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Contents Introduction Timelines and progress Taxable person Free Zones Live Webinar on

UAE Corporate Tax

Foreign Companies Calculation Mechanism

By: Gaurav Singhal

Group Taxation

30 July 2022

Transfer Pricing Compliances

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Introduction ›

On 28 April 2022, the Ministry of Finance, UAE (MoF) released its public consultation paper to provide insight on the proposed Corporate Tax (CT) regime.

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Objective: To incorporate internationally known and accepted principles and to ensure that UAE CT regime is readily understood rather than introducing new concepts

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The detailed law was expected to be issued by the mid of 2022 and is yet to be released.

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Introduction ›

The OECD and G20 inclusive framework on BEPS has been continuously evolving to address BEPS issues / tax avoidance, and to ensure coherence of international tax rules

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BEPS 2.0 constitutes 2 ‘pillars’: Pillar 1 is focused on reallocation of consolidated profit of multinational groups, and Pillar 2 introduces a global minimum effective tax rate

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In line with BEPS 2.0, the MoF is introducing a Federal CT for financial years starting on or after 1 June 2023

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Key principles followed by MoF in development of UAE CT

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UAE CT Regime – Progress

Jan 31, 2022

MoF announced introduction of federal CT

June 1, 2023

April 28, 2022

UAE Federal Tax Authority (FTA) issued FAQs

MoF issued consultation paper

Introduction of detailed provisions of CT law

Jan 31, 2022

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UAE CT regime will become effective for first financial year starting on or after this date

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Snapshot Identify taxable person (and its Residential status) Identify the incomes that are taxable Computation of taxable income – Starting from the Accounting Profit Adjustment for exemptions, disallowances (Eg: Interest-Cap) Offset tax losses (if any) of earlier years Computing tax liability after reducing tax credit available Other important provisions (such as, transfer pricing, group relief, etc.)

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Taxable Persons ›

Legal Persons  Limited Liability Company, Private Shareholding Company, Public Joint Stock Company, other UAE incorporated entities

 Limited liability partnerships  Foreign entities having a Permanent Establishment (PE) in UAE  Foreign entities that are effectively managed, controlled in UAE

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Natural Persons  Engaged in business or commercial activity in UAE  Partners in unincorporated partnership

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Persons Not Covered ›

Individuals (including expats) having employment and other personal income

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Private or family trust holding UAE real estate and other investment on behalf of beneficiaries

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Limited and general partnership where at least 1 partner has unlimited liability

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Other unincorporated joint ventures and associate of persons

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Exempt persons

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Persons Exempt from CT ›

Federal and emirate governments, their departments

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Wholly government owned UAE companies carrying out sovereign / mandated activities

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Companies engaged in extraction of natural resources

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Charities, other public benefit organizations

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Pension funds

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Investment funds

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Income taxable in UAE ›

Worldwide Taxation  Legal person, incorporated in UAE

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Non - Resident  Income from PE in UAE  UAE sourced income

 Foreign entity with PoEM in UAE ›

Territorial Taxation  Natural person: Only income from business activity carried out in UAE, is taxable under CT`

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Free Zones

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Free Zones Persons (FZP) ›

0% CT on companies, branches registered in FZ

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FZPs are required to file a tax return

Rest of the World UAE

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Certain incomes are taxable at normal rate of tax

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Certain scenarios may result in complete disqualification from 0% CT rate

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Irrevocable option to move to regular CT regime

FZ-1

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FZ-2

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Free Zones Persons (FZP) › Alternative scenarios Scenarios

Taxability

Income from another person in same FZ

0% CT

Income from another person in another FZ

0% CT

Passive income from a person in Mainland UAE

0% CT

Profit of FZP from branch in Mainland UAE

Regular CT

Transaction with a person outside UAE

0% CT

Income from regulated financial services directed at 0% CT foreign markets Income from transaction between FZP and its group 0% CT company in Mainland UAE FZP **

for

** But no deduction to payer entity in Mainland HEADS UP CONSULTING – TAX | REGULATORY | TRANSACTIONS

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Foreign Entities

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Foreign Entities and UAE Taxation Place of Effective Management ›

PoEM: Interpretations by OECD and international jurisprudence

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Highly fact-specific

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Location where key management and commercial decisions are taken

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Interaction with Tie-breaker rule in DTAAs, and how it has been augmented by the Multi Lateral Instrument (MLI)

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Foreign Entities and UAE Taxation Permanent Establishment ›

A place of business through which a foreign entity carries on its business in a host country (UAE) Rest of the World

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Determination of PE is designed on the basis of OECD Model Tax Convention

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The activity threshold that will trigger a PE in UAE will be determined by certain detailed tests

UAE

Home office

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Industry Branch

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Foreign Entities and UAE Taxation ›

Fixed Place PE  A fixed place of business through which business of an enterprise is wholly or partly carried on in other country

 Includes, a place of management, branch, employee’s home office, factory, workshop, real property, building site, etc.  Specific Activity Exemption: Preparatory or auxiliary activities ›

Agency PE

 Agent who is legally, economically dependent  Habitually exercises authority to conclude contracts in the name of the foreign entity (or negotiates / concludes contracts)  Exclusion: Independent agent + Ordinary course of business HEADS UP CONSULTING – TAX | REGULATORY | TRANSACTIONS

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Calculation of Taxable Income

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Calculation Mechanism Particulars

Amount

Accounting Net Profit / (Loss) as per financial statement

XXX

Add: Unrealized loss pertaining to a capital item, if recorded in the financial statement (unrealized gain, to be reduced)

XXX

Add: Net interest expense in excess of 30% of EBITDA • Safe-harbor protection, group ratio rules allowed • Valid commercial reasons for Intra-group borrowing

XXX

Add: 50% of entertainment expenses on customers, shareholders, suppliers, etc.

XXX

Add: Administrative penalties, recoverable VAT, donation paid to unapproved charity

XXX

Less: Exempted income (discussed in a separate slide) Taxable income HEADS UP CONSULTING – TAX | REGULATORY | TRANSACTIONS

(XXX) XXX

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Calculation Mechanism Particulars Taxable Income

Amount XXX

Corporate tax: Tax on taxable income upto AED 375,000 (A)

0% CT

Tax on income above AED 375,000 (B)

9% CT

CT liability (A+B) Less: Foreign Tax Credit (FTC)*, if any Final CT Payable

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XXX (XXX) XXX

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Exempt incomes ›

Dividend, and Capital Gains from sale of shares (in both UAE and foreign subsidiary), that meet Participation Exemption, i.e.:  UAE shareholder owns minimum 5% shares in the company

 In case of foreign company, it should be subject to a minimum of 9% tax ›

Dividend received by UAE corporate shareholder from FZP (taxed @ 0%) also eligible for exemption

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CG on sale of shares in FZP also exempt, if:  FZP is holding company and  Substantially all its income is derived from subsidiaries, that meets participation exemption

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Exempt incomes ›

Income from Foreign branch to be eligible for exemption (provided it is taxed at a sufficient level outside the UAE) Alternatively, UAE corporate may opt to claim offer their branch profit to tax, and claim a credit for taxes paid outside UAE (irrevocable option, to apply for all foreign branches)

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Tax Losses ›

Entities allowed to offset loss against taxable income of future years

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Maximum adjustment permitted in an year - Up to 75% of its taxable income

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Tax losses can be carried forward indefinitely

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In case of change in shareholding by more than 50%, the losses can be carried forward only if same or similar business is continued (this restriction is not applicable to listed businesses)

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Losses that cannot be carried forward Losses incurred before effective date of CT

Incurred before person became a taxpayer

Losses pertaining to exempted income

FZP’s loss, not attributable to mainland

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Group Taxation

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Group Taxation ›

Generally, tax laws treat each entity in group, as separate tax unit / person

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UAE CT regime will allow group consolidation, wherein corporate group will be treated as a single taxpayer and can file a single tax return, upon satisfaction of the following conditions:  95% shareholding of every group entity is directly / indirectly held by same parent company

 Parent / subsidiary are not exempt person, or FZP availing 0% CT rate  Group entities follow same financial year

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Group Taxation ›

Treatment of losses (where group consolidation is not opted for)  A company can transfer its tax losses to its group company, provided both entities are 75% commonly owned and none of the entities are FZP availing 0% CT rate  Total offset not to exceed 75% of taxable income of company receiving the transferred loss

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Transfer Pricing

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Transfer Pricing ›

TP regulation in line with internationally recognized Arm’s Length Principle

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Transactions between ‘related parties’ and ‘connected persons’

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Arm’s Length Price (ALP) determined using internationally recognized TP methods

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Excessive payment to owner / its connected person, not deductible

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Requirement to maintain a Master and Local file, if value of related party transaction exceeds monetary threshold

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Transfer Pricing Related Party › Individuals related to the fourth degree of kinship › Individual holding directly or indirectly 50% or more share / control in the legal entity (alone or with a related party) › Legal entities, where one entity (alone or with a related party) holds directly / indirectly 50% or more share / control in another entity › Legal entities, where their 50% or more share / control is owned by a common person › Branch or PE › Partners of same unincorporated partnership › Exempt and non-exempt activities of the same person HEADS UP CONSULTING – TAX | REGULATORY | TRANSACTIONS

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Transfer Pricing Connected Person › An individual directly / indirectly having control or ownership of taxable person

› Director or officer of taxable person › An individual related to owner, director or officer to the fourth degree of kinship › Partner in an unincorporated partnership

› Any other related party to the above

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Compliances

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Compliances under CT Registration

Businesses to obtain Tax Registration number within a prescribed time

Withholding tax 0% withholding tax is proposed for all domestic and international payments

Payment Tax to paid within 9 months from the end of relevant tax period (No requirement to pay Advance Tax)

Return of income Tax Return to be filed within 9 months from the end of relevant tax period

Assessment FTA may review CT return, and may issue an assessment within prescribed time

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Gaurav Singhal



Qualifications:

B.Com (H), CA, LL.B.

Mobile :

+91 98111 30097

E-mail :

gs@headsup.in

Gaurav has an experience of 20+ yrs, specializing in Corporate and International Taxation. He has worked for more than 10 years, with organizations such as BMR Associates, KPMG and Ernst & Young.



He is a co-founder of Heads Up Consulting, a tax boutique firm.

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He has been nominated as a Special Invitee of the Committee on International Taxation of the ICAI for year 2022-23.

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He is a regular speaker in various seminars organized by various forums such as ICAI, IFA, PHD Chambers, etc. He is frequently invited by companies and law

firms, to train their employees on domestic and international taxation.

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