Category: Tax Updates

Tax Planning Strategies for Individual Business Owners in the UAE

Post author By Thomas Vanhee
Post date August 7, 2024

Tax Planning Strategies for Individual Business Owners in the UAE

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

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

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

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

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

1. Salary & Bonuses

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

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

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

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

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

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

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

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

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

2. End-of-Service Benefit (“EOSB”)

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

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

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

3. Director Fees

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

4. Interest Income

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

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

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

5. Renting or selling commercial space to the company

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

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

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

6. Lease or rent any assets to the company

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

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

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

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

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

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

Tax Updates

Ramadan Generosity Generates Tax Revenue

Post author By Thomas Vanhee
Post date July 4, 2024

Ramadan Generosity Generates Tax Revenue

The Holy Month of Ramadan is the ninth month of the Islamic calendar Muslims worldwide observe it as a month of fasting, prayer, self-reflection, and enhanced community spirit. The annual observance of Ramadan is one of the five pillars of Islam.

Ramadan is regarded as a time of piety, charity, and blessings. Charities and foundations are noticeably more active during the Holy Month, providing assistance to those in need. In a spirit of generosity, meals are provided at mosques, malls, and other public places.

Businesses see the Holy Month of Ramadan as an opportunity to enable generosity by organizing sales and offering promotions, deals, discounts, gifts and benefits of all kinds. For example, companies may offer “buy one, get one free” or “two for the price of one” promotions, or other combined offers where certain products are offered for free or at a reduced price when bought together with another product (e.g., receiving one year of car insurance free of charge when purchasing a new car).

Traditionally, businesses also celebrate the Holy month by hosting Iftar parties, handing out Iftar snack boxes, or giving gifts in cash or in kind during Eid al Fitr, the religious feast marking the end of Ramadan.

This article discusses how to deal with UAE value-added tax (VAT) and Corporate Taxation (CIT) while maintaining the spirit of generosity embedded in the Holy Month of Ramadan.

Is There No Such Thing as a Free Lunch, Really?

Arguably, VAT does not like free items. It taxes so-called deemed supplies, where businesses give things away for free for which it previously deducted input VAT. However, not all free supplies are necessarily deemed supplies. Even though both look similar, i.e. a third party seemingly receives something without paying for it, only free supplies that are also deemed supplies carry VAT consequences.

As part of strategy to increase its sales and market share, a business may offer a customer a free item. For example, a supermarket could offer a “buy one, get one” formula for shampoo bottles. Although it provides the second bottle for free, the customer actually pays a lower price for two bottles. Therefore, this situation is not a deemed supply but rather a joint offer. In this case, the consideration paid by the consumer for (allegedly) one item only (i.e., the first bottle of shampoo) constitutes the taxable amount for the overall bundle supply (i.e., the two bottles of shampoo).

The same reasoning, also in terms of taxable amount determination, holds for promotional discounts, such as businesses slashing their prices by 50% during Ramadan. In this case, as in the previous situation, a business is not offering half of the product for free but rather a price discount. The discounted price reduces the taxable amount of the overall bundle supply.

A business might also consider giving a different item in addition to the item bought. For instance, upon purchase of an electric toothbrush, the seller can offer two free tubes of toothpaste. Although the item is given for free, such a “free supply” is still not a deemed supply. This is because the free item is given with the objective of increasing sales of the main item and should be considered ancillary to it. Similarly, such promotional offers and discounts can be claimed as deductible expenditures from a CIT perspective, given that such expenses are incurred wholly and exclusively for business purposes to promote products or services.

It is very different when a grocery store decides to donate food supplies to a shelter or to allow all employees to pick an item from its stock for Ramadan. Those constitute deemed supplies, and they are liable to VAT needs. This means that VAT on these deemed supplies constitutes a cost for the business since it is giving the items for free.

On the other hand, if employers know upon purchase that they are purchasing items not intended for taxable supplies, they cannot recover the input VAT (and the subject of the deemed supplies is not even on the table).

The business making the deemed supplies needs to issue a tax invoice for the deemed supply and, ideally, deliver it to the recipient. The VAT on the tax invoice is not deductible in the recipient’s hands.

In the UAE, the taxable value of deemed supplies is its cost. This constitutes the taxable basis on which VAT should be accounted for.

However, even though a supply may constitute a deemed supply, two thresholds apply. If a business stays below the thresholds, it can continue to recover the input VAT and does not have to account for VAT on the deemed supply.

There are two thresholds which apply alternatively:

The output tax chargeable on all deemed supplies should not exceed AED 2,000 in a 12-month period (i.e., AED 40,000 of costs VAT exclusive), and;
The value per person does not exceed AED 500 in a 12-month period (i.e., AED 10,000 of costs VAT exclusive), and it concerns samples or commercial gifts.

Fulfillment of one of these two thresholds allow businesses to occasionally provide small benefits or gifts to their employees and third parties without incurring VAT liabilities.

Given that these thresholds are very low, a business will easily exceed them. Considering the substantial administrative burden of monitoring the thresholds and implementing a process, a business could find it more practical to ignore the thresholds and always account for output VAT on the deemed supplies. That is also what most informed businesses seem to do.

While UAE VAT generates tax revenue from gifting by creating a deeming fiction, from a CIT perspective, expenses incurred on account of donations, grants, or gifts are not allowed as deductible expenditures when paid to a person who is not a Qualified Public Benefit Entity (“QPBE”). Where they are disallowed, they are added back and subject to UAE CIT.

UAE CIT legislation allows tax deductions for employment remuneration and any perquisites attached to the employment contract. Nevertheless, gifts given to employees that relate wholly or exclusively to the business but are not in accordance with the employment contract are not allowed.

Presently, the UAE CT Law and other domestic guidances released by the Federal Tax Authority do not clarify the deductibility of expenses for festive gifting to employees. Nonetheless, on the combined reading of the deductibility and non-deductibility rules, we are of the view that such expenses are unlikely to relate to the business fully. According to the UAE CT Law (Article 28, 2, d), the Federal Cabinet would further issue a decision to specifically list types of expenditure which are not deductible. We would additionally expect the FTA to issue guidance on the matter.

On the other hand, donations shall be allowed as a deductible expenditure when made to a QPBE. This is to encourage social and public welfare activities that are subject to regulatory oversight in the UAE. The clear distinction between the recipients of the donations, grants, or gifts makes it easier for tax authorities to administer the deductibility of expenses, incentivizing payments to specifically listed charities. We do, however, expect regular sponsorships to be deductible even when made to non-QPBE.

Entertainment and Personal Expenses Incurred during Ramadan

VAT is only recoverable when it is paid for goods and services bought to make taxable supplies. However, even though a business may exclusively make taxable supplies, there may still be expenses which are non-recoverable.

When an employer buys items and gives them to its employees for no charge and for their personal benefit, the employer cannot recover the input VAT. For example, if the employer decides to purchase chocolate dates for Ramadan to give to its employees, the input VAT paid is irrecoverable.

The same holds for so-called “entertainment expenses”. Entertainment services are “hospitality of any kind”. This includes hotel stays, food and drinks, tickets for shows and events and trips for entertainment. Therefore, if a business organizes an Iftar for its employees and for third parties, the input VAT is not deductible. Even though the event is held with the objective of improving social cohesion amongst the team and general ambience, indirectly increasing sales, and, therefore, having a clear business purpose, it is considered an entertainment expense.

However, a Public Clarification published by the Federal Tax Authority confirmed that VAT on certain entertainment costs is recoverable when used for a genuine business purpose, or when incidental to a business purpose. Notably, VAT on food and drinks provided during a business meeting, is recoverable, if:

The hospitality is provided at the same venue as the meeting;
When the meeting is interrupted, it is only by a short break for the provision of hospitality and then resumes as normal (e.g., a lunch break);
The cost per head of providing hospitality does not exceed any internal policy the business has established;
The food and beverages provided are not accompanied by any form of entertainment (e.g., a motivational speaker, a live band, etc.).

On the other hand, where the hospitality provided becomes an end in itself and is the reason for attending an event, it will be considered entertainment costs, and, thus, input VAT paid is not recoverable. In other words, if the staff comes for the party or the TED talk, the business will not be able to recover the input VAT. If the gathering is serious business, the input VAT will be recoverable.

Similar to UAE VAT Law, entertainment from a CIT perspective includes meals, accommodation, transportation, admission fees, facilities and equipment used for entertainment, and expenses for amusement.

From a CIT perspective, entertainment expenses incurred for a taxable person’s customers, shareholders, suppliers or other business partners are restricted to 50%. Given that entertainment expenses have a private element attached to them, which may be difficult to estimate and apportion, the UAE CIT legislation straightway disallows 50% of such costs.

While the current guidelines explain the policy objective of limiting the deductibility of expenses, citing personal consumption, it also states that staff entertainment expenses are fully deductible if incurred for “business purposes”.

There may also be instances where personal non-business expenses form part of the entertainment expenses. Should this be the case, it is important to identify entertainment expenses that relate to the business activity and only allow 50% of such identified portion.

For example, a family-owned company owns a box at the football stadium that is used for a client’s entertainment. Thus, any expenses incurred for client entertainment shall be allowed to the extent of 50% of such expenditure. Conversely, if the shareholder’s family uses such a box, the entire expenditure will be disallowed since it is personal in nature.

Charities

Although charities mostly carry out transactions that are outside the scope of VAT, given that, for the most part, they do not charge any consideration, they may still occasionally render taxable supplies and, therefore, incur certain VAT liabilities, starting from the obligation to register for VAT purposes.

Charities mainly receive their income from subsidies or donations, which are outside the scope of VAT. Occasionally, they may provide sponsoring opportunities to businesses, which are subject to VAT.

Under normal VAT recovery rules, input tax is only recoverable to the extent it relates to taxable supplies. In most cases, charities will be required to allocate and apportion VAT recovery between taxable activities (recoverable) and non-taxable activities or exempt activities (non-recoverable). Therefore, the input VAT recovery may prove to be quite complex.

A special refund scheme applies to so-called Designated Charities which meet the criteria set by the UAE Federal Tax Authority (FTA).

Similar to UAE VAT legislation, charitable organizations carrying out social, cultural, religious, or other public benefit activities without the motive for profit distribution will be exempt from CIT subject to certain conditions. Additionally, to achieve the exemption status, such organizations should apply to the local or Federal Government entity with which they are registered for it to be listed in the UAE Cabinet Decision.

Accordingly, such organizations shall be exempt from CIT from the beginning of the tax period in which it is included in the relevant Decision. The UAE CIT legislation uses the term “Qualifying Public Benefit Entity” (QPBE) for such organizations.

The conditions to be fulfilled by a QPBE to be exempt from CIT include:

It is established and operated for any of the following:
- Exclusively for religious, charitable, scientific, artistic, cultural, athletic, educational, healthcare, environmental, humanitarian, animal protection, or other similar purposes.
- As a professional entity, a chamber of commerce, or a similar entity operated exclusively for the promotion of social welfare or public benefit.
It does not conduct a Business or Business Activity, except for such activities that directly relate to or are aimed at fulfilling the purpose for which the entity was established.
Its income or assets are used exclusively in the furtherance of the purpose for which it was established, or for the payment of any associated necessary and reasonable expenditure incurred.
No part of its income or assets is payable to, or otherwise available, for the personal benefit of any shareholder, member, trustee, founder, or settlor that is not itself a Qualifying Public Benefit Entity, Government Entity, or Government Controlled Entity.
Any other conditions as may be prescribed in a decision issued by the Cabinet at the suggestion of the Minister.

As such, a QPBE should not conduct business or business activity unless the same is aimed at the purpose for which it is established. That is, it may carry out commercial activities as long as the objectives of the organization are met and any additional surplus is not distributed as dividends or any other benefit. For instance, the following shall not be construed as commercial activities:

Organizing events such as gala dinners to raise funds.
The sale of admission tickets by a museum.
Or the sale of refreshments in the canteen of a sports club.

As stated above, on meeting the above conditions, a Qualifying Public Benefit Entity will be an exempt person and thus will not be subject to corporate tax in the UAE, and any payments made to such organizations will be available for tax deduction for the payor.

Conclusions

The Holy Month of Ramadan triggers several tax consequences for businesses.

First, businesses making sales promotions are required to examine the tax consequences of these sales promotions.

Businesses may also not be allowed to recover input VAT on certain purchases or will be liable for VAT on a deemed supply when providing employees with entertainment or gifts.

Similarly, for CIT purposes, it is pertinent to segregate business expenses, entertainment expenses, and non-business-related expenses to assess the amount of tax deductible.

Charitable organizations should evaluate whether they qualify as exempt persons from the perspective of CIT and evaluate the VAT implications in a time-bound manner.

Given the very strict penalty framework, it is important to be aware of the VAT/CIT consequences of these activities and take action in this regard to avoid any claims or penalties.

Business Visitor VAT Refunds

Post author By Thomas Vanhee
Post date March 22, 2024

Income Tax Return Deduction Refund Concept

Business Visitor VAT Refunds

Check your business eligibility for foreign business refund via the Business Visitor Refund Scheme in the EU and GCC. Download our latest brochure here.

Tax Updates UAE Corporate Income Tax UAE Tax

Key Developments in GCC International Tax Treaties – A 2023 Recap

Post author By Thomas Vanhee
Post date January 5, 2024

Key Developments in GCC International Tax Treaties – A 2023 Recap

UAE

January:

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

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

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

February:

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

May:

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

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

August:

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

October:

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

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

November:

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

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

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

QATAR

January:

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

March:

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

June:

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

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

October:

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

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

SAUDI ARABIA

January:

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

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

November:

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

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

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

OMAN

January:

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

May:

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

July:

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

November:

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

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

KUWAIT

March:

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

July:

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

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

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

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

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

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

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

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

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

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

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

Post author By Liam Purcell
Post date November 16, 2023
No Comments on Understanding the Business Response to the OECD/G20’s Pillar Two Initiative: A Survey Analysis

UAE publishes long awaited Cabinet Decisions on Free Zones and Medical Supplies — People against sky

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

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

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

Read our survey.

Tax Updates UAE Corporate Income Tax UAE Tax

30 Highlights about CIT Guide for Non-Resident Persons

Post author By Thomas Vanhee
Post date November 3, 2023

30 Highlights about CIT Guide for Non-Resident Persons

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

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

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

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

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

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

1. State Sourced Income vs. PE

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

2. State Sourced Income vs. UAE Nexus

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

3. Non-Resident Person and Small Business Relief

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

4. UAE CIT Residence and Double Tax Treaties

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

5. Irrelevant Factors for PE Purposes

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

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

6. Fixed Place of Business for PE Purposes

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

7. Multiple Locations for PE Purposes

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

8. Premises at Disposal for PE Purposes

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

9. Hotel Rooms and PE

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

10. Home Office PE

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

11. Manager Travelling to the UAE for Meetings

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

12. Land in the UAE and PE

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

13. Exploration/Extraction Activities and PE

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

14. Automatic Equipment and PE

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

15. Splitting of Contracts and Construction PE

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

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

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

16. Storage/Delivery of Spare Parts

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

17. Warehouse in the UAE

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

18. Warehouse Operated by Logistics Company

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

19. Preparatory/Auxiliary Activities and Purchasing Office

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

20. Preparatory/Auxiliary Activities Performed for a Third Party

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

21. UAE Subsidiary as PE for the Parent

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

22. Digital Nomad and PE

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

23. Physical Presence in the UAE: Travel Restrictions

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

24. Physical Presence in the UAE: Act of War

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

25. Agency PE: Company Representatives

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

26. Agency PE: Subsidiary

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

27. Agency PE: Independent Agent

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

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

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

29. Nexus in the UAE: ATMs

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

30. Nexus in the UAE: Wind Turbines

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

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Int'l Tax & Transfer Pricing Tax Updates

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

Post author By Thomas Vanhee
Post date October 16, 2023

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

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

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

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

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

1. Background

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

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

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

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

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

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

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

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

2. General Interest Deduction Limitation Rule

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

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

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

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

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

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

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

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

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

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

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

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

4. Carried Forward of Disallowed Interest Expenditure

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

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

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

5. De Minimis Rule

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

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

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

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

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

6. Conclusions

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

Tax Updates UAE Corporate Income Tax UAE Tax

Venture Capital Funds and Corporate Taxation: Finding the Winning Formula

Post author By Liam Purcell
Post date October 2, 2023

Income Tax, VAT and Excise Tax and Tax Procedures Updates in the UAE - A Breakdown

Venture Capital Funds and Corporate Taxation: Finding the Winning Formula

Introduction

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

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

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

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

UAE CIT Law Overview

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

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

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

Unincorporated Partnership and Fiscal Transparency

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

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

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

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

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

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

VC Funds and Taxable Person Election

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

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

Qualifying Investment Fund

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

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

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

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

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

Qualifying Free Zone Person

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

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

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

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

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

International Tax Considerations

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

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

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

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

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

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

Conclusions

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

Summary Table

[END NOTES]

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

[2] T. Vanhee, “Impact of UAE Corporate Tax on Law Firms and Professional Services Firms“, https://aurifer.tax/uae-corporate-tax-which-impact-on-law-and-professional-services-firms/, accessed on 2 October 2023.

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

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

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

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

[7] Article 16(8), UAE CIT Law.

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

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

[10] For more details on the QFZP regime, see L. Purcell, “To Qualify or not to Qualify: Analysis and Tax Advisory on the UAE Free Zone Regime, Interaction with Pillar Two, and Beyond”, https://aurifer.tax/to-qualify-or-not-to-qualify-that-is-the-question-the-uae-free-zone-regime-interaction-with-pillar-two-and-beyond/, accessed on 2 October 2023. See also UAE Corporate Tax on Qualifying Free Zone Persons, https://youtu.be/HmjnOAUFm7g, accessed on 2 October 2023.

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

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

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

[14] UAE Ministry of Finance (MoF), “Avoidance of Double Taxation Agreements” https://mof.gov.ae/wp-content/uploads/2023/08/Avoidance-of-Double-Taxation-Agreements1.pdf, accessed on 2 October 2023.

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

GCC Tax Tax Updates

Aurifer’s submission for Pillar one – Amount B

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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Aurifer’s submission for Pillar one – Amount B

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