Author: Thomas Vanhee

Key Developments in GCC International Tax Treaties – A 2023 Recap

Post author By Thomas Vanhee
Post date January 5, 2024

Key Developments in GCC International Tax Treaties – A 2023 Recap

UAE

January:

UAE and Chile – Income Tax Treaty between Chile and the United Arab Emirates was effective on 1 January 2023.

UAE and Zambia – The UAE and Zambia tax treaty entered into force on 13 January 2023 and has been retrospectively effective since 1 January 2023. The withholding tax rates are 5% on Dividends, Interests, Royalties, and Technical Services.

UAE and Democratic Republic of Congo – As per the latest information provided in the August 2023 update by the UAE MoF, the Income Tax Treaty (2021) between Congo and the UAE became effective on 24 January 2023. This treaty will be applicable from 1 January 2024 for withholding and other taxes.

February:

UAE and Gabon – The UAE and Gabon tax treaty entered into force on 16 February 2023 and was retrospectively effective from 1 January 2019. The withholding tax rates are 10% on Dividends and Royalties, 7% on Interests, and 7.5% on Technical and other Services.

May:

UAE and Czech Republic – The Czech Republic and the UAE signed the Czech Republic – UAE Income Tax Treaty (2023). The signing was held in Prague on 24 May, marking a significant milestone in bilateral cooperation between the two nations.

UAE and Swiss Federal Council (Bundesrat) – The Swiss Federal Council (Bundesrat) approved the Protocol to the Switzerland – UAE Income Tax Treaty (2011) on 17 May 2023.

August:

UAE and Cambodia – The third round of negotiations regarding a tax treaty between Cambodia and the United Arab Emirates took place on 21 August 2023. During this meeting, the representatives of both nations addressed all outstanding matters that were carried over from the previous round, which was held earlier on 11 April 2023, leading to an agreement on 30 of the 31 articles under discussion for the Tax Treaty

October:

UAE and Ukraine – As of 19 October 2023, the amending Protocol of Ukraine – United Arab Emirates Income and Capital Tax Treaty (2003) has come into effect. The amending Protocol was signed on 14 February 2021 and will be applicable from 1 January 2024 for withholding and other taxes.

UAE and Tanzania – On 9 October 2023, the UAE Cabinet approved the income tax treaty with Tanzania, which was initially signed on 27 September 2022.

November:

UAE and Ivory Coast – The tax treaty between the UAE and the Republic of Ivory Coast was originally signed on 25 November 2021. The UAE Cabinet granted its formal approval to this bilateral agreement on 4 September 2023.

UAE and Swiss National Assembly (Nationalrat) – The Swiss National Assembly (Nationalrat) has granted its approval to the amending Protocol signed on 5 November 2022, which pertains to the Switzerland and UAE Income Tax Treaty (2011). This Protocol, after endorsement by the Council of States (Ständerat), will proceed further in the legislative process.

UAE and Cuba – Cuba and the United Arab Emirates signed an Income Tax Treaty on 29 November 2023.

QATAR

January:

Qatar and Czech Republic – Czech Republic and Qatar signed an Income Tax Treaty on 21 June 2022, which became effective on 1 January 2023

March:

Qatar and Guernsey – The Protocol to the Double Tax Treaty between Qatar and Guernsey entered into force as of 8 March 2023. The DTT was signed by the two countries back in 2013.

June:

Qatar and Uzbekistan – Uzbekistan and Qatar signed an Income Tax Treaty on 6 June 2023.

Qatar and Ukraine – On 11 June 2023, the amending Protocol, which was signed on 2 September 2021 and pertains to the Qatar – Ukraine Income Tax Treaty (2018), became effective. The provisions of the Protocol concerning withholding and other taxes are typically applicable from 1 January 2024. Importantly, the Protocol has been integrated into the primary text of the Treaty.

October:

Qatar and Saudi Arabia – On 31 October 2023, according to information published by the Saudi Arabian government, the Saudi Arabian Council of Ministers authorized the negotiation and signing of an Income Tax Treaty with Qatar. The Tax Treaty to be negotiated, signed, and ratified by both contracting parties will be the first agreement of this kind between Saudi Arabia and Qatar.

Qatar and Egypt – On 19 October 2023, the President of Egypt signed Decree No. 254 of 2023, ratifying the Income Tax Treaty concluded with Qatar on 27 February 2023. The Decree was published in Egypt’s Official Gazette No. 42 on 19 October 2023. The DTT is not yet in force, pending ratification by Qatar.

SAUDI ARABIA

January:

Saudi Arabia and Morocco – The Income Tax Treaty between Morocco and Saudi Arabia was effective on 1 January 2023.

Saudi Arabia and Sri Lanka – Sri Lanka and Saudi Arabia signed an Income Tax Treaty on 26 January 2023.

November:

Saudi Arabia and Slovakia – Saudi Arabia and the Slovak Republic formally signed an income tax treaty on 13 November 2023. The signing took place in Bratislava, Slovakia.

Saudi Arabia and Gambia – The Gambia and Saudi Arabia entered into a tax treaty on 9 November 2023 as part of the Saudi-Arab- African Economic Conference held in Riyadh on the same day.

Saudi Arabia and Egypt – Saudi Arabia and Egypt are in the process of negotiating a revision to their DTT.

OMAN

January:

Oman and Qatar – The Income and Tax Capital Treaty between Oman and Qatar became effective on 1 January 2023.

May:

Oman and Egypt – Egypt and Oman signed an Income Tax Treaty on 22 May 2023 and a Memorandum of Understanding on cooperation in areas related to financial policies and developments on the sidelines of the Egyptian-Omani Business Forum in Cairo.

July:

Oman and Cyprus – Oman signed a DTT with Cyprus. Official approval was granted for an agreement to combat double taxation and address tax evasion pertaining to income taxes on 19 July 2023.

November:

Oman and Russia – On 29 November 2023, the Russian government announced the approval of the Oman-Russia Income Tax Treaty (2023) by the Russian State Duma, the lower chamber of the Russian parliament. The treaty outlines specific tax rates.

Oman and Kazakhstan – On 10 November 2023, the Kazakhstan government granted authorization through Decree No. 994 for the Minister of Finance to sign an income and capital tax treaty with Oman. An official version of the income and capital tax treaty has yet to be published.

KUWAIT

March:

Kuwait and San Marino ‘initiated’ a DTT on 23 March.

July:

Kuwait and Ecuador – Substantial progress was revealed in the ongoing negotiations for a DTT between Ecuador and Kuwait. The discussions, now at an advanced stage, indicate a promising advancement in the bilateral tax relations between both countries.

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

Immovable Property Income in the UAE: Tax Implications for Domestic and Foreign Investors

Post author By Thomas Vanhee
Post date December 29, 2023
No Comments on Immovable Property Income in the UAE: Tax Implications for Domestic and Foreign Investors

Immovable Property Income in the UAE: Tax Implications for Domestic and Foreign Investors

Explore the complexities of real estate investment taxation in the UAE with the article “Immovable Property Income in the UAE: Tax Implications for Domestic and Foreign Investors.”

This piece, authored by our very own Thomas Vanhee, Priyanka Naik, and Giorgio Beretta, and featured in Tax Notes International on December 18, 2023, offers a detailed look at the new corporate tax landscape effective June 1, 2023.

It provides valuable insights for both local and international investors navigating the UAE’s real estate market.

Click to read the full article and stay informed about these essential tax developments.

GCC Tax Int'l Tax & Transfer Pricing

Overview Draft KSA Income Tax Law and Draft Tax Procedures Law

Post author By Thomas Vanhee
Post date November 3, 2023

Overview Draft KSA Income Tax Law and Draft Tax Procedures Law

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

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

Tax haven blacklist

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

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

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

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

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

Withholding taxes

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

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

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

Special incentives

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

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

Updated Residency rules and Service Permanent Establishment

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

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

Binding nature of rulings and guide and Zakat penalties

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

Non-GCC national resident persons clarified to be in scope

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

Adoption BEPS standards

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

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

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

Consistency terms and clarifications

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

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

Other provisions

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

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

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

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

Pillar Two and entry into force

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

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

UAE Corporate Income Tax UAE Tax

UAE’s Corporate Tax Framework: Understanding Participation Exemption

Post author By Thomas Vanhee
Post date November 3, 2023

UAE’s Corporate Tax Framework: Understanding Participation Exemption

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

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

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

Check below to learn more.

Tax Updates UAE Corporate Income Tax UAE Tax

30 Highlights about CIT Guide for Non-Resident Persons

Post author By Thomas Vanhee
Post date November 3, 2023

30 Highlights about CIT Guide for Non-Resident Persons

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

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

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

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

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

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

1. State Sourced Income vs. PE

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

2. State Sourced Income vs. UAE Nexus

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

3. Non-Resident Person and Small Business Relief

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

4. UAE CIT Residence and Double Tax Treaties

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

5. Irrelevant Factors for PE Purposes

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

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

6. Fixed Place of Business for PE Purposes

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

7. Multiple Locations for PE Purposes

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

8. Premises at Disposal for PE Purposes

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

9. Hotel Rooms and PE

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

10. Home Office PE

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

11. Manager Travelling to the UAE for Meetings

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

12. Land in the UAE and PE

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

13. Exploration/Extraction Activities and PE

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

14. Automatic Equipment and PE

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

15. Splitting of Contracts and Construction PE

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

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

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

16. Storage/Delivery of Spare Parts

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

17. Warehouse in the UAE

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

18. Warehouse Operated by Logistics Company

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

19. Preparatory/Auxiliary Activities and Purchasing Office

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

20. Preparatory/Auxiliary Activities Performed for a Third Party

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

21. UAE Subsidiary as PE for the Parent

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

22. Digital Nomad and PE

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

23. Physical Presence in the UAE: Travel Restrictions

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

24. Physical Presence in the UAE: Act of War

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

25. Agency PE: Company Representatives

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

26. Agency PE: Subsidiary

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

27. Agency PE: Independent Agent

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

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

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

29. Nexus in the UAE: ATMs

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

30. Nexus in the UAE: Wind Turbines

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

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Int'l Tax & Transfer Pricing Tax Updates

Aligning Thin Capitalization Rules under Income Tax Law with OECD/G20 BEPS Action 4

Post author By Thomas Vanhee
Post date October 16, 2023

Aligning Thin Capitalization Rules under Income Tax Law with OECD/G20 BEPS Action 4

Aurifer is a boutique tax law firm with offices in Dubai (UAE), Riyadh (KSA), and Brussels (Belgium), advising governments, companies, and other stakeholders on tax policy matters all across the Gulf Cooperation Council (“GCC”) countries. We also participate in public consultations launched by international organizations such as the Organisation for Economic Cooperation and Development (“OECD”).

Aurifer is pleased to provide its comments in response to the Sultanate of Oman Tax Authority’s proposal of replacing or adding to the current thin capitalization rules applied on companies according to the Income Tax Law with recommendations stated in the OECD/G20 Base Erosion and Profit Shifting Action 4 Final Report issued on 5 October 2015 (“BEPS Action 4 Final Report”) and following implementation.

We commend Oman for its continuing efforts to align domestic tax rules and procedures with best practices developed by international organizations such as the OECD. We particularly appreciate Oman’s ongoing commitment to identify and close the gaps in the existing international tax rules and counter tax treaty abuse as part of its duties as a signatory of the Multilateral Convention to Implement Tax Treaty Related Measure to Prevent Base Erosion and Profit Shifting (“Multilateral Convention” or “MLI”). This progress has also been acknowledged by Oman’s removal from the EU list of non-cooperative jurisdictions for tax purposes on 6 October 2020.

The sections below set out specific comments in relation to the policy recommendations outlined in the BEPS Action 4 Final Report, taking into account the specificities and dynamics of Oman’s economy. We hope our comments may be useful in redrafting or updating the current thin capitalization rules under Oman’s Income Tax Law and express our endorsement of any initiative that seeks to improve legal certainty for taxpayers and tax authorities alike. We are happy to discuss the contents of this letter at your convenience.

1. Background

The Sultanate of Oman has developed various initiatives to attract investment from abroad and to stimulate multiple economic sectors. According to the latest data released by the National Centre for Statistics and Information (NCSI), Foreign Direct Investment (FDI) in Oman reached a staggering OMR 19.620 billion during the last quarter of 2022. Increasing amounts of FDI highlight the growing interest of international investors in Oman’s economy, particularly in the oil, gas, and real estate sectors.

When investing in Oman, Multinational Enterprises (MNEs) may finance investments via equity or debt financing. Although economically equivalent, the decision to pursue equity or debt financing is not neutral from a tax standpoint. This is because interest on debt constitutes a deductible expense for the payer and taxable income for the payee. On the contrary, dividends or similar equity returns are generally not deductible for the payer and simultaneously the payee may benefit from participation exemption on dividends.

In the case of intra-group arrangements, these differences in treatment may create a tax-induced bias towards debt financing, particularly if the parent company is able to claim relief, in the residence country, for interest expenses towards subsidiaries in other jurisdictions. In the case of hybrid instruments, what constitutes interest in Oman, may not necessarily constitute taxable income in the country of residence.

In a cross-border context, such as in the case of FDI in Oman, debt financing may lead to BEPS practices in the form of international debt-shifting. For instance, MNEs and other foreign companies may decide to invest in Oman through heavily debt-financed entities, sheltering local profits from Oman’s Income Tax and affecting the integrity of the country’s income tax system.

Aligning with many other countries’ experiences, Oman has already introduced various provisions in its income tax legislation to counter BEPS practices involving excessive debt financing (Chapter 9 of the Executive Regulation of the Income Tax Law). Notably, interest deduction on the loans taken from related parties is limited to twice (2:1) of the debt-to-equity ratio (Articles 41 and 42 of the Executive Regulation of the Income Tax Law). The interest deduction is further restricted if the interest rates on foreign debt are not comparable to the third-party rates or terms (Article 43 of the Executive Regulation of the Income Tax Law).

The provisions currently in place under Oman’s income tax legislation are an important first step to limiting the possibility for domestic and foreign investors to resort to debt financing too heavily.

However, the current rules fail to consider the varying levels of debt that may be needed depending on the economic sector in which the financed entity operates. They also create administrative burdens on both tax authorities and the taxpayers. Moreover, the current provisions are not sufficiently robust in tackling complex structural arrangements where the actual debt raised by the financed entity is disguised.

Overall, the existing rules do not appear sufficiently elaborated to tackle all the BEPS risks relating to the exploitation of excessive debt financing. In the following sections, we discuss possible measures to improve the alignment of the current thin capitalization rules under Oman’s Income Tax to the recommendations outlined in the BEPS Action 4 Final Report.

2. General Interest Deduction Limitation Rule

A first measure to better align the existing thin capitalization rules under Oman’s Income Tax to the recommendations outlined in the BEPS Action 4 Final Report would be implementing a General Interest Deduction Limitation Rule, calculated based on a predetermined benchmark fixed ratio. The introduction of this measure is the main recommendation outlined in the BEPS Action 4 Final Report.

Under this rule, an entity’s net deductions for interest (and payments economically equivalent to interest) are capped to a percentage (i.e., a fixed ratio) of its earnings before interest, taxes, depreciation, and amortization (“EBITDA”). In this regard, the BEPS Action 4 Final Report recommends a range of 10 – 30% of the EBITDA that should be allowed as a deductible tax expenditure. Compared with a gross interest rule, a net interest rule would reduce the risk of double taxation, as an entity’s interest income would be set against its interest expense before the interest limitation is applied. Factors such as carry-forward of disallowed interest expenditure, interest rates in the country, whether the fixed ratio rule is applied in isolation or in conjunction with other regulations, etc., play an important role in determining the level of benchmark required to be fixed.

Although relatively straightforward to apply and administer, the fixed ratio rule outlined above is a blunt tool that does not consider the varying levels of debt that entities operating in different sectors may raise. This issue can be resolved by applying the fixed ratio rule in combination with a so-called “group ratio rule”, which considers the level of debt financing within a group of companies. Setting a ratio at the group level allows a group’s entity to deduct net interest expenditure up to its group’s net third-party interest to EBITDA ratio.

We submit that introducing the fixed ratio rule, combined with a group ratio rule, is crucial to ensure that an entity’s net interest deductions are directly linked to the taxable income generated by its economic activities. From a comparative perspective in GCC countries, we note that a general interest deduction limitation rule (capped at 30% of the financed entity’s EBITDA for the relevant tax period), applicable to standalone as well as group entities, has been introduced under the UAE Corporate Tax (Article 30 of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses). Qatar instead applies an interest limitation rule similar to the current one in force in Oman, whereby interest paid to related parties on the share of debts exceeding a 3:1 ratio of the company’s equity as per the accounts is not deductible (Article 10 of Executive Regulations to Law No. 24 of 2018). No thin capitalization rules currently exist in the corporate tax legislation of Saudi Arabia and Kuwait, although both do have limitations in place for interest deductibility.

Even though a general interest deduction limitation rule, in accordance with BEPS Action 4 Final Report, may be relatively straightforward to implement, the definition of the actual meaning of the terms “Interest” and” EBITDA” requires further deliberation. The next section elaborates on the factors that may be considered while defining these terms.

3. Definition of the Terms “Interest” and “EBITDA”

The BEPS Action 4 Final Report considers the risk that standalone or group entities may easily circumvent the thin capitalization rules by disguising debt arrangements, especially if involving related entities. To this end, the BEPS Action 4 Final Report highlights the need to adopt an approach focusing on a payment’s economic substance rather than its legal form.

Based on this substance-over-form approach, the BEPS Action 4 Final Report stipulates that interest on all forms of payments that are linked to the financing of an entity, determined by applying a fixed or variable percentage to an actual or notional principal over time, must be taken into account for the purposes of the thin capitalization rules. The same considerations apply to other expenses incurred in connection with raising finance, such as arrangement and guarantee fees.

From a comparative perspective in GCC countries, we note that the UAE has followed the BEPS

Action 4 Final Report’s recommended approach in this regard. Notably, under UAE Corporate Tax (Ministerial Decision No. 126 of 2023), it is stipulated that amounts incurred in connection with raising finance shall be considered interest for the purposes of the General Interest Deduction Limitation Rule. Moreover, the concept of “interest” under UAE Corporate Tax includes other types of payments such as guarantee, arrangement, and commitment fees. It is also important to note that UAE Corporate Tax provisions ensure that interest-equivalent component on Islamic Financial Instruments are treated as interest for the purposes of the General Interest Deduction Limitation Rule. Finally, specific rules are set for capitalized interest, foreign exchange movements, and finance and non-finance leases.

In addition to the definition of “interest”, guidance would also be required to understand how EBITDA needs to be calculated, i.e., based on earnings in financial statements or the determination prescribed for income tax purposes. We believe the net interest deduction limitation computation should be based on earnings in the financial statements since the group ratio rule can only be applied based on the group’s consolidated financial statements. At the same time, however, it is appropriate that accounting EBITDA is adjusted for any tax-exempt income (e.g., dividends).

From a comparative perspective in GCC countries, we note that certain types of interest expenditure are included or excluded from the EBITDA calculation for the purposes of the General Interest Deduction Limitation Rule under UAE Corporate Tax. Among the included expenses are depreciation, amortization, and capitalized interest expenditures. On the other hand, interest expenditures relating to “Qualifying Infrastructure Projects” are excluded for EBITDA calculation purposes. Such an exclusion aligns with BEPS Action 4 Final Report’s recommendations, which provide carve-outs for interest paid on loans used to fund public-benefit projects, where the BEPS risk is reduced given the strong connection with the relevant country.

4. Carried Forward of Disallowed Interest Expenditure

The current thin capitalization rules under Oman’s Income Tax do not allow carry-forward or carry-back of disallowed interest. A permanent disallowance of net interest expense is considered economically inappropriate as it does not consider earnings volatility and possible mismatches in the timing of interest expense and EBITDA, nor major capital expenses for projects spanning multiple years which do not immediately generate revenues. The lack of carry-forward of disallowed interest under thin capitalization rules may also lead to double taxation to the extent that interest income is taxed in the hands of the payee.

To address these issues, we consider it appropriate to set up provisions under Oman’s Income tax allowing the carry-forward of disallowed interest expenditure to future years. The BEPS Action 4 Final Report advises countries to set up carry-forward mechanisms of disallowed interest expenses to reduce the impact of earnings volatility on the ability of an entity to deduct interest expense. The BEPS Action 4 Final Report also adds that this measure can help entities that incur interest expenses on long-term investments expected to generate taxable income only in later years. It also allows entities with losses to claim interest deductions when they return to profit. To reduce possible BEPS risks, strict requirements in terms of time and/or value of interest to be carried forward can be imposed.

From a comparative perspective in GCC countries, we note that the carrying-forward of disallowed interest expenses is permitted under UAE Corporate Tax for a period of 10 years (Article 30 of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses). To reduce BEPS risks, limitations exist for exploiting and carrying forward disallowed or unutilized interest expenses by standalone entities before or after joining a tax group (Ministerial Decision No. 126 of 2023). What the exact duration should be for the carry forward of losses, depends on policy preferences in the country.

5. De Minimis Rule

Unquestionably, introducing a General Interest Deduction Limitation under Oman’s Income Tax would be a major step in tackling BEPS risks involving excessive debt financing. At the same time, however, it is important to exclude from the scope of the application of this rule situations that do not pose significant BEPS risks. In this regard, the BEPS Action 4 Final Report suggests setting a de minimis threshold based on the monetary value of net interest expense. Entities or groups falling below this threshold may deduct interest expense without restrictions. Where a rule is applied at the level of an individual entity, anti-fragmentation rules might eventually be introduced to avoid abuse of the de minimis rule by a business setting up multiple entities.

Introducing a de minimis threshold to apply the fixed and group ratio rules would enable Oman to focus on entities that pose material BEPS risks relating to excessive debt financing. Being based on a monetary value, a de minimis threshold would be relatively easy to implement, while avoiding major administrative costs for taxpayers and tax authorities alike. It may also be a measure favourable to SMEs. The setting of the monetary threshold should reflect several factors, including the local economic and interest rate environment, as well as relevant tax or legal considerations.

This threshold may be reviewed and updated periodically to reflect changes in these factors.

From a comparative perspective in GCC countries, we note that the General Interest Deduction Limitation Rule under UAE Corporate Tax provides for a de minimis threshold, which applies

where the net Interest expenditure for the relevant tax period does not exceed AED 12 million (Ministerial Decision No. 126 of 2023).

6. Conclusions

We believe that the introduction of a General Interest Limitation Rule, incorporating a fixed ratio rule and group ratio rule, under Oman’s Income Tax would provide an effective framework to tackle most BEPS risks involving excessive debt financing. These rules should be accompanied by a series of other measures, notably defining the concepts of “interest” and “EBITDA”, allowing the carry-forward of disallowed interest expenditure, and setting a de minimis threshold and carve-outs for specific economic sectors. Eventually, besides a General Interest Limitation Rule, Oman might consider implementing targeted anti-avoidance rules that disallow interest expense on specific transactions showing particular BEPS risks.

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Tax Implications for Resident and Foreign Investors in the UAE Real Estate

Post author By Thomas Vanhee
Post date September 12, 2023

Tax Implications for Resident and Foreign Investors in the UAE Real Estate

Real estate is a thriving and dynamic sector within the UAE’s economy. This sector is an important source of foreign direct investment to sustain the UAE’s continuous growth, attracting many investors worldwide each year.

The treatment of income from immovable property under the new UAE Corporate Income Tax (UAE CIT) is, however, complex. An accurate analysis of the impact of UAE CIT on this sector is, therefore, crucial for both UAE and non-UAE individuals and companies to maximise their investment strategies.

The infographics below help you navigate the intricacies of the UAE CIT and its impact on your real estate investment strategy, whether you decide to invest in immovable properties in the UAE mainland or any of the over 40 UAE Free Zones.

Aurifer published a more extensive article on UAE CIT and Immovable Property. You can access and download it here.

Get in touch with our team of experts if you want to maximise your growth strategy by investing in the UAE’s thriving real estate market.

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UAE CIT and Immovable Property

Post author By Thomas Vanhee
Post date September 1, 2023

UAE CIT and Immovable Property

The treatment of income from immovable property under the UAE Corporate Income Tax (UAE CIT) can be complex.

Income from immovable property, whether derived from rent or sale, may be subject to UAE CIT at rates of 9% or 0%, or it might be exempt, depending on various circumstances.

A 9% UAE CIT rate applies to the income that a UAE company earns from real estate located both within the UAE mainland and outside the UAE’s territory. Conversely, a 0% UAE CIT rate is available in certain situations for income from immovable property located in UAE Free Zones (FZs) when earned by FZ entities recognized as Qualifying Free Zone Persons (QFZPs).

Income from real estate situated outside the UAE, when earned by UAE businesses, is taxable in the foreign country. Additionally, as of 1 June 2023, it is also subject to the UAE CIT. However, double tax relief might be available under double tax treaties (DTTs) that the UAE has concluded with other countries, or based on provisions within the UAE CIT law.

Whether you’re a UAE-based or an international business dealing with real estate in the UAE (either in the mainland or FZs) or abroad, this infographic will guide you through the intricate rules surrounding immovable property income under UAE CIT.

Check below to learn more.

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UAE’s New Tax Procedures Executive Regulations

Post author By Thomas Vanhee
Post date August 2, 2023

UAE’s New Tax Procedures Executive Regulations

The UAE has recently issued Cabinet Decision No. 74 of 2023, impacting its Tax Procedures. This Decision replaces the previous Executive Regulation on Tax Procedures and aligns it with the most recent version of the Tax Procedures Law, which was effective since 1 March 2023 but did not have Executive Regulations yet. The New Executive Regulation shall be effective from 1 August 2023.

The FTA has additionally issued guidance by way of a Public Clarification on Tax Procedures (TAXP006). The Public Clarification aims to highlight the differences between the previous and new Executive Regulations and provides additional clarification on the new provisions.

We have listed what we consider the most notable changes as per the new Executive Regulations:

Article 1 – Under the newly expanded definition, the term ‘Assets’ now encompasses not only tangible assets but also intangible assets such as patents, brands, licenses, trademarks, computer programs, copyrights, goodwill and customer lists.

The relevance of the expansion relates to the potential seizing of these assets and record keeping.

Article 2 – Businesses have an obligation to maintain “documents supporting the entries in the accounting records and commercial books”. This provision was broad in the new Federal Tax Procedures Law, and its execution was delegated to the Executive Regulations. It is now clear that the obligations include:
Business-related documents such as correspondence, invoices, tax invoices, licenses, and agreements/contracts.
Documents containing details of any election, determination, or calculation made by a taxable person in relation to its tax affairs, including the basis, method of estimation, determination made, and calculations performed, are required to be maintained.

In other words, this suggests, amongst others, that the working papers to prepare a CT return are also records that the FTA may consult.

Documents related to related party transactions and the circumstances under which such transactions were made, including transfer pricing documents, are required to be maintained.

We note, however, that Pillar Two companies and businesses with a turnover of more than 200M AED are already subject to the requirement to prepare a master file and local file under Ministerial Decision No. 97 of 2023. In addition to that, Qualifying Free Zone Persons also need to adhere to transfer pricing principles.

The takeaway here presumably is that no matter the size of the business, when there is a related party transaction, these need to be documented and analyzed. In other words, there seems to be no de minimis rule for related party transactions, which, particularly for SMEs, may pose certain challenges.

We note further that there is no guidance as to what are not considered business records. Do internal emails constitute business records? There seem to be little or no limitations to the audit power of the FTA.

Additionally, there seem to be no limitations to potential fishing expeditions nor to audits with one taxpayer to detect noncompliance with another taxpayer.

Article 3 – The New Federal Tax Procedures Law delegated this provision to the Executive Regulations. It specifies that the default record-keeping period is five years as from the year following the tax period to which they relate.

For real estate records, the period is seven years. Article 71(2) of the VAT Executive Regulations still states that it is 15 years, and the Capital Asset Scheme for VAT purposes requires a taxable person to monitor the use of a real estate asset over 10 years’ time. While the Executive Regulations to the Federal Tax Procedures Law could claim the lex posterior principle, it is unclear whether it would be a lex specialis. Irrespective of a potential academic discussion on the matter, it is likely that the law of the lowest common denominator will determine that taxpayers will still keep real estate records for 15 years.

The period for record-keeping is extended in case of an audit, dispute or voluntary disclosure, in line with the extensions of the statute of limitations made in the new Federal Tax Procedures Law.

Article 4 – Further contains requirements for the electronic keeping of records.
Article 5 – Previously, only documents in Arabic were prescribed for submission to the FTA. However, now taxpayers have the option to submit these documents in either English or Arabic. When submitted in English, the FTA may request a translation.

This provision is essentially legalizing a practice which was currently in existence, where many records were already submitted in English and accepted. The UAE courts system in recent years has been more accepting of the use of English, and the new Civil Procedures Decree-Law No. 42 of 2022 already foresaw the use of English in mainland courts as from 2023 onwards.

Article 6 – Businesses that are tax-registered with the FTA are required to promptly notify the FTA of any changes in their e-mail address, trade license, or legal status.
Article 7 – All licensing bodies responsible for issuing trade licenses to businesses in the UAE are now required to promptly notify the FTA with essential data and information on each business within 20 business days of the issuance or renewal of the trade license.
Article 10 – Taxpayers should submit a voluntary disclosure to rectify errors in the Tax Return, including errors that do not affect the tax due. The Clarification gives the example of imports of services made by a taxable person with a full right to recover input VAT or incorrect Emirates reporting.
Article 11 – The FTA can now notify individuals through various means, including text messages on mobile phones, notifications via smart applications, and notifications through the FTA’s electronic systems.
Article 12 – A natural person seeking to register as a tax agent must meet the minimum educational requirements and possess relevant experience in tax, accounting, or legal fields as per the new Executive Regulations.

The tax agent is no longer required to be proficient in both Arabic and English, as fluency in either language is now acceptable. Additionally, there is no need to submit proof of medical fitness to perform the duties of the profession.

This change is important and will substantially increase the number of available tax agents and will add to the diversity of available tax agents. There will be further Decisions providing a tighter framework of the tax agent concept. Organisations, i.e., Companies, will also be able to register as a tax agent (this was previously referred to as an “agency”).

Article 13 – The New Executive Regulations provides comprehensive guidelines and procedures for both listing and delisting tax agents by the FTA.
Article 14 – The New Executive Regulations introduces additional obligations for tax agents in addition to the ones specified in the previous Executive Regulation, such as, for example, meeting continuous development and record-keeping requirements.
Article 16 – The New Executive Regulations mandates that the FTA must provide a person with a minimum of 10 business days’ notice before initiating a tax audit. Despite this change, the general procedures, rights, and obligations related to the tax audit remain unchanged and in effect.

The New Executive Regulations do, however, include certain modifications and updates to ensure compliance with the latest tax regulations and practices.

Article 17 – Tax audits can be done on data stored electronically.

By conducting tax audits on electronically stored data, the FTA aims to enhance transparency and compliance in tax reporting. It enables the FTA to verify the accuracy of tax returns and ensure that taxpayers are fulfilling their tax obligations in accordance with the law. Having readily available electronic records also reduces taxpayers’ burden during the audit process, as they can provide the required information in a digital format.

The provisions presumably prepare for E-audits and audits of the E-invoicing records under the E-invoicing obligations, which will enter into force in July 2025.

Article 22 – A new provision was added in the new Executive Regulations where the FTA is now authorized to sell seized and abandoned goods that are perishable or susceptible to shortage or leakage.
Articles 23 & 24 – In cases of tax evasion crimes and deliberate failure to settle administrative penalties, individuals have the option to submit a reconciliation application to the FTA before any criminal proceedings commence. The application is made with the Federal prosecutor.

To be eligible for reconciliation, the person must commit to fully settling the payable tax and administrative penalties owed to the FTA as part of the reconciliation process. This measure allows individuals to rectify their tax-related misconduct and avoid further legal consequences by resolving outstanding tax obligations through reconciliation.

The new Executive Regulations provide additional details and guidance on the procedural aspects of the reconciliation.

Article 25 – The new Executive Regulations provide provisions for the extension of deadlines with 20 days for relevant tax assessment review requests, objections, accepting submissions, and reconsideration. The Tax Disputes Resolution Committee may also extend its period to decide on an objection by another 60 days and may even, in exceptional circumstances, accept a late submission of an objection by a taxpayer.
Article 27 – Upon the appointment of a bankruptcy trustee, the FTA must inform them about the due tax amount for the business subject to bankruptcy. If required, the FTA will also notify the trustee of its intention to conduct a tax audit for a specific tax period within 20 business days of the trustee’s appointment.

We note further that there is still no manager’s or director’s liability foreseen in the tax procedures law (see our earlier comments here).

The changes in the Executive Regulations are not substantial, and they are not meant to be, as substantial changes would need to go into the law. The changes around tax agents are important, though and will have an important effect on the sector.

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UAE Releases Cabinet Decision on CT Admin Penalties

Post author By Thomas Vanhee
Post date August 1, 2023

UAE Releases Cabinet Decision on CT Admin Penalties

The Ministry of Finance (“MoF”) published Cabinet Decision No. 75 of 2023, adopted by the UAE’S Federal Cabinet, outlining the Administrative Penalties for Violations of the Corporate Income Tax legislation. This new Decision is set to be effective from August 1, 2023. We’ve incorporate our own insights based on this Cabinet Decision. Read on to know more.

The following penalties apply for different violations related to CT compliance:

Failure to maintain the required records and information will result in a penalty of AED 10,000 for each violation. In case of repeated violations, the penalty increases to AED 20,000.

These are the same penalties as for VAT and Excise Tax violations.

Non-compliance with the request to submit tax-related data, records, and documents in Arabic will incur a penalty of AED 5,000.

This is a different penalty than for VAT and Excise Tax violations, where the penalty is AED 20,000.

Failing to submit a deregistration application within the specified timeframe will be penalised with AED 1,000 monthly, with a maximum cap of AED 10,000.

These are the same penalties as for VAT and Excise Tax violations.

Neglecting to notify the authorities of cases that may require amendments to the provided information will result in a penalty of AED 1,000 for each violation. In case of repeated violations within 2 years from the date of the last violation, the penalty increases to AED 5,000.

This is a different penalty than for VAT and Excise Tax violations, where the penalty is AED 5,000 for the first-time violation and AED 10,000 in case of repetition.

Failure of the Legal Representative to provide notification of their appointment within the specified timeframes will be subjected to a penalty of AED 1,000.

This is a different penalty than for VAT and Excise Tax violations, where the penalty is AED 10,000, and the penalty is due from the Legal Representative’s funds.

Failing to file a Tax Return within the timeframes will incur a monthly penalty of AED 500 for the first 12 months and AED 1,000 per month from the 13th month onward, whether by the taxable person is his legal representative.

This penalty is marginally lower than the failure to submit a VAT and Excise Tax return, which attracts a penalty of AED 1,000 for the first violation, and AED 2,000 for any subsequent violations.

Failure to settle payable tax will attract a monthly penalty of 14% per annum.

This somewhat intriguing formulation presumably means that the penalty will be prorated per month, which would result in a monthly penalty of 1.17%. This is comparably high and does more than just compensate for the value of money over time (even with high inflation). It also does not mention the starting date from which the penalty applies, presumably the filing due date of the CT return.

This again is different from VAT and Excise Tax, where the late payment penalty could potentially not apply in case of a Voluntary Disclosure before being notified of an audit and settling the VAT or Excise Tax on time (we note another penalty may be applied though which can range from 5 to 40%).

Submitting an incorrect tax return will result in a penalty of AED 500 (unless corrected before the deadline).

This penalty is again marginally lower than the failure to submit a VAT and Excise Tax return, which attracts a penalty of AED 1,000 for the first violation, and AED 2,000 for any subsequent violations.

Submitting a Voluntary Disclosure related to Tax Return errors will lead to a monthly penalty of 1% on the Tax Difference.

Presumably, this penalty would not apply when the taxable person incurs a loss, and there’s a negative change to the loss (i.e. after correction, there are more tax losses). It will remain to be seen what will happen to a change in loss, where after the correction, there are fewer tax losses (e.g. a company recorded a tax loss of 100, and after correction, it’s only 50). The described situation, in regard to losses, does require the compulsory submission of a Voluntary Disclosure.

The penalty provision is not comparable to VAT and Excise tax, where the equivalent penalty would range from 5 to 40%, and is also time-dependent but structured in a different manner. We encourage readers to check out our webinar, where we covered the 2021 changes to the UAE penalties regime for VAT and Excise Tax.

Neglecting to submit a Voluntary Disclosure in relation to errors in the Tax Return before being notified by the authority will incur a fixed penalty of 15% on the Tax Difference and a monthly penalty of 1% on the Tax Difference.

To write this provision in a positive way, it describes the penalties applicable to a business after it has been notified of an audit and it has not submitted a Voluntary Disclosure.

The penalty provision is not comparable to VAT and Excise tax, where the equivalent penalty would be 50% for violations detected during an audit. For VAT and Excise Tax, there is an additional penalty of 4% per month from the due date of the tax for the relevant tax return until the issuance of the Tax Assessment.

Failing to facilitate the Tax Auditor during the Tax Audit will result in a penalty of AED 20,000.

This provision is the same as for VAT and Excise Tax and is the exceptional stick the FTA will use in case of non-cooperation.

Not submitting or late submission of a Declaration to the Authority will lead to a monthly penalty of AED 500 for the first 12 months and AED 1,000 per month from the 13^th month onward.

This may be applicable to a range of requirements, such as the declaration to be filed on behalf of the partners in an unincorporated (transparent) partnership or the declaration to request for an exemption of CT (e.g. for a qualifying public benefit entity, a qualifying investment fund, a public pension or social security fund).

Key Developments in GCC International Tax Treaties – A 2023 Recap

Immovable Property Income in the UAE: Tax Implications for Domestic and Foreign Investors

Overview Draft KSA Income Tax Law and Draft Tax Procedures Law

UAE’s Corporate Tax Framework: Understanding Participation Exemption

30 Highlights about CIT Guide for Non-Resident Persons

Aligning Thin Capitalization Rules under Income Tax Law with OECD/G20 BEPS Action 4

Tax Implications for Resident and Foreign Investors in the UAE Real Estate

UAE CIT and Immovable Property

UAE’s New Tax Procedures Executive Regulations

UAE Releases Cabinet Decision on CT Admin Penalties

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