Category: GCC Tax

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.

GCC Tax Tax Updates

Aurifer’s submission for Pillar one – Amount B

Post author By Liam Purcell
Post date August 31, 2023

Businessman holding magnifying glass zoom and analyzing financial indicators

Aurifer’s submission for Pillar one – Amount B

Pillar One – Amount B Submission

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

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

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

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

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

1. GCC Perspective

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

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

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

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

2. Scope

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

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

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

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

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

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

3. Transfer Pricing Methodology

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

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

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

4. Pricing Matrix

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

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

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

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

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

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

5. Tax Certainty

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

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

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

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Working remotely tax free – not that simple

Post author By Thomas Vanhee
Post date May 9, 2023

Working remotely tax free – not that simple

The Government of Dubai launched a virtual working program for overseas employees wishing to relocate to Dubai whilst retaining employment in their respective countries. This program aims to enable individuals to utilize the economical and tax advantages associated with residing in Dubai, despite being employed in their countries.

While seemingly very attractive, unfortunately it is not that easy for these employees to ensure that their salary will be tax free. In addition, every case may be different. Of course the UAE does not impose Personal Income Tax, but that does not mean that the other jurisdiction will let go that easily.

One can broadly distinguish the following scenarios:

Scenario 1: No Double Taxation Treaty in place between UAE and country of employment

Nothing shall prevent the application of the Personal Income Tax Law of the country of employment. That country shall retain the right to tax the person on his employment income (but may choose not to tax the employment income).

E.g.: Jim is a US Citizen and and is employed by USCO. He decides to work from Dubai. The US tax authority still has the right to tax Jim.

Scenario 2: Double Tax Treaty in place between UAE and country of employment or tax residency and person does not qualify as tax resident in UAE

A non-resident in the UAE which is employed by a non UAE entity would still be taxed on his income in the state of his residence. Under the treaty, the country of residence would be obliged to provide double tax relief for taxes paid in the UAE. Even though the UAE has a primary right to tax, due to the fact that it does not tax employment income, the state of residence retains the right to tax the income of the employee.

As an exception, in cases where the country of employment applies an exemption system, the person may not pay tax in the country of residence and exercise his employment tax-free in the UAE.

E.g.: Roberto is a tax resident of country A, employed by a company incorporated in country A. Roberto moved to Dubai in December 2020 to benefit from the virtual working scheme. Roberto is not a resident in the UAE for tax purposes and is not aiming to be a resident in the UAE for the near future.

The Double Tax Agreement between country A and the UAE applies the credit method to eliminate double taxation, which entails that country A shall deduct from the taxes calculated, the Income Tax paid in the UAE. As there is no Income Tax in the UAE, country A shall request the tax due in totality and fully retain its right to tax.

The situation would differ if Roberto is a tax resident of country B and relocates to Dubai, and the Double Taxation Agreement between the UAE and country B applies an exemption method. Under the exemption system, any income which may be taxed by the UAE will be exempt from tax in country B. In the absence of the conditional subject to tax rule, the exemption system would effectively allow Roberto to escape the burden of Personal Income Tax in Country B, and pay no taxes in the UAE.

Scenario 3: Double Taxation Treaty in place between UAE and country of employment and the person qualifies as tax resident in the UAE.

This situation may lead to a so-called Dual Residency issue, where two jurisdictions consider a person a tax resident. Given that the person in our assumption qualifies as a tax resident in UAE in addition to being a resident in his country of employment as well, the tie-breaker rule would apply to determine the residency of that person.

On the basis of the tie breaker rule, it may not be that easy to consider a person who just moved as a tax resident in the UAE, if he still has his first home in the country of employment, and if his economic and social interest alongside his habitual abode are in the same country, and if he hold nationality in the country of employment.

In case the person is considered to be a resident in the UAE under the tie-breaker rule, the UAE has the exclusive right to tax, even if such right is not exercised. The other country may argue however that the person is neither liable nor (effectively) subject to tax in the UAE. What happens next depends highly on the other jurisdiction’s tax policy.

Given that there is no Personal Income Tax in the UAE, there are also no domestic legal criteria to consider a person a tax resident in the UAE. There is however a means to obtain a tax residency certificate, based on criteria prescribed by the UAE Ministry of Finance. To obtain such a certificate, the applicant amongst others has to be resident in the UAE for a period exceeding 183 days, and submit an annual lease agreement documented by the competent authority.

E.g.: Roberto in this scenario qualifies as a tax resident in the UAE and also in country A due to his employment ties in country A. Both countries may consider Roberto as a tax resident on under their domestic law. The dual-residency tie-breaker rule in the treaty between country A and the UAE, based on the OECD Model, dictates that Roberto’s residency shall be decided on the basis of:

a) Place of permanent home. If in both/none of the states then;

b) Centre of vital interest. If cannot be determined then;

c) Habitual abode. If in both/none of the states then;

d) Nationality. If national of both states;

e) Competent authority shall determine by mutual agreement.

If it is determined on the previous basis that Roberto is a resident of the UAE, he shall be taxed exclusively in the UAE because the job is executed in the UAE where he is resident even though the employer is resident in country A.

As a consequence, Roberto will effectively not be subject to any Personal Income Tax.

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

Post author By Liam Purcell
Post date April 12, 2023

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

Introduction

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

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

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

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

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

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

Where We Stand

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

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

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

Our Thoughts

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Pillar Two

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

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

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

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

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

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

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

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

Conclusion

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

GCC Tax

Tax exemptions for KSA Regional Headquarters

Post author By Thomas Vanhee
Post date March 25, 2023
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Tax exemptions for KSA Regional Headquarters

The Kingdom of Saudi Arabia (KSA), as part of Vision 2030, aims to diversify its economy and reduce its dependency on fiscal resources stemming from commodities.

Amongst others, Vision 2030 focuses on attracting more Foreign Direct Investment. It does so through incentivizing businesses to establish themselves in KSA. Additionally, subject to certain conditions, only businesses which are incorporated in KSA can still tender for contracts with the government and government agencies (i.e., any entities or agencies with public legal personality in KSA) from 1 January 2024.

The introduction of the Regional Headquarters Program (“RHQ”) fits in with Vision 2030. This joint initiative between the Ministry of Investment (“MISA”) and the Royal Commission for Riyadh City (“RCRC”), invites global companies with a presence in the MENA region to relocate their regional headquarters to the KSA, promising accessibility to the ever-expanding economy of Saudi Arabia and to be part of the 2030 strategic development goals.

Regional headquarters by definition refers to “the home or center of operations, including research and development, of a national or multinational corporation with no retail sales to the general public”. The eligibility requirements and further details for an RHQ are outlined by Invest Saudi, and can be found here.

Based on what is already known so far, the program offers a range of benefits and facilities for RHQs in KSA, although it remains to be seen at this stage whether RHQs will get to enjoy any tax holidays or incentives. Although often rumored, there is currently no legal framework to award such tax exemptions, until further notice.

This, in turn, brings the tax consequences in focus of setting up an RHQ in KSA. By nature, the RHQ will be a location for strategic and management functions, and possible support services. This triggers proper tax consequences. This article provides an overview of the tax implications following the setup of the RHQ in KSA within the context of the existing KSA corporate income tax framework.

Taxable revenue generated by the RHQ

For those that establish an RHQ in KSA, the legal entity through which the RHQ license will be operated, will be considered a tax resident in KSA based on its place of incorporation. If this is an LLC, its worldwide income is subject to tax in KSA.

The fact that its C-suite, and therefore assumed to be the decision makers, may potentially not be resident in KSA effectively, or take decisions outside of KSA, has no bearing on the tax residency of the RHQ, which is simply a KSA tax resident.

If, however, the place of effective management of such an entity is outside of KSA, the entity may have a second residency, which may create additional issues outside of KSA in the country where the entity would be considered as having a second residency.

Setting up the RHQ as a branch, and not as an LLC has its own challenges, especially around profit allocation.

While from a regulatory point of view the RHQ license does not permit commercial activities, the revenue generated will be subject to corporate tax in KSA. Under the existing corporate income tax framework, 20% corporate income tax will apply on the taxable income generated by the RHQ.

Given that the RHQ is aimed mainly at foreign investors, while a theoretical possibility, it is unlikely that the entity will be held by GCC nationals such that zakat will apply on its zakat base at a rate of 2.5% (the zakat base is calculated differently than taxable income for corporate income tax purposes).

While the entity’s activity is not of a commercial nature, from a tax point of view, it has key strategic functions sitting in KSA. The entity needs to comply with transfer pricing rules and needs to be remunerated for its functions. An entity which is a pure cost center and is therefore loss making continuously is not permissible from a transfer pricing point of view, not desirable and is likely to trigger an audit.

The RHQ’s functions, assets and risks will need to be analysed, and likely the outcome will be that its strategic functions need to be remunerated at arm’s length determined through a benchmarking analysis, while its less strategic functions, such as back office functions, would be considered as low value intra group services (“LVIGS”), where the nature of such services is considered supportive and supplementary rather than an element of the core business of the Group.

The OECD have a safe harbour for LVIGS transactions which include accounting and auditing, tax and legal services, IT services (when not part of the principal activity of the group), HR activities etc. KSA has endorsed those Guidelines.

Where services meet the definition of LVIGS, a simplified approach may be available, which would see the appropriate cost base identified for the LVIGS activities be recharged with a profit markup of 5% with no requirement for a full benchmarking analysis to support the arm’s length nature of same. However, documentation should be retained which supports the rationale for the treatment of the activities as LVIGS. This includes a Master File and Local File where intercompany transactions exceed 6M SAR annually.

Below is a table of the mandatory activities under the RHQ license, and the optional ones.

Mandatory RHQ Activities – Strategic direction	Mandatory RHQ Activities – management functions	Optional RHQ Activities
Formulate and monitor regional strategy	Business planning	Sales and Marketing Support
Coordinate strategic alignment	Budgeting	Human Resources, and Personnel Management
Embed products and/or services in region	Business coordination	Training Services
Support M&A	Identification of new market opportunities	Financial Management, Foreign Exchange, and Treasury Centre Services
Review financial performance	Monitoring of the regional market, competitors, and operations	Compliance and Internal Control
	Marketing plan for the region	Accounting
	Operational and financial reporting	Legal
		Auditing
		Research and Analysis
		Advisory Services
		Operations Control
		Logistics and Supply chain management
		International Trading
		Technical Support or Engineering Assistance
		Network Operations for IT System,
		Research and Development
		Intellectual Property Rights Management
		Production Management
		Sourcing of Raw Materials and Parts

Other pitfalls for newly incorporated RHQ’s?

KSA residents are obliged to withhold a tax from the amounts payable to non-resident entities for services (“WHT”). WHT applies on the gross income sourced by the non-resident entities from KSA at the time of payment by the KSA resident customer. The rate applied to the payments ranges between 5% to 20%, depending on income types.

However, subject to the double taxation treaties (“DTTs”) entered with KSA, non-residents from countries that have treaties with KSA may be able to avail of a WHT exemption or relief on the income generated. KSA has entered DTT’s with numerous countries outlining the extent to which tax may be charged and the potential relief available on the WHT application pertaining to profit repatriation, dividend, interest and royalty payments, among a few others. The list and overview of DTT’s can be found here.

KSA additionally has wide Permanent Establishment concepts, covering amongst others virtual Permanent Establishments. KSA also has a Force of Attraction principle, widening the scope of any profits allocated to a Permanent Establishment. This exceptional position from an international point of view tends to constitute more of an issue with non-treaty countries.

The Financial Times has recently published an article found here, which refers to how the taxation uncertainty is “paralyzing some people from doing things”, with fears among executives revolving around how the setting up of the RHQ in KSA could potentially give rise to a tax creep on the regional profits generated outside of KSA, allowing KSA to tax such profits under its domestic tax legislative, in the absence of tax treaties between KSA and other countries in the region.

These concerns are partially unfounded. If the activities described above are conducted in KSA, no other countries would be entitled to tax them. Their very nature would not make them particularly prone to Permanent Establishment risks elsewhere (although there may be residency risks elsewhere).

Where there is more of a valid concern, is around passive income, where DTT’s may help in reducing potential foreign withholding taxes and establishing a method for double tax relief to be used in KSA. It is therefore important that KSA continues to develop its DTT network.

Value Added Tax (“VAT”) considerations

In general, the place of supply in respect to both goods and services determines the applicable VAT regime. The supply of services by a KSA resident entity, including an RHQ, to a non-resident customer, who benefits from the service outside the GCC territory, is in principle subject to zero-rate for KSA VAT purposes. In order to apply the zero-rate, the supplier must ensure it can meet each of the criteria set out in Article 33 of the VAT Implementing Regulations.

This treatment should be appropriately accounted for in any invoices issued by the RHQ to its affiliates. Additionally, it will be important for the RHQ to monitor the activities/supplies undertaken in KSA which are subject to VAT and whether they will exceed the standard threshold of 375,000 SAR, requiring them to register for VAT in KSA.

Concluding thoughts

There is currently no tax exemption available for RHQ activities. The taxation of RHQ activities therefore has no specific angle to it. The attention point mainly turns towards Transfer Pricing and the appropriate arm’s length remuneration for RHQ activities. Given the potential mix of strategic, management and back office activities, these arrangements need to be analysed and appropriately remunerated.

We will potentially see more clarification from ZATCA or from MISA on the aspects of the RHQ program soon, and definitely more interest, given the very fast growth KSA is currently going through, and the multitude of megaprojects and smaller projects being developed.

As we have seen in the UAE for Qualifying Free Zone Persons, even if benefits are granted (0% in the case of the UAE), transactions need to comply with transfer pricing. Therefore, even if eventually RHQ’s are granted a tax holiday, the transfer pricing principles will remain very relevant.

GCC Tax

UAE Corporate tax makes tax structuring and conducting tax due diligence more relevant

Post author By Thomas Vanhee
Post date March 1, 2023
No Comments on UAE Corporate tax makes tax structuring and conducting tax due diligence more relevant

UAE Corporate tax makes tax structuring and conducting tax due diligence more relevant

Over recent years, Mergers and Acquisitions (M&A) activities in the Middle East have held steady, despite the challenging economic climate across the world.

Such feat can be credited to the economic strategies implemented by the countries in the region. The United Arab Emirates (UAE) has remained the top market for M&A activity, with 155 deals worth $17.2 billion (AED 63 billion) in the first nine months of 2022, according to reports.

Saudi Arabia has also launched initiatives that had a positive impact on M&A, such as Vision 2030, the privatization of state-owned assets, and industry consolidation.

With favorable business and UAE corporate tax policies, the Middle East has become a prosperous hub for trade and investment, leading to a steady stream of M&A activity as businesses seek to access new markets and generate additional revenue streams.

In this article, we provide insights on some of the basic concepts of how to manage the tax aspects of M&A transactions. We also discuss the nuances of the law pertaining to the direct and indirect tax regime in the UAE, and how these impact M&A.

Why conduct a Tax Due Diligence?

Conducting a tax due diligence helps to assess possible tax risks associated with the target company that the buyer plans to acquire, or the seller wishes to sell.

From the buyer’s point of view, a tax due diligence is required for the following reasons:

Ability to assess the target’s tax compliance,
Evaluation of any tax exposures or contingencies, and
Estimation of any potential tax costs or benefits of the transaction.

From the seller’s point of view, a tax due diligence is required for the following reasons:

Ensuring proper addressal of historical tax exposure to help reduce the risk of any future tax disputes or penalties,
Increase the value of the deal, and
Understand the tax implications of the transaction and potential tax planning opportunities.

A Tax due diligence can create value. A clean slate for the target, will reduce uncertainty, and therefore increase the deal value.

Negotiating the deal and managing risk

Deals can be structured in a variety of ways, of which the simplest ones are the negotiation of outright Asset Purchase Agreements or Share Purchase Agreements.

Some of the matters that the buyer may pay attention to following a due diligence are:

Adjustment of purchase price,
Negotiation of representation and warranties,
Inclusion of specific indemnity clauses, and
Removal or restructuring of tainted structures until the risks are mitigated, or resolution of tax disputes before the deal is concluded.

Some of the matters that the seller may pay attention to are:

Maximize the after-tax proceeds from the sale,
Structuring the deal in the most efficient way possible, and
Removing uncertainty on certain positions.

Often a tax ruling is highly critical in respect of the structuring of the deal itself. Having the tax authority rubberstamp the transactions helps in avoiding any future disputes.

A popular method is also to insure against the risks discussed above and to procure ‘Warranty and Indemnity Insurance’ (W&I Insurance). Essentially, W&I Insurance provides cover for losses arising from a breach of warranties and claims under tax indemnities.

This way, the benefit for the seller is that they access the sale proceeds immediately, rather than, for instance, having an amount blocked in an escrow. In turn, the buyer is protected from any unknown tax related loss, from the insurer directly, especially when the buyer is not convinced about the financial standing of the seller after closing.

From the insurer point of view, they require a thorough analysis of the tax due diligence report. This will determine any points of uncertainty, and to ensure that the scope of the insurance coverage is limited to the extent of their satisfaction, before quoting for a premium.

Read more on the importance and practice of obtaining tax insurance in the Middle East here.

Another important reason for protection against legal liabilities (during M&A transactions as well as more generally) is that sometimes, non-compliance may even trigger liability for the Directors and other executives of the company. In one of our earlier articles, we discussed the interplay with the personal liabilities of the Directors.

From Current structure (As Is) to Target structure (To Be)

Effective tax structuring is essential to mitigate the tax-related risks that can arise in M&A transactions—such as tax compliance, tax disputes, and transfer pricing. It usually involves carefully designing the structure of the transaction in a tax-efficient manner while ensuring compliance with applicable laws and regulations.

Pre-deal structuring may happen to make the Target more attractive, and Post-deal structuring may happen to align the acquisition better with the operation model of the buyer.

M&A and Direct Tax

M&A transactions have a profound accounting and valuation impact, both for the buyer and the seller. This in turn leads to a potential tax impact. For example, the M&A deal may revalue the assets and liabilities of the company, or the sale of shares may trigger a capital gain, a potential tax exposure.

Many jurisdictions have provisions under their law to reduce the impact of M&A transactions from a tax point of view, or otherwise address certain relief on certain types of reorganisations.

For example, under the UAE CIT Law, transfers of business are considered to be tax neutral and benefit from a temporary exemption of taxes, subject to conditions. This is the case where (i) businesses within the same ‘Qualifying Group’ are restructured (Article 26 UAE CIT law – we will not be covering these aspects here) or (ii) where the M&A transaction is eligible for a specific business restructuring relief (Article 27 UAE CIT Law).

The specific business restructuring relief allows sellers not to have to account for any potential capital gains (or losses) as a result of the transaction. Certain conditions need to be met, as shown below in Table 1.

Table 1 – Tax-neutral restructuring – status of parties and transfer details
Status of the transferor	The transferor is a taxable person
Nature of the transfer	Transfer of entire business, (or) an independent part of the Business (as the case may be)
Status of the transferee	The transferee is either: (a) already a Taxable Person (or) (b) will become a Taxable Person as a result of the transfer
Consideration	In exchange of shares or other ownership interests

Further, the conditions for availing the above benefits are as follows:

Value of shares received shall not exceed net book value of assets transferred or liabilities assumed (less the value of any other form of consideration received),
The transfer is undertaken as per the applicable laws of the UAE,
The taxable persons are either:
- Resident persons, or
- Non-Resident persons with a Permanent Establishment (PE) in the UAE,
Neither the transferor(s), nor the transferee(s) are ‘Exempt persons’ or ‘Qualifying Free Zone Persons’,
The Financial Years of all the Taxable Persons end on the same date,
The Taxable Persons prepare their financial statements using the same accounting standards,
The transfer is undertaken for valid commercial or non-fiscal reasons which reflect economic reality.

In terms of the consequences, in both situations for this benefit to accrue, the following must be observed:

The assets and liabilities shall be treated as being transferred at their net book value such that neither a gain, nor a loss arises,
Any unutilised Tax Losses incurred by the Taxable Person (transferor) prior to the Tax Period in which the transfer is completed may be carried forward to the Taxable Person (transferee), subject to conditions to be prescribed by the Minister. The law itself provides one condition. Where the taxable person transfers an independent part of its business, the unutilised loss carry forward benefit is only attributable to the extent of the independent part of the Business being transferred (this benefit is also subject to the change-in-control provisions discussed later).

The tax-neutral benefit is not available, and therefore there is a clawback, when any of the following occurs within 2 years from the date of the transfer:

The shares or other ownership interest in the taxable person (transferor or the transferee) are disposed of (in whole or in part) to a Person that is not a member of the Qualifying Group to which the Taxable Person(s) belong(s), or
There is subsequent transfer or disposal of the (independent part of) the business.

If any of the above activities occur within two years, the transfer of the (independent part of the) business shall be treated as having taken place at Market Value at the date of transfer, what is popularly known as the ‘claw-back provision’.

The unutilised tax loss carry-over benefit is also subject to the transferee conducting the same or similar Business or Business Activity, following a change in ownership of more than 50%. Relevant factors to decide if the Business or Business activities conducted are same or similar include:

The transferee uses some or all of the same assets as before the ownership change;
The transferee has not made any significant changes to the core identity or operations of its Business since the ownership change; and
Where there have been any changes, it is a result of the development or exploitation of assets, services, processes, products or methods that existed before the ownership change.

M&A and Indirect Tax

From an indirect tax point of view, it is important to note a difference between an ‘Asset Deal’ and a ‘Share Deal’.

An ‘Asset Deal’ is where the buyer acquires specific assets of the target company. The buyer does not acquire ownership of the target company itself. Instead, the target company continues to exist, and the buyer becomes the owner of the specific assets.

A ‘Share Deal’, on the other hand, is where the buyer acquires the target company by purchasing its shares. This gives the buyer full ownership and control of the target company, including all of its assets and liabilities.

Within ‘Asset deal’, there are two types of deals – (i) normal sale of assets (sale of assets) (ii) sale of assets as part of the Transfer of Going Concern (TOGC) (sale of business).

As per the clarification provided by the UAE FTA, a sale of assets is normally subject to VAT as a taxable supply. This is because only the specific assets, and not the entire business itself is transferred.

On the other hand, where the assets are sold as part of a transfer of a business as a going concern (“TOGC”), the transfer is not a ‘supply’ and no VAT is charged. For example, if the transferor sells the factory building, all the machines and transfers the rights from the employment and supply contracts, this is considered as a TOGC, and is not considered a ‘supply’ for VAT purposes. A similar understanding is given in the guidances to the Saudi Arabian VAT law, which explains the same concept referring to as a ‘Qualifying Transfer’. We have summarised the difference between an ‘Asset Deal’ and a ‘Share Deal’ in the below table:

Conclusion and Final Thoughts:

Tax advisors play a crucial role in structuring M&A deals. Over recent years, the GCC tax landscape has become increasingly complex. This is the result of a number of contributing factors, such as the introduction of VAT, frequent changes in local legislation, the implementation of the Base Erosion and Profit Shifting (BEPS) standards, increased transparency and disclosure measures (Ultimate Beneficial Ownership (UBO) reporting requirement, Common Reporting Standards / Foreign Account Tax Compliance Act (CRS/FATCA) standards, and a range of other changes.

In addition, taxpayers may have noticed an increased focus on enforcement by the tax authorities, which is evidenced by an uptake in tax audits and disputes.

We have tackled how new tax rules impact M&A deals before in one of our previous webinars, noting how tax advisory plays a critical role in M&A transactions, as tax issues can have a significant impact on the success of the deal and the post-merger integration process.

The UAE Ministry of Finance has designed a carefully balanced CIT system and has tried to avoid adversely affecting M&A transactions.

Going forward, the tax department’s involvement in the transaction will be much more important, and like in other jurisdictions, tax can sometimes make or break a deal.

The UAE CIT applies as from June 2023, but the involvement of the tax teams in the M&A deals from a UAE CIT point of view, has already started. The FTA will no doubt develop an important ruling practice important for the legal certainty around M&A Transactions.

GCC Tax

Scoring Tax Exemptions in Qatar

Post author By Thomas Vanhee
Post date November 1, 2022
No Comments on Scoring Tax Exemptions in Qatar

Scoring Tax Exemptions in Qatar

International sports bodies typically insist on obtaining widespread tax exemptions as a precondition to awarding the hosting rights to a bidder. This also applies for events organized by the Fédération Internationale de Football Association (FIFA). FIFA’s biggest event, the Football World Cup, will kick off later this month in Qatar.

Obtaining tax exemptions is such a sensitive topic for sports organizations that there have even been instances where the events have entirely moved to another country because a country was unable to grant the exemption. For example, the T20 Cricket World Cup was moved from India to the United Arab Emirates (UAE) and Oman last year because the Indian Government did not offer the exemptions in time.

In Qatar, even though Qatar has Free Zones, only the Qatar Financial Centre (QFC) issues its own tax framework. It applies next to the general tax framework applicable in the rest of the State of Qatar. We will be looking at these frameworks in this article.

Claiming Tax Exemptions (Substantive Aspects)

For mainland Qatar, Ministerial Decision No. 9 of 2022 (Ministerial Decision) issued earlier this year on 25 August 2022 = provides details on the exemptions available to different parties, based on Government Guarantee No. (3) dated 22 February 2010 (Government Guarantee) issued by the State of Qatar to FIFA.

The most comprehensive exemption benefits are provided to FIFA itself and its affiliates (whether residents or non-residents). They are totally exempt from any taxes.

Contractors are granted a limited exemption to the extent of all taxes on import, export or transfer of goods, services and rights related to the activities of the World Cup, if the goods are imported for their use by:

The Contractors themselves in Qatar,
The Contractors, with the possibility of re-exporting the goods,
The Contractors, with the possibility to donate to sports entities, charitable foundations etc.

Individuals employed or appointed by the following, are also exempt from individual taxes on payments, fringe benefits or amounts paid or received in relation to the World Cup, until 31 December 2023:

FIFA,
FIFA’s affiliates,
Continental or National Football Associations,
Event broadcasters,
Suppliers of goods,
Works contractors and
Service providers.

This exemption also covers Personal Income Taxes for those individuals who enter and exit Qatar between 60 days before the first match (21 September 2022) until 60 days after the final match (16 February 2023), as long as they do not permanently reside in Qatar. This exemption may be void of much effect, given the absence of Personal Income Tax in Qatar.

An Exemption from Excise tax is to be obtained by way of refund, by providing documents like purchase invoices and bank details.

Claiming The Exemptions – Logistical Aspects

For exemptions granted by the General Tax Authority (GTA), there is no requirement to register with the GTA. Instead, FIFA (through the Supreme Committee for Delivery and Legacy (Supreme Committee)) prepared a list of exempted entities and individual, containing data such as the nature of contracted works, term and value of the contract, and the residency of the contracting party.

The Supreme Committee then provides the GTA the relevant documentation (Articles of Associations of companies, addresses of individuals etc.) in regard to the organisation or individuals for whom the Tax Exemption is applied.

For claiming customs duty exemptions with the General Authority of Customs (GAC), (and unlike the procedure with the GTA), the claimants need to register with the GAC.

Here too, FIFA approves the list for the Supreme Committee to provide to the GAC to entitle those entities to exemptions from customs duties and fees. Based on this list, the GAC provides the listed entities amongst others with facilities in regard to electronic customs clearance.

In this regard, the GAC also earlier this year launched a ‘Sports Events Management System’ to facilitate customs procedures during sporting events, including the World Cup. This system provides electronic services for the clearance of goods, including easy registrations, accelerated customs procedures, and the inclusion of a special unit to facilitate approvals for incoming shipments.

There may be some interesting questions on the applicability of the Ministerial Decision, including:

To what extent are the activities ‘directly or indirectly’ related to the activities of the World Cup? For example, does it include online betting platforms involved in placing bets on the matches? Would it include businesses that are involved in ancillary aspects to the World Cup such as general tourism consequent to the World Cup?
Would match fee or advertisement / sponsorship / award income earned by the footballers in relation to the World Cup also be covered under the Ministerial Decision?
Where an event broadcaster obtains substantial advertisement income from brand sponsors during the broadcast of the match or match related activities, is such income also exempt from taxes?

QFC – Tax Exemption Regime for the World Cup

The QFC in its Concessionary Statement of Practice (Statement) explicitly provides that a QFC entity which is a:

FIFA subsidiary – is exempt from Corporation tax and any other charge, levy, penalty or interest related thereto;
FIFA Host Broadcaster or a Local Organizing Committee (LoC) Entity – is exempt from Tax ‘in relation to taxable profits that are derived from activities carried on for the purposes of the World Cup’.

The major conditions for such QFC entities to claim the exemption are as follows:

Such QFC entities have genuine economic substance in Qatar,
The QFC entity operates in terms of the license and upon authorization of the Qatar Financial Centre Regulatory Authority (QFCRA),
An Advanced Ruling has been applied for by the QFC entity and granted by the QFC, confirming the exempt status of such QFC entity,
The QFC entity is included in the list provided by FIFA to the QFC Tax Department,
The sole or main purpose of such QFC entity is not avoidance of tax,
The QFC Tax Department is satisfied that granting the exemption is not in breach of international tax principles set out in the BEPS Project minimum standards.

The potential activities that can be developed in the QFC are limited, and therefore not all types of businesses can set up in the QFC.

No VAT – No VAT Exemption

Even though Qatar is a part of the GCC VAT Agreement and committed to implement VAT in the same vein as its neighboring countries of the UAE, Kingdom of Saudi Arabia (KSA), Bahrain and Oman have done, it has not yet enacted any legislation.

Therefore, there is currently no need for a VAT exemption for the World Cup. Who knows, VAT may be introduced shortly after the organization of the World Cup?

Exemptions Worth the Trouble?

Granting tax exemptions for international sporting events are sometimes controversial. The public in some hosting countries do not always believe they receive a return on investments from the event. While Qatar has spent substantial amounts of money on the construction of infrastructure, the effect of the tax exemptions is rather limited, and at least for Qatar, it seems to have been worth the investment. In any case, the exemptions are a precondition, without which a country cannot bid. After the UAE had hosted the FIFA Club World Cup a number of times, Saudi Arabia will now be looking at hosting the Asian Winter Games in 2029. Those countries have given similar tax concessions to the international organizations managing the events.

For future possible events in the UAE, it will also be interesting to see how the sporting organizations and the tax authorities will deal with the Corporate Income Tax (CIT) which is to be introduced in the UAE in June 2023. The relationship may be anything between an unbridled and full-fledged exemption (if the UAE is willing to do so), or it may lead to rather interesting tax claims (like the Formula 1 case on Permanent Establishment (PE) in India a few years ago, which was decided by the courts in the tax authority’s favor). Time alone can tell.

GCC Tax

Taxation of Non-Fungible Tokens – Musings observations and interrogations.

Post author By Thomas Vanhee
Post date July 1, 2022
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Taxation of Non-Fungible Tokens – Musings observations and interrogations.

Taxation of Non-Fungible Tokens – Musings observations and interrogations.

Non-Fungible Tokens (“NFTs”) have been hot, although the market seems to be cooling down as of late. According to a recent Bloomberg article though, there are still monthly NFT sales for an approximate value of 1bn USD. As trade value reduces, The Bored Ape seems to be boring its potential customers now. With the drop in the value of cryptocurrencies this may also affect the value of NFT’s.

Different countries have taken different tax positions on income derived from their supply, and on supply of NFTs (and some countries are yet to take a position).

When an NFT is sold, it is a digital representation on the blockchain of an artistic work or other object (e.g. trading cards, images, music, gold bars, diamonds etc.). The NFT grants the purchaser certain rights of use, although a precise legal framework is lacking in many jurisdictions. It is said that the blockchain ensures a digital title deed or proof of digital ownership.

When transferring an NFT, the underlying asset is not transferred. The NFT is a unique, non-interchangeable item. By way of an example, an NFT could be a digital representation of a painting featuring a monkey, but not the painting featuring a monkey itself.

In this article, we discuss the (possible) treatment of NFTs in different jurisdictions and the potential application of existing VAT and Corporate Income Tax (“CIT / CT”) laws on NFTs. Our article builds on an earlier analysis of the VAT treatment for cryptocurrencies, which you can find here).

VAT – between electronic services and regular taxable services.

As far as NFTs are concerned, the fact that these are usually paid with cryptocurrencies is not relevant. A sale of an NFT will raise the same questions on whether it is taxable, regardless of the mode of payment, whether the payment is made in regular (fiat) currency, crypto currency or in kind.

Currently, the most debated question is whether the sale of an NFT is subject to VAT or not? To answer this question, we examine the positions taken by some countries.

Firstly, it is important to note that NFTs are treated as services for VAT purposes under EU VAT law, as they do not constitute a supply of tangible assets.

In Spain, the Tax Authority (Dirección General de Tributos, the “STA”) issued an interesting ruling (V0482-22 of March 10, 2022). Fernando Matesanz discusses in his article the scenario of a natural person transforming photographs to produce unique pieces using photoshop-transformed illustrations. He then auctioned them on the internet through digital platforms that were not authorised to provide the real identity of the buyers (nicknames were adopted).

The STA held that the sale of an NFT is a supply of service, more specifically an Electronically Supplied Service (“ESS”), based on the fulfillment of the following tests: (i) automated and require minimal human intervention and (ii) are not feasible without information technology.

One major concern raised by many Spanish suppliers of NFT’s was that the identity of the acquirers was not disclosed to the supplier, given the nature of the transaction on the blockchain. Therefore, the difficulty was that the seller would not have been certain if Spanish VAT ought to be accounted for or not. If the buyer of the NFT would be abroad, no Spanish VAT would apply.

In our view, the qualification by the STA as an ESS is at least debatable. One school of thought can be that there is nothing automated about a digital representation of a(n artistic) work. It is a mere representation of an underlying asset. An NFT is a far cry from the traditional electronically supplied services, such as streamed music or movies. The ESS definition also does not refer to the requirement, or absence thereof, of a legal entitlement to an underlying asset.

At the same time, another school of thought can also exist, especially considering the facts of the Ruling, that while the act of using the photoshop software certainly requires human intervention and skills, the overarching representation (being the subject matter of the sale in question) which is generated via the blockchain itself does not require any human intervention. This latter view is supported by a Spanish tax expert, Rubén Bashandeh.

Fernando Martesanz’ article equally highlights the issues in determining the location of the supplier. Additionally, it flags the issues around the interpretation of the Use and Enjoyment rule which may localize the service in Spain, even if the regular place of supply rules determines these services outside the EU.

The UAE mandates the Use and Enjoyment rule (special place of supply rule), as a base rule for ESS and not as an exception to the normal rule to avoid double or non-taxation. It locates the service in the jurisdiction where services are used and enjoyed. The practical issues with this type of identification are well known.

Even if somehow, it can be established that the purchaser, say in the UAE, can be verified to have used and enjoyed the NFT in the UAE itself, or if a UAE supplier would adopt a conservative position on the matter, then the UAE would certainly be considered an attractive jurisdiction, given that the VAT rate is only 5% as compared to as high as 27% in some European countries or other jurisdictions.

A view similar to the Spanish Ruling was shared by the Belgian Minister of Finance, who recently stated in Parliament that he considers such a sale of an NFT akin to any other sale and therefore, in the view of the Finance Minister, an ESS.

In Switzerland too, as per the opinion of Cyrill Diefenbacher and Ollin Söllnerm in their article, the sale of NFTs would also qualify as ESS as Swiss VAT law is relatively aligned with the EU VAT laws. The authors also rightfully refer to the VAT exemption for creators of artwork which may apply, and which are common across multiple jurisdictions (but not the GCC).

The experiences that the UAE, or the broader Gulf Cooperation Council (“GCC”), can borrow from Europe are rather limited. NFT’s also do not seem to be as relevant in the other GCC countries.

Given their continued importance, other jurisdictions are bound to take position on the matter. With the VAT systems in the UAE and GCC being relatively new, an opportunity presents itself to align the tax framework with technological developments.

Income Tax – speculative income or regular income?

In the GCC countries, the sale of NFTs by a private person would not be subject to any form of taxation, given the absence of personal income tax. If the sale is made by a corporate (or an establishment), this may be different.

NFTs are taxed and regarded as property in most countries. There exists a distinction between (i) a taxpayer who creates NFTs and (ii) merely purchases or sells NFTs. The creation does not usually trigger any income tax. However, once the NFT is sold or otherwise transferred, the gain from the sale or transfer may be subject to tax.

In Switzerland, the tax treatment of NFTs depends on whether NFTs are considered private assets (not subject to tax) or business assets (subject to income tax). According to the Swiss definition of business asset, any individual participating in a “self-employed activity” and making a profit would be subject to income tax on the purchase and sale of NFTs. The same above cited article states that the key criteria to consider in establishing such an activity would be the transaction volume and potential use of debt to finance the transaction.

In our view, the above criteria would hardly apply to the UAE because the trigger of CIT in the UAE will be based on whether the individual is (required to) have a license or a permit to conduct the trade in the UAE.

With the UAE bringing in business tax (perhaps a more appropriate word for a corporate tax that taxes individuals), that legislative framework needs to be considered too. There is no difference made between speculative income and regular income, although the UAE does distinguish between passive and active income, stating its intention to tax only active income of natural persons.

In the US, the Internal Revenue Service (“IRS”) guidance on taxation of digital assets is sparse. Yet some authors referred to below have opined on how the taxability of NFTs would be played out. Section 197 of the Internal Revenue Code potentially allows taxpayers to amortize their adjusted basis in their NFTs over 15 years, as NFTs are considered intangible assets. However, this section can only apply to taxpayers other than creators. In the opinion of these authors, ”Amortization deductions would be allowed, and any potential losses such deductions generate would also be allowed as long as the taxpayer meets all of the loss limitation rules.” It remains to be seen what tax payers will actually hold NFT’s for 15 years.

In the US, a dealer (one who buys and sells NFTs as a business) seems to be taxed on the sale of NFTs as ordinary income. Both dealers and creators could deduct business expenses relating to the sale of the NFTs (this includes the cost of the acquisition of the NFTs) and where the sale amounts to a loss, US regulations would allow for a deduction against other ordinary income for the dealers (see here). Lastly, regarding depreciation, it seems that NFTs would not be subject to depreciation due to the fact that their useful life is hardly determinable.

In India, the tax law was recently amended to introduce a charging section for income earned from Virtual Digital Assets (“VDA”) (which includes NFTs). It is a separate provision separate from provisions on business profits or capital gains. Given the intention of the Government of the UAE to have a relatively simple and business friendly tax system, it is unlikely that the UAE would follow the Indian route. The separate charge is heavily criticized as detrimental for the NFT trade in India.

In Denmark, the Tax Assessment Council in Denmark (Skatterådet – the highest administrative tax assessment authority), has taken the position that the gains derived from the sale of NFTs would be considered ‘business income’, at least in the particular case at hand.

In this case, a software engineer earned substantially higher income than his salary by selling NFTs (crypto art). The Tax Council in Denmark held that given his intention and professional abilities, the activity is more appropriately considered to be business income.

We can imagine that if a similar scenario would be considered in the UAE, a similar outcome would ensue, despite the fact that the revenue would be earned by an unlicensed person. A one-off gain on account of sale of an NFT may receive a different treatment though.

VARA – Virtual Asset Regulatory Authority.

Government entities and regulatory authorities have also jumped on the NFT bandwagon. In March 2022, the Emirate of Dubai enacted the first legislation relating to virtual assets (Law No. 4 of 2022 on the Regulation of Virtual Assets) creating a new regulatory authority, i.e., Virtual Asset Regulatory Authority (“VARA”) which would provide the legal framework for regulating the trading of virtual assets such as cryptocurrencies and NFTs.

The creation of VARA marks an important step in the Emirate’s journey in becoming the leading hub for Virtual Assets. However, this first step toward virtual asset regulation in the UAE has not yet addressed taxation issues. As for tax purposes, the recent law does not provide clear information on the taxation of such assets but simply states that a person engaging in “services related to offering, and trading in, Virtual Tokens” will require a permit from VARA (Art 16 (a) 7).

Uncertain Space – Uncertain Times!

In conclusion, we will have to wait and see the position that the Government of the UAE, and insofar as relevant, the other GCC governments will take on the VAT and CIT implications of NFTs.

As discussed above, each scenario would require a case-by-case analysis and there is no straitjacket formula available on the CIT issues. As for VAT, it seems considering NFT’s as services is a sensible approach.

We will need to keep a close eye on other countries’ positions and determine the position that fits most appropriately within the tax system of the UAE, and the GCC. Uncertain and equally exciting times are ahead of us.

GCC Tax

Is tax insurance used much in the Middle East?

Post author By Thomas Vanhee
Post date May 5, 2022
No Comments on Is tax insurance used much in the Middle East?

Is tax insurance used much in the Middle East?

What is Tax Insurance and why use it?

Planning and protecting for tax risks identified during the due diligence process through the purchase of a specific insurance product has become increasingly commonplace in the last five years. Indeed, the tax insurance market has grown significantly year-over-year, and it is estimated that over $100 billion of specific tax risk was insured globally in 2021. This, of course, is in addition to those unknown and unquantifiable tax risks that are covered by warranty and indemnity (W&I) policies that are now standard in most transactions and, notably, in private equity, real estate, and infrastructure mergers and acquisitions (M&A).

Despite the booming market globally, there are still several regions where the tax insurance market has yet to take off, including the Middle East, even though M&A activity in the region is buoyant, with more than 650 transactions completed in 2021 and a combined deal value of close to $90 billion. Admittedly, there are several contributing factors, with the most significant being the fact that, historically, the tax regimes in the region have been extremely limited or non-existent and unpredictable. However, this position has been evolving steadily in the last 48 months with the introduction of value-added tax (VAT) and excise tax and is now accelerating following the announcement of the BEPS 2.0 implementation, and the ensuing implementation of Pillar 1 and 2. Most recently, we have seen the United Arab Emirates (UAE) announce that they intend to introduce corporate tax at a rate of 9 percent from June 2023.

While there is every intention for the newly introduced corporate tax regime in the UAE to be simplistic and straightforward, the continued presence of free trade zones, in which corporation tax will not be levied, and other issues add uncertainty and opportunities for abuse. As a result, the expectation is that the legislation and supporting guidance will quickly grow and the level of complexity will increase. In the context of M&A transactions, this will likely increase those instances in which significant tax risks may be identified and need to be handled.

Why Is Specific Tax Insurance on the Rise?

Specific tax insurance is especially popular in a competitive auction process as it allows a potential purchaser to protect themselves from the risk identified, in the event it unwinds to a cash tax liability, while ensuring their bid remains competitive as they will not need to request a price adjustment or contractual protection such as a warranty or indemnity. Such price adjustments or contractual protection may make a bid less attractive.

Vendors are also in favour of it as it mitigates value lost through purchase price adjustments for risks that may never materialise and/or lowers the risk of having funds tied up for long periods in escrow or set aside to cover potential indemnities should they be triggered in the future.

There are other strategies to manage risks, such as:

one party accepts the risk (and there is a corresponding adjustment in the deal value),
eliminating the risk, e.g., by disclosing the risk it materialises, and the uncertainty is removed,
pre-deal planning in which the tainted structure is removed or structured in a way that risks are mitigated e.g., deferring the deal until a holding period is met.

What is the Purpose of W&I Insurance? The purpose of a W&I policy is to protect against risks that are unknown at the time a deal is complete. In doing so, the seller is able to access the sale proceeds immediately rather than, as stated above, have any amount placed in escrow or price-chipped. Meanwhile, the buyer is protected as it can recover any unknown tax-related loss directly from the insurer. In return for providing the W&I policy, the insurer will expect a premium to be paid in return for the risk they are taking on. The size of this policy will depend on a number of factors such as the jurisdictions in which the relevant company operates and the level of due diligence carried out in relation to it.

Typically, the insuring party will want sight of the tax due diligence report and will raise a number of questions with the report preparer to clarify any points of uncertainty and understand the level of work that has been carried out, together with any limitations to the scope. Following this process, they will indicate the expected premium to insure the warranties and indemnities package. The process can be quite extensive, especially when large risks are insured.

Who Needs Specific Tax Insurance? In a tax due diligence process, especially given the ever-increasing level of anti-abuse or anti-avoidance legislation, it is not uncommon for a tax risk to be discovered that, while low in terms of likelihood of crystallisation, is significant in terms of quantum.

Naturally, a buyer would not want to be exposed to this amount should it crystallise, but attempting to protect against it through a purchase price adjustment or specific indemnity is likely to make their bid uncompetitive. Alternatively, a buyer may reach out to an insurance broker who will look to find an insurer to underwrite the risk. The underwriter would typically want a piece of work to be undertaken by a reputable advisor to analyse the risk, quantify it and set out the likelihood of it crystallising. Thus, they would look to price the premium for insuring it accordingly. It should be noted that most insurers will cover the cost of defending the risk and interest and penalties arising, as well as the tax liability itself.

Outside of the deal process, a common use of specific tax insurance is to protect against withholding tax risks of repatriating funds from subsidiaries back to parent companies. As a result of landmark case law, tax authorities (in particular those in Europe) are increasingly scrutinising and disallowing double tax treaty benefits of reducing withholding tax if the relevant tax authorities do not believe that the recipient of the repatriated funds has the sufficient “substance” to benefit from the double tax treaty, or it is not the true ultimate beneficial owner of such repatriated funds (the “beneficial owner” test.) The premium for insuring withholding tax risks will ultimately depend on the facts and circumstances, but premiums can range from two percent to eight percent of the potential tax exposure. For those Middle Eastern focused businesses that are aware of tax insurance, it is most likely that they have encountered it in this context.

How Can We Help?

While this market has yet to fully take off in the Middle East, a number of international insurance brokers and underwriters are increasing their presence in the region. As the tax regime in the region develops and, as we predicted, increases in both complexity and scope, we would expect to see tax insurance increase in relevance in the context of M&A transactions.

Aurifer will be co-hosting a webinar with one of our strategic partners in the region, Alvarez & Marsal, to talk our Middle Eastern clients through tax insurance in further detail and discuss how it may apply to M&A transactions in the region going forward. We look forward to seeing you all there. Registrations will open soon. If you wish to already register, drop an E-mail to lovely@aurifer.tax

GCC Tax VAT

VAT on healthcare comparatively in the GCC

Post author By Thomas Vanhee
Post date December 5, 2021
No Comments on VAT on healthcare comparatively in the GCC

VAT on healthcare comparatively in the GCC

Below we analyse in a comparative manner how the VAT regimes apply to the health care sector in the GCC Member States which have implemented VAT so far, which are the UAE, KSA, Bahrain and Oman. As for Qatar and Kuwait, we are still expecting further announcements from the governments there as regards to the timeline of the implementation. It is still expected they will implement at some point.

Medical Care

The principal supply within the healthcare sector is the direct medical care given to patients by medical practitioners. In today’s world of modern medicine, this encompasses a long list of services and related products. This includes, for example, the basic doctor to patient care, specialist medical treatments within clinics or hospitals, dental or optician services, and physical and mental therapies.

Most VAT regimes around the world implement exemptions (with no recovery of VAT on associated costs) for healthcare, as a basic human need. The affected businesses are often partially state funded through grants and other mechanisms.

The GCC VAT regime has also considered this approach, however zero-ratings (which give deduction of VAT on associated costs) have mainly been favored across the region, in order to shield the sector during initial implementation from aspects such as price inflation and supply/demand economics. This has been different only for Oman.

VAT treatment for health care services

Article 29 of the GCC VAT Agreement gives Member States the option to apply an exemption or a zero rate to the healthcare sector. Therefore, the option to exempt, zero-rate or standard-rate some or all of the healthcare sector transactions (in goods and services) is at the discretion of each member state. While the GCC VAT Agreement discusses sectors, from a VAT point of view there is no such thing as a sector exemption. Only transactions can be exempt.

The UAE, as per article 45 of Federal Decree-Law No. 8/2017 on Value Added Tax, and Bahrain, as per article 53 of Bahrain Decree-Law No. 48/2018 on Value-Added Tax, have applied the zero-rating to preventative and basic healthcare services and related goods and services which are necessary for the treatment of a patient and are administered by licensed healthcare providers. This includes, for example, hospitals, mediclinics, doctors, nurses, dentists, and pharmacies.

Article 69 of Bahrain Resolution No. 12/2018 Issuing the Executive Regulations of the VAT Law provides further insights on the types of transactions falling within the zero-rating, such as treatment of mental illness, speech therapy and sight/hearing tests.

Similar to other global VAT regimes, article 41 of Cabinet Decision No. 52/2017 on the Executive Regulations of Federal Decree-Law No. 8/2017 on Value Added Tax in the UAE and article 69 of Bahrain Resolution No. 12/2018 specifically exclude elective cosmetic treatments from the zero-rating.

The KSA has applied the standard VAT rate of 5% (now 15% since 1 July 2020) on all private healthcare services, unless they are provided to Saudi nationals. For Saudi nationals, effectively, a zero rate has been implemented.

Public healthcare services are kept outside of the scope of VAT. This means that they also cannot recover any input VAT, unless they fall under the refund scheme for government entities.

In Oman, the legislator has settled on a policy to exempt health care services and related goods and services (article 47, 2 Omani VAT Law). This is much in line with EU VAT systems. Its implementation has an adverse impact on the input VAT recovery for businesses making such supplies (e.g. hospitals). Given the very recent implementation, with the application of VAT as of 16 April 2021, there is currently no guidance available in Oman.

UAE
- Scope healthcare services: Zero rate for preventive and basic health care
- Definition: Made by healthcare body or institution, doctor, nurse, technician, dentist, or pharmacy, licensed by the MoH or by any other competent authority, and relate to the wellbeing of a human being
- Inclusions: none
- Exclusions: Elective treatment, Establishments constituting principally holiday or entertainment accomodation
KSA
- Scope healthcare services: OOS for government entities, refund for citizens when private institutions, otherwise 15%
- Definition: none
- Inclusions: none
- Exclusions: none
Bahrain
- Scope healthcare services: Zero rate for preventive and basic health care
- Definition: Qualifying medical Services provided by qualified medical professionals or qualified medical institutions
- Inclusions: General medical health Services, Specialist medical health Services, including surgery, Dental Services, Services related to the treatment of mental illnesses, Occupational or surgical health Services, Speech therapy, Physiotherapy provided by a qualified medical professional, Sight and hearing tests, Nursing care (including care in a nursing home), Services relating to diagnosing an illness, including the analysis of any samples and x-rays, Vaccinations, Health testing and screening that is undertaken under a local law, documented policy or contractual obligation.
- Exclusions: Services of a commercial or investment nature, Cosmetic procedures
- Other: Qualified medical institutions are hospitals, physiotherapy centres, medical centres, private clinics, alternative medical centres and clinics for practicing any supporting medical professions licensed by the National Health Regulatory Authority, or under supervision of MoH. Qualified medical professionals are licensed as practitioners by the National Health Regulatory Authority or under any other Authorized medical body, such as: Medical practitioners, Midwives, Nurses, Mental health specialists, Dentists, Opticians, Radiologists, Pathologists, Paramedics, Pharmacists.
Oman
- Scope healthcare services: Exemption health care services and related goods and services
- Definition: Services provided by Medical Professionals or Medical Institutions
- Inclusions: General Medicine Services, Medical specialty services, Dental services and laboratory work, Psychiatric services, Physical therapy services, Nursing services in hospitals, nursing homes or similar licensed institutions, Legal midwifery services, Diagnosis and treatment of diseases and individuals, Service of surgical, reconstructive and cosmetic surgeries.
- Exclusions: None

Ancillary services

Often when a patient requires medical care, they will need various types of diagnostics, tests, prescriptions, hospital or respite stays, products or devices, transportation, accommodation, and more to support their treatment. In other words, there may be many ancillary goods and services supplied. The ancillary services generally follow the treatment of the main supply (out of scope, exempt, zero rated, or standard rated).

From a VAT perspective, these ancillary services introduce an extra layer of complexity, as the VAT rules are applied on a transaction-by-transaction basis.

The VAT rules do however recognise that when various goods and/or services are supplied together, at times for one single consideration, there may be one principal supply and VAT treatment, with the other supplies ancillary in nature (i.e., a single composite supply). Alternatively, each good and service may be an individual supply in its own right, with an aim in itself and individual VAT treatments applicable (i.e. multiple supplies).

Given the presence of the various regimes in the GCC, taxpayers may resort to wanting to include as many items as possible in the applicable zero rates or exemptions (despite the input VAT deduction limitation for exemptions). To mitigate this risk, in KSA, ZATCA states that “Private Healthcare Providers should not seek to artificially value zero-rated medicines and medical goods supplies at a higher value than commercially appropriate, and should be able to provide support of the commercial pricing adopted upon request.” (ZATCA Healthcare Guideline , Section 4.2).

Some jurisdictions have specifically taken a position in regard to the VAT treatment applicable to ancillary services, when these are not considered to be part of a single composite supply.

United Arab Emirates

Ancillary goods necessary for the supply of such healthcare services supplied in the course of supplying a Person with zero-rated healthcare services are also zero rated.
Accommodation for patients: Other than holiday/entertainment accommodation, this is to be zero-rated as healthcare or residential accommodation.

Bahrain

Ancillary goods and services are also zero rated when they are an integral part of the Healthcare Services and are provided together with the qualifying medical Services. These are for example:
1. Drugs, medicines, bandages and other medical consumables administered or used during the course of performing qualifying medical Services,
2. Laboratory Services performed by qualified persons,
3. Transport Services for patients or those injured,
4. Accommodation and catering Services provided by a qualified medical provider to its patients,
5. Mortuary Services provided by qualified medical providers,
6. Medical consultations provided remotely by means of electronic communications such as telephone or video link.
Not considered as ancillary to the health care (and therefore subject to the standard rate) is the following:
1. The Supply of food and beverages to any Person who is not a patient,
2. Parking and valet Services,
3. Telephone, internet and Electronic Services, including TV rental Services,
4. Accommodation provided to any Person who is not a patient.

Oman

Goods and Services related to Health Care Services shall not include the supply of Services of a commercial nature, such as, the supply of food and drink to visitors, the provision of parking lots for visitors, and all activities that are not included in the medical treatment, such as a TV rental fees or telephone calls allowances.

Subcontracting

There are often complex supply chains in the healthcare sector before the final services/goods can be provided to end consumers. Often, the medical practitioner dealing with the patient seeks external professionals for core healthcare services in specific areas of expertise. They are sometimes referred to as “consultants”. At times, these are engaged between two businesses within the healthcare sector.

It was generally expected that these supplies would similarly avail of the healthcare zero-rating regardless of the fact that the person contractually “receiving” them may not be the ultimate “beneficiary” – i.e. that the zero-rating applies throughout the full supply chain.

This is the case for example in Bahrain, where the zero rate is not limited to the B2C supply to the patient. When a hospital insources the services of a VAT registered medical practitioner for example, the VAT registered practitioner can apply VAT at a zero rate (Section 4.6 of the Bahraini VAT Health Care Guide).

However, in the UAE, the subcontracting of normally zero rated healthcare services is not subject to a zero rate, on the account of the fact that a business cannot be the person who receives the treatment (Public Clarification VATP016).

Pharmaceutical products and medical equipment

The UAE, KSA, Bahrain and Oman have implemented a zero-rating for certain pharmaceuticals and medical equipment, with lists of approved products available from the regulating health authority for each country. This zero rating was mandatory under article 31 of the GCC VAT Treaty.

As there are no references to the person supplying the products, the zero-rating will be applicable regardless of what stage in the supply chain the transaction takes place. This means they also apply on imports.

All other goods sold in to or within the healthcare sector, or imported, which do not fall within the prescribed list of pharmaceuticals and medical equipment, or other related goods, would be liable to VAT at the standard rate of 5% (or 15% in KSA).

It is not required that the ultimate recipient or user has a prescription or verified medical use for such commodities.

The Private Healthcare Providers in Saudi Arabia which are charging VAT on their services must identify the qualifying goods that are eligible for zero rating, which are provided to the patient as part of the therapeutic service. This does not apply to medicines or medical goods of a trivial value which are consumed or discarded during the provision of services.

Below, we have mentioned the requirements per jurisdiction.

UAE: Pharmaceutical products or medical equipment (Determined by Cabinet Decision No. 56 of 2017 on medications and medical equipment subject to tax at a zero rate. The products need to be registered with the Ministry of Health and Prevention, or imported with its permission or approval).
KSA: Qualifying medicines and medical goods listed by the SFDA (Human medecines: https://www.sfda.gov.sa/en/drug/search/pages/default.aspx; Vitamins: https://www.sfda.gov.sa/en/drug/search/pages/default.aspx?PageIndex=1&sm=vitamin; Medical appliances and equipment: https://mdma.sfda.gov.sa/ListedProducts.aspx.)
Bahrain: Medicines and medical equipment (Determined by the National Health Regulatory Authority (https://www.nhra.bh). The lists however, are displayed on the website of the NBR, see https://www.nbr.gov.bh/VAT/vat_treatments_and_policies#FAQ60, and include medicines, medical devices and health products.)
Oman: Medicine and medical equipment (Determined by Ministerial Decision No. 59 of 2021 determining the controls for the supply of medicine and medical equipment subject to VAT at the rate of zero percent.)

Government bodies

Public healthcare services will generally be outside the scope of VAT, when undertaken by government bodies empowered to engage in such activities in a sovereign capacity (i.e., they are not carried out in competition with the private sector), as per article 10 of the UAE VAT Law and article 9 of the Bahraini VAT Law. KSA stated that a Government body acting in its capacity as a public authority shall not be considered as conducting an economic activity (Article 9 VAT Implementing Regulations).

KSA has issued guidance in this respect and considers that income of government bodies are outside the scope when those entities carry out designated activities assigned to them by the State through the Law, Royal Decree or order establishing those bodies to carry out public functions (ZATCA VAT Guideline for government bodies in KSA, issued on 12 August 2021, version 1.0).

Supplies not carried out within a public capacity, are subject to normal VAT rules (e.g., certain car parking, gifts shops within hospitals, etc.), including registration requirements.

Special regimes, as allowed for in article 30 of the GCC VAT Agreement, are available for government bodies, which are not within the scope of the VAT regime, in order to allow them a refund of VAT on associated costs.

The KSA VAT regime for public hospitals is an anomaly, as the public hospitals enter into competition with the private sector.

For an overview of the VAT regime applicable to non taxable legal persons, you can read one of our previous articles here.

Insurance

The provision of health insurance, re-insurance and associated broker services are all subject to the standard VAT rate of 5% (or 15% in KSA) across the region to date.

This VAT may only be deducted when incurred by a VAT registered person, for business purposes, and if such VAT is not specifically blocked under the local VAT deduction rules – for example, where a business is obliged to provide health insurance to its employees under local employment law, the associated VAT would be deductible.

Where businesses in the health insurance industry pay VAT on supplies made by healthcare professionals to the insured, care should be taken when determining the business’ VAT deduction entitlement, as only VAT on costs contracted for and incurred by the insurer are deductible.

e-Healthcare

The development of the digital economy has created challenges within global VAT regimes in terms of the treatment of goods and/or services previously supplied in physical form or face-to-face, and now rendered digitally. There are some instances, for example physical and digital books, which have seen alternative treatments in other regions.

However, generally speaking, the VAT treatment should not change, for the supply of healthcare goods and services, as a result of them being rendered or ordered digitally.

The treatment of any associated technology or digital services should be assessed under separate VAT rules.

Registration, compliance & penalties

With certain reliefs available from registration and invoicing for wholly zero-rated activities or transactions, as set out within article 13 of Federal Decree-Law No. 8/2017 in the UAE, article 32 of Bahrain Decree-Law No. 48/2018, and article 9 of Saudi Arabia Administrative Decision No. 3839/1438 on the Approval of the Implementing Regulation of the VAT Law, businesses should assess their registration and compliance obligations in the region, comply and/or avail of reliefs where available, in order to mitigate the risk of penalties.

Further evolution?

The VAT regime applicable to healthcare services is certain to further evolve, subject to positions adopted by the tax authorities, case law and policy decisions made after testing the initial adoption. In addition, the different health care authorities may influence the process, and are also empowered to change the VAT regime for certain items.

Keeping a finger on the pulse for the health care sector is therefore a requirement.

Overview Draft KSA Income Tax Law and Draft Tax Procedures Law

Aurifer’s submission for Pillar one – Amount B

Working remotely tax free – not that simple

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

Tax exemptions for KSA Regional Headquarters

UAE Corporate tax makes tax structuring and conducting tax due diligence more relevant

Scoring Tax Exemptions in Qatar

Taxation of Non-Fungible Tokens – Musings observations and interrogations.

Is tax insurance used much in the Middle East?

VAT on healthcare comparatively in the GCC

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