The UAE has globally been recognised as one of the few surviving large and growing economies, which continues to be free of income tax. It holds a special place for Indians. Several high net-worth individuals have migrated to the UAE in the recent past and several Indian businesses have set up holding or intermediate trading companies in the Gulf nation. The multiple free zones that enabled setting up of Free Zone Enterprises (FZEs) and the ease of doing business have added to the lustre of the UAE. It was not surprising, therefore, that when the UAE introduced a scheme for Golden visas, a large number of Indians applied.
The UAE introduced a value-added tax (VAT) in January 2018, in what was a totally tax-free environment till then. The rate of tax was a modest 5 per cent but with its introduction, businesses had to collect the tax from consumers and pay it to the tax authorities. The tax authorities then had the ability to call for and verify the accounts to examine the adequacy of taxes collected. VAT, however, is a pass-through tax and did not impact the profits of an enterprise. It did impose a compliance burden and suddenly businesses were worried that if the taxes were not appropriately collected or paid, they could be subjected to penalties as high as three times the tax.
In 2021, the OECD came out with its Two-Pillar approach, which this column had dealt with earlier. When the OECD came out with an Inclusive Framework, 141 countries signed up, including the UAE. One of the requirements of the Inclusive Framework was the levy of a minimum 15 per cent corporate tax on the profits of enterprises. In January 2022, the UAE took the first step by releasing FAQs. A public consultation document was released in end-April, which provided the overall framework for the introduction of corporate tax. This set in motion the transition of the UAE from a tax-free regime to one that would conform to the global norms of taxation.
Clearly, this has significant impact on businesses, which will need to ensure that they prepare accounts in accordance with acceptable standards, have them audited, and pay appropriate tax on taxable income.
The proposals basically provide that all entities (corporate or otherwise) that carry on business would need to pay taxes in respect of accounting years commencing after June 1, 2023, at the rate of 9 per cent. If a business has a turnover exceeding €750 million and operates in other countries, it will need to pay taxes at a separate rate, which is to be prescribed. This rate is expected to be 15 per cent, to conform to the OECD’s recommendations.
As it happens, whenever a new tax is proposed to be levied, there is apprehension that it will make the destination less competitive. However, there is a clear recognition that the introduction of corporate tax in the UAE will provide legitimacy to the businesses operating there, that the Gulf nation will become a part of an overall global framework, and that the introduction of taxes does not blunt its competitive edge.
What stands out from the consultation document is that apart from the taxes being relatively modest at 9 per cent/15 per cent, the tax framework is relatively simple. The accounting profits (subject to a few adjustments) will be the amount on which taxes will be required to be paid. Taxes will be payable by all enterprises carrying on commercial activity in the UAE and by foreign entities that are controlled and managed from the UAE. Legal entities incorporated in the UAE would pay taxes in the country on their worldwide income, whereas others would pay tax on their UAE-sourced income.
A heartening proposition is the continuing commitment that the government will honour agreements entered into with FZEs and the income of these enterprises will continue to be outside the ambit of corporate tax. That said, if an FZE deals with or carries on activity in the mainland, provisions have been introduced to tax income arising in the mainland and/or disallow the related expenditure. These provisions require very careful consideration and there may be a need for entities that operate in FZEs as well as in the mainland to have a closer look and restructure their operations.
With a view to encourage companies to consider the UAE as a holding company jurisdiction, foreign dividend and capital gains as well as dividend from UAE-based entities would continue to be exempt from tax, subject to compliance with certain conditions. However, those using the UAE as a holding company jurisdiction would need to be cognisant of the fact that there is a restriction on interest deduction, to the extent of 30 per cent to the Ebitda.
Another significant set of provisions that would make compliance easy and will mitigate the rigours of tax is the provision about grouping. Companies with common shareholding of at least 95 per cent can form corporate tax groups. There are some unique provisions with regard to transfer of losses between group companies. Generally speaking, taxes are payable on 75 per cent of the book profits, the balance being set off against brought-forward losses. There are provisions for making restructuring and business transfers tax-exempt.
Finally, there are no requirements for withholding taxes and no need to pay advance taxes, both of which are very welcome provisions.
With the introduction of corporate tax, all entities carrying on business in the UAE need to evaluate whether the way the businesses are currently structured is appropriate or not. A variety of considerations would come in. For example, one needs to consider restructuring debt and equity so as to get interest deduction, or how assets should be held and rentals should be charged, or evaluate location of intellectual property and charging of royalties, among others. Given that several businesses in India have links to the UAE, Indian businesses will need to closely evaluate their structures and ensure that these are efficient in the context of the introduction of corporate tax.
While the UAE will lose its tag of a tax-free nation, businesses will benefit from enhanced transparency and recognition of the country as a fully globally compliant jurisdiction and, with appropriate structuring, ensure that the rigours of corporate tax are minimised.
The writer is CEO of Dhruva Advisors LLP. Views are personal
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