Category: UAE Corporate Income Tax

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

Post author By Thomas Vanhee
Post date May 22, 2025

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

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

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

UAE Corporate Tax: Audit & Financial Reporting Overview

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

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

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

UAE Corporate Income Tax

Transitional Provisions under UAE Corporate Income Tax

Post author By Thomas Vanhee
Post date March 27, 2025

Transitional Provisions under UAE Corporate Income Tax

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

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

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

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

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

Ensuring Balance Sheet Compliance with Transfer Pricing Principles

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

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

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

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

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

Transitional Provisions offering Opportunity for Locking in Gains for Specific Assets

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

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

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

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

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

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

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

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

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

– The asset was recorded on a historical cost basis.

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

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

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

We now discuss each asset type separately in more detail.

Qualifying Immovable Property

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

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

Under UAE CIT regulations, immovable property includes:

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

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

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

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

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

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

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

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

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

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

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

Calculation of Taxable Gain (Post-CIT Gain):

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

Qualifying Intangible Assets

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

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

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

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

Qualifying Financial Assets and Liabilities

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

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

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

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

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

Group Ownership of Assets

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

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

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

Conclusion

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

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

UAE Corporate Income Tax

Family Foundations and UAE Corporate Income Tax

Post author By Thomas Vanhee
Post date May 2, 2024

The business people working together at table. The meeting or summit concept

Family Foundations and UAE Corporate Income Tax

In the evolving landscape of UAE Corporate Income Taxation (“UAE CIT”), the intricacies surrounding family foundations stand out as an area of significant interest as well as complexity.

Family foundations encounter a unique set of challenges and opportunities under the new UAE CIT regime. The introduction of CIT in the UAE highlighted the importance of not just succession planning but also tax planning and compliance management.

Effective tax planning and compliance, grounded in a deep understanding of the UAE CIT Law (“Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses”), is crucial for these entities to optimize their tax positions, avoid penalties and contribute to their long-term sustainability and growth.

This requires a strategic review of financial structures, operational practices, and investment strategies to align with the UAE CIT framework while achieving business objectives.

This article aims to delve into the nuances of family foundations as outlined in the UAE CIT Law and provide a thorough understanding of their tax treatment.

Family Foundations under UAE CIT Law

Family foundations hold a unique position in the UAE legal landscape, with specific provisions of UAE CIT Law applying to them. Understanding these provisions is key to navigating the wealth of tax obligations and benefits you can access using this type of structure.

Under the different UAE laws, multiple types of foundations and trusts exist. A foundation, generally a civil law concept, is, in principle, a type of structure with a legal personality. Being endowed with legal personality, it would be subject to UAE CIT if not for the special regime applicable to it under the UAE CIT Law.

Trusts are generally a common law concept and, in the UAE, also have legal personality when established under the UAE Trust Law (see Article (3) of that Law). The same holds for endowments under the UAE Endowments Law No (5) of 2018 (see Article (10)1 of that law), but not for trusts established in the Financial Free Zones.

Foundations have gained a lot of popularity in recent years. Indeed, in the UAE, these vehicles are mainly used for succession planning and asset protection.

Tax Transparency of Family Foundations

Article 1 of the UAE CIT Law defines a family foundation as a foundation, trust, or similar entity. In other words, the family foundation as a concept under the UAE CIT law refers to a broader context than just foundations per se.

These entities are established with the primary aim of benefiting identifiable natural persons or public benefit entities. The beneficiaries need to be identified or identifiable (e.g., distant relatives, friends, or future offspring). Their core activities consist of managing assets or funds related to savings or investments.

The key provision is Article 17 of UAE CIT Law, which allows family foundations to be treated as unincorporated partnerships and, hence, not be subject to UAE CIT. Following the application of these provisions, family foundations are, therefore, transparent for tax purposes. This means that any potential taxation shifts a level, in this case, to the family foundation’s beneficiaries.

Several conditions need to be met for a family foundation to be treated as a fiscally transparent entity. From an administrative point of view, an application to that effect must be filed with the UAE Federal Tax Authority (“UAE FTA”).

A family foundation seeking to be treated as fiscally transparent is not permitted to undertake activities that would have constituted a business activity within the meaning of the UAE CIT Law if the activity had been undertaken or the assets held by the founder, settlor or any of the beneficiaries of the structure. In this regard, in general, the constitutional documents of the family foundation outline the objectives of the vehicle. Those would normally not include commercial objectives.

This means that if the income was directly earned by natural persons, or the assets directly held by one of the above natural persons, the income would not fall inside the scope of UAE Corporate Income Tax. By reference to Article 11, 6 of the UAE CIT Law, Cabinet Decision No. 49 of 2023 states that employment income, real estate income and personal investment income earned (directly) by a natural person are not within the scope of UAE CIT and do not constitute business income. Real estate income and personal investment income are relevant for family foundations, employment income is not, as a legal person cannot have an employment contract.

The ensuing fiscal transparency also ensures a better alignment of UAE CIT with the neutrality of legal forms. Indeed, the possibility of family foundations being treated as fiscally transparent entities reflects the reality that individuals use those entities to manage their personal wealth and investments for a number of legitimate aims, such as asset protection, succession, and other reasons. The income from those assets would otherwise also not be liable under UAE CIT had it been earned directly by those individuals. The foundation, or the trust, comes with the added benefit of asset protection and succession planning.

Any potential capital gains realized by the family foundation, e.g. through the sale of shares or real estate assets, would also likely not be considered taxable at the family foundation level. This point is, however, unclear, and no guidance exists to confirm it. Equally, in regard to the accumulation of assets, guidance is lacking, but it is assumed by the authors it also benefits from the transparency regime.

Another requirement is that the family foundation must not be set up for the main or principal purpose of avoiding UAE CIT. Given the tax neutrality achieved by a family foundation under the UAE CIT Law, the structure is treated as a pass-through, so there would not necessarily be any possibility for the avoidance of taxes.

Common Family Foundation Structures

A UAE resident individual wishes to preserve their assets for succession planning and contributes his Dubai real estate assets to the family foundation, as well as the shares held in the top holding company of a large, diversified group. The individual has fallen out with certain kids. He instead wants to favor other kids in terms of succession while avoiding inheritance disputes. Therefore, the individual contributes the shares held in the Holding Co and settles a concessionary rate to the Dubai Land Department for the transfer of the real estate assets into the Foundation. This situation is depicted below.

Payments to Beneficiaries

While not explicitly stated in the UAE legislation, payments made to beneficiaries fall under the general rules. Given that the family foundation is fiscally transparent, the tax regime needs to be analyzed at the beneficiaries’ level.

While not made explicit, we would expect that given the income earned is outside of the scope of UAE CIT, based on the exclusion under the abovementioned Cabinet Decision No. 49 of 2023, there would be no UAE CIT applicable.

If the beneficiaries are not UAE tax residents, however, the tax regime applicable to the payments made to the beneficiaries will depend on the tax regime applicable in the country where the beneficiaries are tax residents.

Disqualified Family Foundations

Disqualified family foundations, because they conduct commercial activities, would not benefit from tax transparency for family foundations. Foundations are legal entities and therefore when disqualified they would be taxed as normal legal persons. As to trusts, this would depend on their legal status, as they may not have legal personality.

UAE VAT Obligations of Family Foundations

VAT and UAE CIT operate under different definitions. Therefore, it is perfectly foreseeable for a family foundation to have no corporate tax liabilities but encounter VAT liabilities.

For example, if it owns rented commercial real estate and its turnover exceeds the Mandatory Registration Threshold of AED 375,000, the family foundation is required to register for VAT purposes.

Substance for Family Foundations

Under the UAE’s Economic Substance Regulations (“ESR”), licensees earning relevant income are subject to substance requirements, which may entail the obligation for these entities to file a notification and report.

According to the UAE MoF’s FAQs, however, a “trust” or a “foundation” would generally not be considered a licensee. Some foundations may, however, be considered a “Holding Company Business” given that they hold shares and earn passive income. As such, they are subject to substance requirements, which may be limited, as substance requirements for holding companies are reduced.

According to the UAE MoF, the ESR regime may soon be changed or repealed.

Family Foundations and International Tax

In this regard, MOF FAQ No. 107 states: “Further information on the transition from the existing Economic Substance Regulations after the UAE Corporate Tax regime comes into effect and any substance related reporting and compliance obligations for Qualifying Free Zone Persons will be provided in due course.”

Complications arise when assets are held internationally, i.e., if a UAE family foundation keeps assets outside of the UAE territory.

When it comes to real estate assets abroad, they are traditionally agreed to be taxable in the country of situs or source, i.e., where the real estate asset is located. If the income from the real estate is taxable in the country of source, and there is a provision to avoid double taxation under UAE CIT Law or the relevant treaty, the taxes would not be creditable at the level of the family foundation, given that the family foundation is not liable to tax. The tax in the country of source would, therefore, constitute an unrelieved business cost. The beneficiaries also should not be in scope and, thus, would not be able to claim foreign tax credits.

The same situation applies to withholding taxes, which may constitute a pure deadweight cost for the family foundation.

Tax treaty entitlement of tax-transparent entities, such as foundations, is also not guaranteed. Only in 2017 was an additional provision added to Article 1 in both the OECD and UN Model (i.e., under Article 1,2) to confirm that tax-transparent entities can claim treaty benefits, subject to various conditions.

Tax Updates UAE Corporate Income Tax UAE Tax

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.

UAE Corporate Income Tax

Tax Groups under UAE Corporate Income Tax: What You Need to Know

Post author By Thomas Vanhee
Post date February 23, 2024

Tax Groups under UAE Corporate Income Tax: What You Need to Know

The UAE Corporate Income Tax in Articles 40-42 of the UAE Corporate Income Tax Law (Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses) contains provisions on “Tax Groups”, i.e., the situation where two or more taxable persons are allowed to form a tax group and, therefore, be treated as a single taxable person for UAE CIT purposes.

Forming a tax group may benefit taxable persons from various perspectives, such as the possibility to offset income and losses between its members, tax neutralization of inter-group operations, or administrative advantages such as the ability to file a single tax return.

The UAE Federal Tax Authority (FTA) has further commented on the tax group provisions under UAE CIT in the Corporate Tax (CIT) Guide on Tax Groups (CTGTGR1), issued on 8 January 2024. The FTA’s Guide is a valuable resource for taxable persons who are considering forming or entering into a tax group.

We analyze tax group provisions under UAE CIT, also in light of the latest indications contained in the FTA’s Guide, more in-depth below.

Eligibility Criteria

In order to form a tax group, the parent company must file an application before the FTA, where it needs to demonstrate that all of the following conditions are satisfied:

1. Members of the tax group are juridical persons

For a company to form or be part of a tax group, it must be a juridical person, i.e., an entity with a legal identity separate from its founders, like joint stock or limited liability companies. Accordingly, sole establishments run by individuals do not qualify due to the absence of legal personality. The FTA’s Guide clarifies that unincorporated partnerships, due to their lack of separate legal identity, are ineligible for tax grouping in the UAE, in contrast to incorporated partnerships.

The FTA’s Guide leaves the eligibility of foreign-incorporated partnerships managed in the UAE somewhat open to interpretation. Analyzing the relevant provisions of UAE CIT Law and the FTA’s interpretation of those criteria, it seems plausible that these foreign entities, if managed in the UAE and meeting specific legal entity criteria, might qualify for inclusion in a tax group.

On the other hand, it is settled that a juridical person within a fiscally transparent unincorporated partnership is eligible to join a tax group as a member (see our previous reports discussing UAE legal structures and partnerships here).

There is no limit to the number of members of a tax group. However, a juridical person can only be a member of one tax group at any given time. It is also not possible for a parent company to form or enter into multiple tax groups with different subsidiaries.

2. Members of the tax group are UAE residents

The condition of being resident in the UAE includes both entities incorporated in the UAE and foreign entities if effectively managed within the UAE.

However, residency eligibility extends only to entities recognized as UAE tax residents under applicable Double Taxation Agreements (DTAs). Consequently, a juridical person taxed as a resident in another country under such agreements is outright excluded from tax group membership.

DTAs typically set forth their own criteria determining tax residency and may have tie-breaker rules, or, usually, as a last resource to break the “tie”, MAP to determine in which jurisdiction a company is a resident. Tax residency under the relevant DTA is, therefore, critical for defining a company’s ultimate eligibility for inclusion in a tax group. A foreign company not classified as a UAE resident person is ineligible for tax group membership.

Last but not least, having a permanent establishment (PE) in the UAE does not, by itself, suffice for a foreign legal entity to qualify as a UAE resident since the residence criteria under Article 11(3) of UAE CIT Law are not met by a PE.

Embedded in this requirement is that for the purposes of forming a tax group, a UAE resident parent is required. In other words, a group which a foreign holding company holds cannot qualify (unless the foreign holding company is a tax resident in the UAE).

Illustrative example: resident subsidiaries of a foreign parent forming a tax group

Source: Corporate Tax (CIT) Guide on Tax Groups (CTGTGR1), p. 22

Description

Company F (incorporated in and tax resident of a foreign country) holds 100% of the share capital of Company E, which in turn holds 100% of the share capital of Company A, Company B, and Company C. Company A, Company B, Company C and Company E are all incorporated and resident in the UAE for CIT purposes.

Assuming all other conditions to form a tax group are met, Company E, as a parent company, can apply to the FTA together with Company A, Company B, and Company C to form a tax group for UAE CIT purposes.

3. Parent company owns (in)directly at least 95% of the share capital of members of the tax group

Establishing a tax group in the UAE requires the parent company to own, directly or indirectly, at least 95% of the share capital in each subsidiary.

This threshold is key for including companies with minority shareholders, which might be essential due to legal requirements in company formation (e.g. a company type requires two shareholders and the company is incorporated with 99% of the shares held by the parent and 1% by another group company).

Share capital, defined as the nominal issued and paid-up capital, is crucial in determining shareholders’ rights like voting, profit distribution, and capital return.

The FTA’s Guide further elaborates on different types of share or capital and their impact on the formation and maintenance of a tax group according to UAE CIT Law. An important element to note in this regard is that the term “shares or capital” must be interpreted consistently with other provisions under UAE CIT Law and UAE Ministry of Finance (MoF)’s Implementing Decisions (in particular, Ministerial Decision No. 116 of 2023 on the Participation Exemption for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses).

This would suggest an approach favouring a holistic interpretation of the UAE CIT provisions, opening up to cross-references to fill in possible legislative gaps under UAE CIT Law and implementing regulations.

Illustrative example: shares with a different nominal value

Company A (incorporated in and tax resident of the UAE) has issued two classes of shares to its shareholders:

Source: Corporate Tax (CIT) Guide on Tax Groups (CTGTGR1), p. 26

Description

Company B holds 100% of Class 1 shares of Company A. Applying the formula above to Class 1 shares leads to the following result: 1,000 ÷ 2,000 × 100% = 50%.

As the number of shares held in Company A is weighted by reference to their nominal value, the share capital ownership condition is not met by Company B even though Company B has 100% of the Class 1 shares and 99% of the total number of shares.

As rights relating to the shares (such as voting rights and profit rights) are usually determined by reference to the nominal value, this provides a more realistic picture of the ownership stake in Company A.

4. Parent company owns (in)directly at least 95% of the voting rights of members of the tax group

To establish a tax group, the parent company needs to control a minimum of 95% of the voting rights in each subsidiary, counting both direct and indirect holdings. This voting rights condition is separate from share capital ownership and focuses on shareholder-approved matters.

While typically aligned with share capital, voting rights might differ due to share classes, restrictions or unique share types. Accordingly, the assessment of such a condition can produce different results than the share capital condition if restrictions on voting rights apply or if voting rights are not aligned with share capital ownership.

This occurs in the case of shares without voting rights or, on the contrary, carrying extraordinary voting rights. On the other hand, we note that eligibility under the voting rights condition is unaffected in case of vote agreements existing between shareholders or arrangements for a proxy vote.

5. Parent company is (in)directly entitled to at least 95% of each subsidiary’s profits and net assets

Establishing a tax group necessitates the parent company’s entitlement to at least 95% of a subsidiary’s profits and net assets, independently verified from share capital ownership.

This dual condition involves complex assessments, especially when diverse share classes or contractual arrangements exist that might skew the alignment between ownership percentages and economic entitlements.

To this end, the focus is on effective entitlement to profits and net assets. As such, the analysis of both conditions requires a nuanced understanding of legal and financial structures within the company, ensuring that even in the presence of varied share classes, shareholder agreements, nominee agreements or other types of agreements, the parent company maintains the requisite level of control over profits and net assets.

6. No member is an exempt person or QFZP

Tax grouping under UAE CIT specifies that exempt persons or Qualifying Free Zone Persons (QFZPs) are prevented from forming or joining a tax group.

This aligns with the principle of grouping entities having aligned tax obligations (see our previous reports discussing the UAE Free Zone Regime here). In other words, the UAE legislator metaphorically does not want to mix apples and oranges. This is common in other jurisdictions too. Doing otherwise, i.e., allowing tax grouping between members subject to a different tax regime would trigger considerable complexity.

However, a Free Zone Person who is not a QFZP can be part of a tax group if all the other conditions for forming or joining a tax group are met. A Free Zone Person may be a disqualified QFZP or may have opted out of the QFZP regime.

Therefore, being a legal entity established in one of the over 40 UAE Free Zones is not preclusive to tax group eligibility. It also follows that if a tax group member becomes an exempt person or non-electing QFZP, it must exit the tax group from the start of that tax period. Worth noting is that government entities, as exempt persons, cannot form or join tax groups, but their taxable subsidiaries can, under specific conditions. Furthermore, small business relief under Article 21 of UAE CIT Law applies to the tax group’s consolidated revenue, thus possibly affecting individual members’ eligibility for this relief.

7. Members of the tax group must have the same financial year

The financial year condition for tax groups in the UAE emphasizes uniformity in tax filing periods among all tax group members, aimed at simplifying tax administration and reducing the complexity of apportioning results.

This requirement implies that all members must align their financial year with the parent company, including newly incorporated entities wishing to join. Each legal entity can do this by making an application before the FTA before joining a tax group.

Moreover, should there be a need to change the financial year for any member, it must be coordinated across the entire tax group to maintain compliance. This underscores the importance of synchronization in financial reporting within tax groups, ensuring streamlined tax processes and adherence to regulatory requirements.

8. Members of the tax group must prepare their financial statements using the same accounting standards

The accounting standards condition for tax grouping in the UAE mandates not only uniformity in financial years but also in financial reporting. In this regard, it is a requirement that all tax group members use the same standards, typically International Financing Report Standards (IFRS) or IFRS for SMEs if revenue is below AED 50 million.

Financial alignment is meant to facilitate the preparation of consolidated financial statements for the entire tax group, which is crucial for determining taxable income.

In cases where individual members use different standards (e.g., AAOIFI accounting standards for Islamic Financial Institutions), they must align their practices before forming or joining a tax group. The emphasis on consistent accounting practices across the group enhances transparency and accuracy in financial reporting for tax purposes.

As the discussion above shows, establishing a tax group in the UAE is a multifaceted process that necessitates adherence to a series of detailed but also open-to-interpretation criteria.

Modifications to Tax Groups

The FTA’s Guide outlines various scenarios that can occur within a tax group, including formation, joining, leaving, changing the parent company, as well as cessation. The timing of these events is also dictated by the UAE CIT Law. We summarize these events relevant to the lifetime of a tax group under UAE CIT Law below.
The first relevant event relates to entering into a tax group. Joining a tax group involves a subsidiary applying with the parent company to the FTA, provided all the relevant conditions are met. The application submission also determines the tax period for joining. For newly incorporated entities, joining is possible from their incorporation date, either as a new subsidiary or a new parent company.
On the opposite side of the spectrum, there is exiting a tax group. Leaving a tax group occurs when a subsidiary either applies with the parent company for departure, no longer meets membership conditions, or ceases to exist due to business transfer. In cases of business transfer, tax implications of asset and liability transfers are considered, with exceptions for business restructuring relief or qualifying group relief.
Changing the parent company for tax group purposes requires an application to the FTA, ensuring the new parent meets all necessary conditions. This change can happen either through meeting the tax group conditions or as a universal legal successor following a merger or transfer.
We note that the compliance implications of all the changes above are significant. Notably, if a subsidiary does not continuously meet tax group conditions, it must file taxes separately and is liable for its own UAE CIT. Importantly, incorrect tax returns due to unrecognized changes in the tax group can lead to administrative penalties for both the departing entity and the remaining members of the tax group. These complexities highlight the importance of accurate and timely management of tax group status changes to avoid compliance issues and financial penalties.

Deregistration and Cessation of a Tax Group

In essence, the formation or inclusion in a tax group does not necessitate the deregistration of its members, and these members are exempted from filing individual tax returns. A taxable person must apply for tax deregistration if they discontinue their business or business activity.

However, in a tax grouping setting, the cessation is evaluated based on the tax group’s overall activity. This means that if an individual member ceases its business, it does not mandate the deregistration of the entire tax group unless the group as a whole ceases its business activities.

When all members of a tax group cease their business activities, the parent company should request the dissolution of the tax group by applying before the FTA. This application should confirm that all outstanding CT liabilities and administrative penalties have been paid and that the tax group has filed all tax returns. Upon approval of this application, the FTA will deregister the Tax group for CIT purposes from the cessation date or another date set by the FTA.

Subsequently, each member of the dissolved tax group must individually apply for tax deregistration. The FTA’s Guide provides further details as regards the conditions for tax deregistration, including the dissolution of the tax group, a change in the parent company, or the cessation of a subsidiary within the tax group.

When a tax group applies for cessation through the parent company, this application also includes a request for the tax group’s deregistration for UAE CIT purposes. This does not necessarily trigger any consequences for VAT purposes, since tax grouping under UAE CIT is distinct from tax grouping under UAE VAT.

On the other hand, the tax group must confirm in this application that all corporate taxes and administrative penalties are cleared and all tax returns are filed for the FTA to proceed with deregistration. If a tax group ends because it no longer meets the necessary conditions, it must inform the FTA within 20 business days. This notification is also considered the same as a deregistration request. The tax group must state whether all taxes, penalties, and returns are addressed for the FTA to process deregistration.

Finally, in cases where a tax group has only two members, and one transfers its business to the other, resulting in its cessation, the tax group ends as of the transfer date. The remaining entity must notify the FTA within 20 business days of the effectuated transfer, and this notice is taken as a deregistration application. Similarly to other deregistration procedures, the tax group must confirm the payment of all taxes and penalties and the filing of returns for the FTA to proceed with deregistration. No separate application for business restructuring relief is needed in this scenario.

Conclusion and grouping as a planning tool

In conclusion, the ultimate decision to form or join a tax group under UAE CIT Law involves a balanced evaluation of envisaged tax advantages and disadvantages. It is crucial for MNEs operating in the UAE to ensure that all relevant factors are properly considered and that the decision on tax grouping aligns with the MNE’s overall strategic objectives.

Notably, tax grouping serves its best purpose when certain members of the group are loss-making entities. This is because, in a tax group setting, the losses of loss-making members of the tax group are offset immediately and in full against the profits of the profit-making members.

On a standalone basis, instead, losses can be carried forward and offset against 75% of future taxable income. On a standalone basis, losses can also be transferred between members of the same qualifying group (not tax group), which would require that members are 75% commonly held. A downside of forming a tax group is that the nil bracket up to AED 375,000 only applies once at the tax group level instead of multiple times at the individual member’s level.

Moreover, where administrative simplification may be touted for a group’s tax filing, it is not necessarily much simpler, given that a consolidation first needs to take place from an accounting and tax point of view. The filing itself (i.e. filing the numbers on the portal) is not in itself a very burdensome exercise.

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.

UAE Corporate Income Tax UAE Tax

UAE’s Corporate Tax Framework: Understanding Participation Exemption

Post author By Thomas Vanhee
Post date November 3, 2023

UAE’s Corporate Tax Framework: Understanding Participation Exemption

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

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

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

Check below to learn more.

Tax Updates UAE Corporate Income Tax UAE Tax

30 Highlights about CIT Guide for Non-Resident Persons

Post author By Thomas Vanhee
Post date November 3, 2023

30 Highlights about CIT Guide for Non-Resident Persons

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

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

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

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

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

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

1. State Sourced Income vs. PE

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

2. State Sourced Income vs. UAE Nexus

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

3. Non-Resident Person and Small Business Relief

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

4. UAE CIT Residence and Double Tax Treaties

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

5. Irrelevant Factors for PE Purposes

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

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

6. Fixed Place of Business for PE Purposes

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

7. Multiple Locations for PE Purposes

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

8. Premises at Disposal for PE Purposes

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

9. Hotel Rooms and PE

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

10. Home Office PE

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

11. Manager Travelling to the UAE for Meetings

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

12. Land in the UAE and PE

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

13. Exploration/Extraction Activities and PE

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

14. Automatic Equipment and PE

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

15. Splitting of Contracts and Construction PE

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

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

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

16. Storage/Delivery of Spare Parts

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

17. Warehouse in the UAE

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

18. Warehouse Operated by Logistics Company

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

19. Preparatory/Auxiliary Activities and Purchasing Office

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

20. Preparatory/Auxiliary Activities Performed for a Third Party

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

21. UAE Subsidiary as PE for the Parent

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

22. Digital Nomad and PE

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

23. Physical Presence in the UAE: Travel Restrictions

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

24. Physical Presence in the UAE: Act of War

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

25. Agency PE: Company Representatives

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

26. Agency PE: Subsidiary

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

27. Agency PE: Independent Agent

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

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

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

29. Nexus in the UAE: ATMs

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

30. Nexus in the UAE: Wind Turbines

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

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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.

UAE Corporate Income Tax UAE Tax

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

Post author By Thomas Vanhee
Post date September 12, 2023

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

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

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

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

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

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

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