Year of the 50th legislative amendments – key considerations for directors of UAE companies
Following the largest legal reform in the country’s history, the UAE government has announced the introduction of federal corporate income tax. In this article, we take a look at how structures and deals will be impacted by corporate tax and what UAE businesses should be aware of.
The UAE’s corporate tax rate will be one of the lowest in the world and is still attractive for inward investment. The Ministry of Finance has also confirmed that there will be no UAE withholding tax on dividends, interest, royalties and similar payments. The UAE government has positioned the introduction of corporate tax to ensure that the UAE will remain an attractive destination for foreign direct investment for years to come.
The UAE will also continue to attract highly qualified individuals into the country because it will remain tax free for employment income (whether received from the public or private sector), and no tax will be levied on income or gains deriving from personal investments.
The Ministry of Finance announcement states that free zone businesses will be subject to corporate tax – in particular they will be required to submit corporate tax returns. The Ministry of Finance has, however, stated that the new regime will honour the tax incentives currently offered to free zone establishments, if they comply with applicable regulatory requirements and do not conduct business onshore in the UAE.
It is not uncommon for businesses to operate from a free zone with a proportion of their revenue derived from the supply of goods or services onshore. It would appear, on the face of the announcement, that this part of their revenue could be subject to corporate tax. This makes sense as otherwise free zone establishment would be an obvious tax mitigation option.
Although we have not seen the Law or Implementing Regulations with the finer detail of the impact on free zone businesses, it is likely that there will be increased administrative requirements to account for their onshore derived revenues. With the relaxation of foreign ownership restrictions and greater real estate choices onshore, it may be that businesses based in the free zones will assess whether they should establish an onshore presence.
The application of corporate tax in the UAE will have a fundamental impact on decisions around approaches to market entry and corporate structuring. Businesses operating in the UAE will need to consider what impact corporate tax will have on their existing structures, shareholding arrangements, agreements between group companies, their ability to maximise the use of losses or other corporate tax reliefs, and whether any proposed reorganisations or disposals will qualify for corporate tax reliefs (such as in respect of qualifying intra-group transactions or disposals of qualifying holdings) or may trigger unexpected corporate tax liabilities. International companies with marketing or so-called “rep-offices” in the UAE will also need to consider whether these will now be treated as taxable permanent establishments and whether the FTA will seek to attribute substantial taxable profits to the operations of such offices.
The M&A market will be affected by the introduction of corporate tax. Investors will welcome the fact that dividends and capital gains of a qualifying shareholding will be exempt from tax. However, greater due diligence costs are likely, to ensure that there is a full understanding of the corporate tax liabilities being acquired. We may see an increased flow of asset rather the share sales, so that buyers can control better the tax liabilities they acquire. Agreements will need to be bolstered to include more extensive tax warranties and indemnities. We may also see greater interest in warranty and indemnity insurance cover, to offer protection for shortfalls in protection for unexpected tax liabilities and penalties. This may be particularly the case for the first few years of the new corporate tax regime, where there may be greater risk of mistakes as the system and its requirements are embedded into organisational processes.
All UAE businesses should start to plan ahead for the introduction of corporate tax. As ever, however, the devil will be in the detail. A full review of the Corporate Tax Law and Regulations once issued will be necessary to understand, for example, exactly how the exemptions will apply and to clarify how free zone busines will be treated. Some legal restructuring may be advisable to optimise the corporate tax position.