taxpayers – both companies and individuals – in an abusive manner. As described by the Explanatory Guide on UAE CIT of May 2023, this occurs when taxpayers seek to reduce their tax liabilities in a way that is not consistent with the original intent and purpose of the law whilst still complying with the letter of the law. The test is whether it can be reasonably concluded that the taxpayer entered into the transactions and arrangements without a valid commercial reason and that its main purpose was to obtain a tax advantage that was not consistent with the intention of UAE CIT Law. To this end, all the relevant circumstances of the case must be examined.

Finally, it must also be considered that if the legal entity qualifies as a QFZP, the above strategies are less important, given that the tax-deductible expense reduces the tax liability to 0. However, they may still be important if there is a risk that the QFZP may be disqualified. As to companies falling into the scope of Pillar 2, the deduction would reduce GloBE income and, therefore, also the base on which the Top-up Tax is calculated. However, there are unlikely to be many privately held companies that are also within the scope of Pillar 2.

Navigating the New Corporate Income Tax (CIT) Landscape in the UAE: Key Compliance Requirements and Audit Obligations

UAE Corporate Tax: Audit & Financial Reporting Overview

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UAE CIT Readiness Survey Results Are In!

CEPAs and FTAs: Exploring New Partnership Agreements by UAE and GCC Countries

10 Highlights on the Updates to the UAE VAT Executive Regulations Effective 15 November 2024

The UAE CIT Impact on Natural Persons

Tax Planning Strategies for Individual Business Owners in the UAE

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