Global Indian Family Enterprises: Legal, Financial and Operational Consideration
FAME Advisory was proud to collaborate with Jersey Finance to co-host a private wealth-themed event focused on Indian family enterprises. This event was held at Taj Dubai on June 20, 2024.
Our esteemed director, CA Nirav Shah, initiated and led the Global Indian Family Enterprises event. At this exclusive event, he offered a unique opportunity to gain invaluable insights through his captivating keynote speech.
What was covered in this event:
- Multi-Jurisdictional structures
- Increasing popularity of UAE structures
- Legal family governance and tax considerations
- Next-generation integration into family enterprises
This exclusive event included a dynamic panel discussion that featured senior professionals from the UAE, Jersey and India.
VAT Penalties and Fines in UAE: Cabinet Decision No. (49) of 2021 Impact
Ayushi Agrawal
The United Arab Emirates (UAE) has published Cabinet Decision No. (49) of 2021, which amends Cabinet Decision No. (40) of 2017 on Administrative Penalties for Violations of Tax Law in the UAE. The amendments have came in effect since 28 June 2021.
After the amendments, VAT penalties and fines in UAE have been reduced substantially as compared to the previous legislation.
This article compares the penalties that were applicable previously and the new penalties.
Understand the impact of VAT penalties under the UAE’s Tax Regulatory Framework.
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Below is the comparison between the penalties that were applicable previously and the new penalties.
VAT Penalties and Fines in UAE: Before and after Cabinet Decision No. (49)
Failure to keep required records and other information
The failure of the Person conducting Business to keep the required records and other information specified in the Tax Procedures Law and the Tax Law. Before the amendment, the previous penalty imposed was AED 10000 for the default that happened the first time, and in case of repetition, it would be AED 50,000. After the amendment, the penalty in case of default repeats changed and was reduced to AED 20,000.
For example, in case if a business does not maintain invoices and receipts for sales made in January and June during the year 2024, it would be penalised with AED 10,000 for the first default in January and AED 20,000 for the repetitive default that happened in June.
Failure to inform the Authority of the amendment of tax record information
The failure of the Registrant to inform the Authority of any circumstance that requires the amendment of the information pertaining to its Tax record kept by the Authority. The previous penalty was AED 5,000 for the first time and AED 15,000 in case of repetition. However, in the case of the repetition of default, the penalty has decreased to AED.
For example, a company that moves to a new address but does not inform the tax authority about the change in its official records in 2023 and further changes its shareholders in 2023 would be penalised AED 5,000 for the default of address change in 2023 and AED 10,000 for the default in updating the shareholders' records.
Submittal of an incorrect Tax Return by the Registrant
The penalty for the submittal of an incorrect Tax Return by the Registrant was AED 3,000 for the first time and AED 5,000 in case of repetition. This has now changed to AED 1000 in the case of the first default and AED 2000 in the case of repetitive default.
For example, if a company submits a VAT return showing fewer sales than the actual need, it will be penalised AED 1,000 for the first default in 2023.
Late payment penalty for failure to settle the stated VAT in the submitted VAT return:
Late payment penalties for underpaid VAT as per the voluntary disclosure or tax assessment were 2%-Day after the due date, 4% one week after the due date, 1% per day one month after the due date, and which could go up to a maximum of 300%.
Now, the penalty is 2% a day after the due date, 2% one week after the due date, and 4% per month one month after the due date, which can go up to 300% maximum.
When a business has submitted its VAT return on time but fails to pay the due VAT amount of AED 50,000 by the deadline, it needs to pay 2% of the unpaid tax immediately, i.e. AED 1,000, plus 4% per month up to 300% of the unpaid tax, i.e. maximum up to AED 150,000.
Late payment penalty for underpaid VAT as per the voluntary disclosure or tax assessment
This has significantly changed the percentage of the penalty that would be imposed on the business in case of late payment for underpaid VAT as per the voluntary disclosure or tax assessment. The VAT late payment penalty in UAE before was 5% of underpaid value irrespective of when disclosed. However, the new amendment changed provided that if the error was disclosed in the first year, 5% of underpaid tax value, 10%, 20%, 30% and 40% if disclosed in the second year, third year, fourth year and a fifth year or thereafter respectively.
Where additional VAT liabilities arise from a voluntary disclosure or a tax assessment, the new rules represent a significant change. Now, taxpayers will be given 20 days to settle any underpaid tax before late payment penalties apply.
A company based on a voluntary disclosure finds that they owe an additional VAT of AED 20,000. They do not pay the amount within 20 days.
Where additional VAT liabilities arise from a voluntary disclosure or a tax assessment, the new rules represent a significant change. Now, taxpayers will be given 20 days to settle any underpaid tax before late payment penalties apply.
A company based on a voluntary disclosure finds that they owe an additional VAT of AED 20,000. They do not pay the amount within 20 days.
- Year 1: 5% of the underpaid tax (AED 1,000)
- Year 2: 10% of the underpaid tax (AED 2,000)
- Year 3: 20% of the underpaid tax (AED 4,000)
- Year 4: 30% of the underpaid tax (AED 6,000)
- Year 5 or thereafter: 40% of the underpaid tax (AED 8,000)
Failure of the Person/Taxpayer to voluntarily disclose an error
The failure of the Person/Taxpayer to voluntarily disclose an error in the Tax Return, Tax Assessment, or refund application pursuant to Article 10 (1) and 10(2) of the Tax Procedures Law before being notified by the Authority that it will be subject to a Tax Audit.
The previous penalty was 30% of the underpaid tax after notification of the FTA audit and 50% of the underpaid tax upon the error. The penalty is 50% of the underpaid tax, along with 4% of the underpaid tax per month from the due date of the VAT.
A taxpayer realises they made a mistake in their previous tax return but does not report it before receiving a notice of a tax audit, where the undeclared amount is AED 10,000. It needs to pay 50% of the undeclared tax amount, i.e. AED 5,000, along with 4% from the due date of the VAT return.
Failure of the Taxable Person to submit a registration application
The penalty for failure of the Taxable Person to submit a registration application within the timeframe specified in the Tax Law previously was AED 20,000, which is reduced to AED 10,000.
A business that reaches the turnover threshold for VAT registration but fails to apply for registration within the timeframe specified by the Tax Law needs to pay AED 10,000.
Failure of the Registrant to submit a deregistration application
In case the Registrant fails to submit a deregistration application within the timeframe specified in the Tax Law, the law previously imposed AED 10000. Now, the penalty is changed to AED 1,000 in case of delay, and on the same date monthly thereafter, up to a maximum of AED 10,000.
A company stops trading and is no longer required to be VAT registered but does not apply for deregistration in a timely manner and thus needs to pay AED 10,000.
Failure by the Taxable Person to display prices inclusive of Tax
If the Taxable Person fails to display prices inclusive of Tax, a penalty of AED 5000 will be imposed, which previously was AED 15000.
A businessman who advertises products with prices that do not include VAT, contrary to the requirement to display tax-inclusive prices, would need to pay AED 5,000 per instance.
Failure of the Taxable Person to issue a Tax Invoice
The failure of the Taxable Person to issue a Tax Invoice or the alternative document when making any supply earlier attracted a penalty of AED 5,000 for each tax invoice or alternative document, whereas now it is AED 2,500 for each detected case.
A service provider does not issue a tax invoice to its clients for services provided in the year 2024. He needs to pay AED 2,500 per invoice not issued.
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Implications of the Amendments to VAT Penalties and Fines in UAE
Overall, after the amendments, the penalty has been reduced, and it has adopted a supportive approach towards business. By reducing VAT fines, the UAE tax authority aims to create a more business-friendly environment, reducing the financial burden and encouraging compliance. Below are the key changes:
- Ensure Compliance with the Law: The reduced penalties will encourage businesses to comply with tax without the fear of high penalties.
- Supporting Businesses: By reducing the fines, the TAX authority is giving its support to those who usually struggle with high penalties.
- Promoting Voluntary Disclosures: By giving the grace period for voluntary disclosures, the businessman will come forward and rectify errors early.
- Improving Record-Keeping and Reporting: The reduced penalties for record-keeping and reporting will encourage businesses to maintain correct and updated records.
- Increase Focus on Business Operations: By making the tax compliance process easy and smoother, businesses can focus on their growth and development.
Final Words on VAT Penalties and Fines in UAE
The amendments introduced through Cabinet Decision No. (49) of 2021 marks a significant shift VAT penalties and fines in UAE, now aiming to foster a more supportive environment for businesses. With such a reduction in penalties across various violations, the UAE tax authority seeks to encourage compliance and promote a culture of voluntary disclosure and accurate record-keeping.
Therefore, the new framework reflects a step towards enhancing business confidence and ensuring economic development in the UAE.
At FAME, we help businesses understand these changes and ensure that your business stays compliant with VAT regulations and minimises risks of fines and penalties. We guide businesses to overcome VAT compliance challenges and optimise their performance in the UAE market.
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Public Clarification No. 38 (Manpower vs Visa facilitation services)
Ayushi Agrawal
FTA has come up with a new public clarification no. 3 Manpower vs Visa facilitation services 8 (Manpower vs Visa Facilitation Services), which can resolve one of the challenges faced by UAE companies in the application of VAT.
This clarification arises in the instances where an employment visa is held by one company while the employees work under the supervision and control of another company.
There are two kinds of supply which having different VAT treatments in this scenario. Therefore, it’s necessary to identify the supply for applying the correct VAT treatment: Manpower Services or Visa facilitation services.
Let’s understand in detail for each of these supplies and its treatment under VAT.
Manpower Services
When a Company (Supplier) identify/recruit/hire the candidates and make such employees available to another Company (Customer), then it is generally regarded as a taxable supply of manpower services under the VAT legislation.
Here, the Supplier is generally responsible for all the employment obligations, including the payment of salaries and other benefits. Besides that, the Supplier will be responsible for ensuring whether the employee has performed their duties and the quality of work as well.
Value of supply: Consideration includes the full amount received or expected to be received by the Supplier from the Customer, including employees’ salaries, benefits, or any additional amount charged and other recharges related to manpower services.
I.e., Consideration = Salaries & other benefits paid to employee (whether paid by Supplier/Customer)+ any additional amount charged by the Supplier respect to this supply
Visa Facilitation Services
This is like an exception to manpower services. A supply would not be treated as a supply of manpower services but instead, as a supply of visa facilitation services when all the following conditions are satisfied:
1.The employment visa holder (“Facilitator”) and the Customer are part of the same corporate group but are not part of the same tax group. (If it is under the same tax group then such supply would be out of scope in VAT)
Here, a question arises: what is the corporate group?
These are companies operating in the same corporate structure, which includes common ownership of the companies specified under clause (2), article (9) of Executive Regulation.
2. The Facilitator’s business activities do not include the supply of manpower.
This means if the facilitator supplies any manpower services to any person the condition will not be met.
3. The facilitator is not responsible for any of the obligations related to the employee
As a part of visa facilitation, customers take responsibility for the following obligations:
- Payment of an employee’s salary.
- Payment of other monetary benefits, including financial incentives, annual flight allowances, and housing allowances.
- Provision of medical insurance and accommodation
So, the customer has to pay all these employee obligations.
And facilitator’s obligation is limited to incurring the cost relating to obtaining the employment visa
4. The Facilitator sponsors these employees to exclusively work for and under the supervision and control of the Customer.
Implies that employees exclusively work for the Customer and are under that Customer’s supervision and control, this condition would be met.
If any of the conditions above fail to be met by the facilitator, then such supply shall be treated as a supply of manpower services
Nature of Supply: Visa facilitation services are also regarded as taxable supply in UAE
Value of Supply: Value of facilitation services differ from value of manpower services
Here Value of supply = amount changed for the services which could include the recharge of expenses such as typing fees, medical tests and issuance of employee Emirates IDs
The value of the supply of visa facilitation services excludes the employee’s salary, annual flight allowance, and any other monetary benefits, as these are the obligation of the customer.
In short, what FTA trying to differentiate here is the value of supply between these two services i.e. manpower Vs visa facilitation services, which can be summaries below;
Special valuation rule for supply between related parties & supplies without any consideration
Value of Supply – Related parties
Case-1: The facilitator charges a fee that’s equal to the market value of the supply, The fees charged would be regarded as consideration for the taxable supply of services, and that will be the value of supply.
Case-2: The facilitator charges a fee that is less than the market value, then the value of supply is the market value of the supply; the facilitator is required to impose VAT on the market value of the supply, regardless of the actual amount charged for the visa facilitation services.
Value of Supply – No fee is charged
When supply happens without any consideration, the provisions of the deemed supply will trigger.
However, if the supplier has not recovered the input VAT for the related goods or services, a supply made by him without consideration will not be regarded as deemed supply (Article 12 of VAT decree-law).
When a Facilitator provides facilitation services to customers without charging any fee there are two possible scenarios
Case 1: If the facilitator does not recover the input VAT incurred to make the supply, then the supply of visa facilitation services will not be deemed supply. It would fall outside the scope of VAT.
Case 2: The facilitator recovered any input VAT tax to supply the visa facilitating services, the facilitator will be required to account for the output tax due based on the total cost incurred to make the supply, including direct and indirect costs.
(Here “direct cost” refers to costs that specifically relate to the services provided within this context, including typing fees, logistics, and any other fees charged for the purpose of visa issuance. “Indirect costs” refers to overhead expenses (e.g. office rental and utilities) as well as other general operational expenses incurred by the Facilitator).
In instances where the Facilitator is unable to calculate the cost of providing the visa facilitation service, the market value of similar services may be used as an indication of the value of the supply.
Examples for Manpower vs Visa facilitation services
Supply of Manpower Services (Example 1)
Company A holds the employment visas for employees working at Company B. Company A makes these employees available to Company B. Hence, Company A is regarded as supplying manpower services irrespective of whether the employees’ salaries and benefits are paid by Company A or Company B.
The consideration for the supply of manpower services is equal to the total amount incurred by Company B, including salaries and benefits (irrespective of whether the employees’ salaries and benefits are paid by Company A or Company B), as well as any amounts related to the services provided by Company A to Company B in relation to the supply of the services.
Supply- Exception to Visa Facilitation Service (Example 2)
Company A holds employment visas for persons working for Company B. Company A and B are part of the same corporate group.
As part of Company A’s operations, it also provides secondment services to businesses outside its corporate group. Company A is, therefore, regarded as supplying manpower services, and the supply does not meet the second condition.
Consequently, the supply of visa support services provided by Company A to Company B does not qualify as a supply of visa facilitation services and Company A is regarded as supplying manpower services to Company B.
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GCC Tax And Regulatory Communique May 2024
Webinar on Navigating FTA’s Free Zone Persons’ Guide
Webinar on Navigating FTA’s Free Zone Persons’ Guide
FAME Advisory DMCC has come up with the exclusive webinar: Navigating FTA’s Free Zone Persons’ Guide: Key Insights and Application.
With this webinar on Navigating FTA’s Free Zone Persons’ Guide: Key Insights and Application, we aim to discuss important aspects of the Free Zone regime. FAME Advisory’s Esteemed Director and Founder, CA Nirav Shah is going to share the insights on the Guidance released on Free zone persons. We will also go through various nuances and intricacies involved in relation to availing the 0% benefit for a Free Zone person
Besides that, FAME Advisory’s Taxpert, Karishma Bhuwalka will deliver more information on CT guide on free zone persons, providing useful insights in the simplest way.
What Does this Webinar on Navigating FTA’s Free Zone Persons’ Guide Cover?
The FAME Advisory’s webinar on Navigating FTA’s Free Zone Persons’ Guide: Key Insights and Application will cover the following:
- Insights into the Guidance released on Free Zone Persons
- Clarifications on various technical aspects for entities operating in a Free Zone in the UAE
- Case studies related to CT guide on free zone persons
Who should Join Our Webinar on Navigating FTA’s Free Zone Persons’ Guide ?
The webinar will be useful for:
- Tax enthusiasts and upcoming consultants who wish to advise people on UAE corporate tax matters for free zone persons.
- Business owners, managers, and compliance officers who handle corporate tax compliance for free zone entities.
- Finance professionals who are involved in tax planning and free zone advisory.
- Legal professionals who deal with corporate tax matters in free zone.
- Individuals and students who wish to learn about corporate tax laws and regulations for their professional or academic growth.
Benefits of Joining Our Webinar on Navigating FTA’s Free Zone Persons’ Guide
- Opportunity to learn from veteran corporate tax expert, CA Nirav Shah
- Exclusive insights on CT guide on Free zone Persons
- Stay updated with the latest regulations and enhance your CT knowledge
- Learn about CT guide on free zone persons with the practical case-studies
About Speaker
1. Nirav Shah
(Director, Fame Advisory DMCC)
Mr. Nirav Shah, Director at FAME Advisory is a qualified Chartered Accountant and a stalwart in the industry being recognized as amongst the top corporate structuring, international tax, and compliance expert in the UAE.
2. Karishma Bhuwalka
(Manager- Tax Advisory, Fame Advisory DMCC)
Karishma Bhuwalka is an experienced chartered accountant who has been working in the field of direct & international taxation for more than a decade. Karishma strives to provide solution-oriented advisory for clients & ensure tax compliance. Over the course of her professional journey, she has helped several firms solve complex group structure and transfer pricing issues. Moreover, she ensured compliance for clients at an affordable cost without compromising quality.
Economic Substance Regulations (ESR) Audit Intimation– Response Preparation and Documents Required
Ayushi Agrawal
Under the Cabinet of Ministers Resolution number (57) of 2020 concerning Economic Substance Requirements and ministerial decision number (100) of 2020 to comply with the Economic Substance Regulation (ESR) you are under audit.
If you or your entity received ESR Audit notice from National Assessing Authority, this article comes handy as we cover primary factors that should be taken care of. You can also keep this article as your go-to resource for future reference.
What is an Economic Substance Regulations (ESR) Audit Notice?
Federal Tax Authority (FTA), being the National Assessing Authority, may undertake assessments to determine whether a Licensee has met the Economic substance Test or not. FTA can either send additional Information request or issue audit Notice in this regard.
As per the Economic Substance Regulation, UAE entities whose business activities meet the scope and definition of any of the nine ESR relevant activities, are required to prepare and submit Economic substance Notification and Economic Substance Report.
Relevant Activities Under ESR Law
- Banking Business
- Insurance Business
- Investment Fund management Business
- Lease – Finance Business
- Headquarters Business
- Shipping Business
- Holding Company Business
- Intellectual property Business (“IP”)
- Distribution and Service Center Business
Such reporting entities are Licensees for ESR law.
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How is the Economic Substance Regulations (ESR) Audit notice issued?
Licensee (Being a UAE Business entity) subject to ESR Audit will be sent intimation either on the registered email or resubmit link will be activated on the ESR Portal or both. The Tax Auditor from Federal Tax Authority will send email to the registered email address indicating the submission requirements.
For ESR Audit licensee will get ‘you are under audit’ email from the tax auditor of Federal Tax Authority. The email notifies about the entity under audit, List of requirements to be submitted and time frame or submission deadline. Usually, FTA gives 5 business days from the date of Audit Notification for submitting the Audit Response.
One may also get additional Information request from their License issuing Authorities, with regards to the ESN or ESR submitted, where in an information for supporting your submissions may be assessed.
What are the details asked under Economic Substance Regulations (ESR) Audit Notice?
One of the most common ESR audit challenges that licensees have is the detailed asked under the ESR audit.
The ESR Audit intimation usually comes with a File name – Initial List of requirements. It has standard set of questions and requirements.
There is an exhaustive list that requires you to submit large amount of information with the deadline of five business days.
To make it easy for you to understand the complete list, we have categorized the information requested under ESR audit:
- Company related general documents – Trade License, Lease agreement
- Constitutional documents – Memorandum of Association, UBO declaration
- Employee Details – CVs, Timesheets, Employee Contracts, Passport, Visa and Emirates ID of the Employees, working papers for calculation of Full Time Employees.
- Financial Information – Audited Financials/Management Accounts, Working Papers for calculation of Relevant Income, Profit/Loss attributable to the relevant activity
- Relevant Activity Information – Clarification for type of Relevant Activity reported and justification as to how business activity meets the Relevant Activity criteria.
- Assets details – Details of Physical assets held in UAE, Lease Agreements, Title Deeds/purchase agreements of the assets
- Boar Meetings – The questions relating to number of board meetings held within UAE and Outside UAE, Number of resident directors present, details of resident directors and non-resident directors, explanations in case no meetings were held during the reporting year
- Outsourcing Information – If the main activity of the business is outsourced, all the information related to Outsourced activity, Entity to whom activities are outsourced and other related information
You can use this as ESR audit preparation checklist for documents. Overall, the list has more than 30 items which includes questions and documentary evidence. In substance, everything asked revolves around the submissions done at the time of Filing your Economic Substance Notification and Economic Substance Report. Therefore, don’t get anxious looking at the long list of requirements. Yes, you are mostly prepared at the submission stage and in the Audit stage, you only need to organize and present your documents and justification.
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How to Submit Economic Substance Regulations (ESR) Audit Response?
Tax Auditor of Federal Tax Authority can ask you to submit the information in the following ways:
Email Response – Reply to the email received from the FTA Tax Auditor with the response letter and all the documents and working files prepared.
ESR Portal Response – If the Audit Intimation email says – click on the link to submit your response – you have been asked to submit Audit Response on ESR portal through your dashboard. Click on the link, Login and you will find resubmit link against the Financial Year column for which Audit has been initiated.
How will I know if the Information provided would suffice?
After the review of your submissions, the FTA will ensure it has received all the information it requires to conduct the audit. So, you may receive the request (on registered email address) to resubmit some information or submit additional information. But if no such email comes after your submission – You have done it all right, as far as submission of response is concerned.
Economic Substance Regulations (ESR) Audit Conclusion
So long as the working papers, relevant activity information and the documents of the company can evidence that your entity meets the Economic substance Test, the Audit will conclude, and the Auditee receives confirmation as below –
the National Assessing Authority determines that a Licensee or an Exempted Licensee has failed to comply with applicable provisions of the ESR Regulations, the National Assessing Authority may impose various administrative penalties as set out under ESR Regulations.
What are the important aspects to be considered for Economic Substance Regulations (ESR) Audit?
- Note that, FTA is assessing whether Reporting entity meets the Economic substance Test or not? Here are the key requirements of Economic substance Test
- The Licensee conducts Core Income-Generating Activities (“CIGA”) in the UAE.
- The Relevant Activity is directed and managed in the UAE;
- Having regard to the level of Relevant Income earned from a Relevant Activity, has an:
- adequate number of qualified full-time (or equivalent) employees in relation to the activity,
- incurs adequate operating expenditure by it in the UAE
- has adequate physical assets (e.g. premises) in the UAE.
- Verify the details submitted in the Economic Substance Report and ensure that all the information submitted therein is same as the Audit Response you will be submitting.
- Arrange the documents and mark them in the same series in which they are asked in the Initial Requirement List – this will ensure that no document or information is missed out.
- All the explanations and working papers should be provided in separate files and keep the file names in context of the information asked. For instance, if you are providing the Employee Register – Name it as Working Paper for calculation of Full Time Employees (FTEs)
FAME Advisory’s Economic Substance Regulations (ESR) Audit Service
We have been assisting clients in conducting ESR registration as well as handling ESR audit requirements for them. FAME Advisory prepares the complete documentation and response on the behalf of licensee and ensure that the companies meet the requirement of Economic Substance Test.
This article summarizes all the practical aspects that we have dealt with so far, while handling ESR audit process for our clients. It will help you at the time of your ESR Audit. Keep this as your guide and avoid rush in preparing your audit response within just 5 days.
If you want assistance in preparing your ESR Audit response or are looking for ESR filing services, feel free to reach FAME Advisory DMCC.
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FTA Releases Guide on Free Zone Persons
The Federal Tax Authority (FTA) has finally released the much-awaited Corporate Tax (CT) guide for Free Zone entities on May 20, 2024.
This guide offers comprehensive guidance and clarity on various technical aspects for entities conducting business in a Free Zone in the UAE. It is designed to be read alongside the relevant articles of the UAE Corporate Tax Law, implementing decisions, and other guidance published by the FTA.
Below are some of the key highlights from the CT guide for Free Zone entities:
| Confirmation from Free Zone Authority: | Every Free Zone person should check with their respective Free Zone Authority to confirm if they operate in a Free Zone or Designated Zone to avail the benefit of CT@0%. There is no separate list of Free Zones/Designated zones issued for CT purposes. |
| Election: | i) A Free Zone Person will be deemed to be a Qualifying Free Zone Person (QFZP) unless they fail to meet one of the QFZP conditions or elect to be subject to tax. ii)A QFZP that elects to be subject to standard CT (i.e. 9%), or fails to meet the QFZP criteria for a specific Tax Period, will lose its QFZP status starting from the beginning of the Tax Period in which it elects to pay CT or fails to meet the criteria, as well as for the following four Tax Periods. After this period, a new election can be made if the entity wishes to continue not being treated as a QFZP unless it no longer meets the criteria of QFZP in a particular tax period. iii)The said election can be made at any point during the Tax Period in question or in the subsequent Tax Return after the Tax Period ends. This election cannot be made after the tax return filing deadline for the concerned tax period. |
| Allocation of expenses: | If a Free Zone Person generates both Qualifying Income and Taxable Income (for example, income attributable to its Foreign Permanent Establishment or Domestic Permanent Establishment), it must allocate expenses between the two and also maintain sufficient documentation that the profits attributed are commensurate with the functions performed, assets used, and risks based on the arm’s length principle. |
| Transaction between free zone persons: | In case of Qualifying Income derived from transactions between Free Zone Persons, the seller may obtain a written statement or undertaking from the purchaser affirming their role as a Beneficial Recipient and their intention to utilize the services or goods for their free zone business. |
| No income during start up phase: | A Free Zone Person who hasn’t earned any Qualifying Income in a Tax Period because they haven’t commenced revenue generation won’t lose eligibility as a QFZP, as long as they do not derive any non-qualifying revenue and fulfill all other obligations outlined in the CT Law. |
| Treatment of Tax losses: | i)Tax Losses incurred by a QFZP on their Taxable Income can be carried forward to offset against future Taxable Income, except for income from intellectual property. ii)Losses related to Qualifying Income cannot be used to offset Taxable Income, transferred, or carried forward. Further, QFZPs cannot transfer or receive Tax Losses from other Taxable Persons. |
| Outsourcing of core income generating activity: | In case a Free Zone Person outsources a core income-generating activity to another entity within a Free Zone or Designated Zone, adequate supervision over the activity by the Free Zone Person is important where it should be capable of overseeing and controlling the activity adequately, and ensuring that the resources of the entity performing the activity are sufficient for the specific services rendered to the Free Zone Person, without any duplication of assets, employees, or expenses across multiple Free Zone Persons. For distribution activity, core income generating activity must be outsourced within a designated zone. |
| Treatment of Mixed use property: | In the case of a hotel building in a Free Zone, revenue allocation between commercial and non-commercial units should be determined. This allocation can be based on the records of the land registry department or alternative methods like rental or property value. The aim is to achieve a fair and reasonable arm’s length allocation considering the specifics of each case. Generally, retail outlets and restaurants are classified as commercial units, while rooms, conference rooms, and banquet halls are considered non-commercial units. |
| Ancillary activities: | Qualifying Activities include ancillary activities, which are those necessary for the performance of the main activity or contributing minorly to the main Qualifying Activity and are closely related to it. If an ancillary activity is conducted independently of the main Qualifying Activity, it will not be considered a Qualifying Activity. Determining whether an activity is ancillary depends on the specifics of the main Qualifying Activity conducted by the Free Zone Person and will be assessed based on the particular facts and circumstances of the case. |
| Income from Qualifying Intellectual Property: | i) In order to benefit from the 0% rate on Qualifying income from Qualifying Intellectual property, a QFZP must be able to demonstrate a nexus between Qualifying expenditure and income from Qualifying Intellectual Property. In such cases, a QFZP must set up an appropriate tracking system in order to avail the benefit. ii) While calculating the Qualifying income from Intellectual Property, the sum of Qualifying expenditure and Uplift expenditure shall be lower of the following- – 130% of Qualifying Expenditure – Overall Expenditures |
| Compliances: | 1. A QFZP is not required to prepare separate Financial Statements for its Qualifying Income and its other income and should have sufficient documentation to demonstrate the calculation of Qualifying Income. 2. A QFZP is not required to prepare separate Financial Statements for any of its branches. |
Here are the main highlights from this CT guide regarding Qualifying activities –
| 1. Manufacturing of goods or materials: | 1. Activities that might be considered ancillary to the Qualifying Activity of manufacturing goods or materials, provided they naturally and integrally complement the main Qualifying Activity and meet the conditions for ancillary activities, include post-sale activities and customer support. Also, manufacturing does not include repairs. 2. Intangible items like software, which can be sold independently of a physical asset, are not considered goods under the definition for this Qualifying Activity. Therefore, the creation of software, ERPs, automation tools, and similar items will not be classified as the manufacturing of goods or materials. However, Software embedded in hardware (i.e. it is inherently part of the hardware) generally would be considered as goods. 3. Goods that are manufactured in the UAE do not need to pass through a Designated Zone, however, the distribution activity is required to be conducted in or from a Designated Zone in order to be a Qualifying Activity. However, the question remains unresolved as to whether a manufacturer producing goods or materials within a free zone, which isn’t designated as such, would have their distribution activities from that free zone considered as Qualifying activities. |
| 2.Trading of Qualifying Commodities: | 1. Qualifying Commodities encompass metals, minerals, energy, and agricultural products traded in their raw form on a Recognized Commodities Exchange Market. Recognized Commodities Exchange Market means the following- – Markets that are established in the UAE and licensed and regulated by the relevant authorities (such as Central Bank of the UAE, the Dubai Financial Services Authority of the Dubai International Financial Centre (DFSA), the Financial Services Regulatory Authority of the Abu Dhabi Global Market (FSRA), or the Securities and Commodities Authority (SCA). For example, the Dubai Gold & Commodities Exchange in the UAE) or – Markets are of equal standing if established outside the UAE(such as the Chicago Board of Trade, and the London Metal Exchange). 2. The Qualifying Commodity needs to be in a form that is traded on a Recognised Commodities Exchange Market. Metals, minerals, energy, and agriculture commodities that are traded on a Recognised Commodities Exchange Market will be deemed to be in raw form when they meet the conditions to be traded on the said exchange (for example, gold being 99.4% purity in bullion form). The trade itself does not need to be performed through an exchange. 3. Raw form refers to commodities in their natural, unprocessed state, with no added value, traded on recognized commodities exchange markets before any processing or transformation. 4. Under agricultural commodities it includes products like wheat, corn, and soybeans. 5. Under Energy commodities it includes crude oil and natural gas. 6. Under Metals it includes items like gold, silver bars, and aluminum ingots. |
| 3. Holding of shares and other securities for investment purposes: | 1. The active trading of shares and other securities would not constitute a Qualifying Activity. 2. If the intention to hold can be demonstrated for an uninterrupted period of at least 12 months, Shares and other securities shall be deemed to be held for investment purposes and accordingly benefit shall be available. 3. Income derived from securities backed by receivables from non-financial asset is excluded from the Qualifying Activity. However, securities backed by receivables from a financial asset will be considered under Qualifying Activity. |
| 4. Ownership, management and operation of ships: | 1. Ships used for local transportation or leisure or recreational purposes, or as floating hotels, restaurants or casinos is not considered under Qualifying Activity. 2. Business consisting solely of maintenance, fit-out or repairing Ships will not be considered as a Qualifying Activity. 3. It also does not include the leasing of shipping containers, unless that activity is ancillary to a shipping business. |
| 5.Fund management services and Wealth and investment management services: | 1. Fund management services and Wealth and investment management services will be considered as Qualifying Activities if they are subject to the regulatory oversight of the relevant Competent Authority in the UAE. The following shall be considered as Competent Authority in the UAE:- – Central Bank of the United Arab Emirates – The Dubai Financial Services Authority – The Financial Services Regulatory Authority of the Abu – – Dhabi Global Market or – The Securities and Commodities Authority 2. Single Family Office and Multi Family Office would not be considered under Qualifying Activity of wealth and investment management services if it is not appropriately regulated by a relevant Competent Authority. |
| 6.Treasury and financing services to Related Parties: | 1. Under this activity, the definition of Related Parties includes Domestic Permanent Establishments and self-investment. Income from investment of surplus funds such as Interest from bank deposits, will be treated under Qualifying Activity as it will be considered as Treasury and Financing services to oneself. 2. The activity of Treasury and Financing is widely defined and includes cash pooling, cash management, risk management, investment management and financing. |
| 7.Financing and leasing of Aircraft: | Sub-leasing of Aircraft will fall within the scope of Qualifying activity. |
| 8.Distribution of goods or material in or from a Designated Zone | 1. A key feature of distribution activity is that the distributor holds the title to the products which differentiates it from Logistics services. 2. As per MD 265 of 2023, definition of “Distribution of goods or material in or from a Designated Zone” includes buying and selling of goods, materials, component parts or any other items that are tangible or movable. Accordingly, distribution of intangible products and services such as licenses, software and financial products/ services will not be covered under distribution activity. However, the guide has further clarified that if the product is embedded onto a hardware, income for which is not separately identifiable, they can still qualify for Distribution activity. 3. The concept of ‘end-user’ is now defined in the Guide. End-user is the person who eventually uses the product for its intended purpose, whether they may be personal, commercial or industrial. Accordingly, if a distributor is engaged in selling goods to a customer who is end-user (i.e., uses or consumes the product), then such activity will not be considered as a Qualifying activity. A QFZP has to conduct necessary due-diligence (obtain KYC, undertaking etc. from the customer) to demonstrate that the customer is not an end-user in order to fall within the scope of the Distribution as a Qualifying activity. 4. Under Ministerial Decision No. 265 of 2023 on Free Zone, it was not clear whether High Seas Sales (Third port shipment) is covered under Qualifying activity -Distribution of goods or materials in or from a Designated Zones, as goods do not physically enter UAE. Now the new guide has clarified that High Seas Sales (Third Port Shipment) if undertaken from Designated Zones shall be covered under Qualifying Activities. 5. There are no limitations on the mode of distribution. For goods that are procured from UAE itself and sold in UAE/outside, they do not need to pass through a Designated Zone. The requirement of distributed goods to enter a Designated Zone only applies in case goods are imported into the UAE and then sold. |
| 9. Logistics services: | 1. Logistics services do not include the movement of people. 2. Last-mile delivery services outside of the Free Zone in the UAE or in a foreign country will also be considered as a Qualifying Activity provided QFZP performs most of its logistics services within a Free Zone for its customers in the UAE outside a Free Zone or foreign customers. |
Treatment of Unrealized Gains and Losses Under UAE Corporate Tax
Ayushi Agrawal
For calculating taxable income under the UAE Corporate Tax law (the CT law), general rules for determining taxable income- defined under Article 20 of the Corporate Tax Law (CT law) are to be considered. According to Article 20 (2) of the CT law – taxable income for a tax period shall be calculated by considering accounting income and making specific adjustments defined under Article 20 (2); the first adjustment is for – any unrealized gains or losses under UAE Corporate Tax.
In this article, we will see how unrealized gains and losses are treated and how they impact the computation of Taxable income. We will first understand the Term realisation principle with ‘Unrealized Gain /Unrealized Loss’.
What is the realisation principle, and when is income realised for UAE Corporate Tax purposes?
As under many other Corporate Tax systems, the UAE Corporate Tax regime allows Taxable Persons to apply the realisation principle for determining their Taxable Income. This means that income will be taxable, and a deduction would be allowed only when a gain or loss is realised. Realisation would happen, for example, when the relevant asset is sold or terminated
Under the realisation principle, the Taxable Income for each Tax Period would exclude unrealized gains and losses in respect of assets or liabilities that are subject to fair value or impairment accounting or held on the capital account, depending on the election made by the Taxable Person.
What are Unrealized Gains and Losses Under UAE Corporate Tax?
Let’s have a look at unrealized gains and losses specifically:
Unrealized Gains:
In simple terms, the gains which have not yet been realised in cash are known as unrealized gains. For example, items such as financial instruments, which are liquid and short-term, are subject to the fair value of accounting.
An unrealized gain is an increase in the value of an asset or investment that has not been realised in cash; it becomes a realised gain when the asset or investment is sold.
Unrealized Losses:
The losses that have not yet been suffered or occurred are unrealized.
An unrealized loss is a decrease in the value of an asset or investment that has not been realised in cash; it becomes a realised loss when the asset or investment is sold.
Following accounting items can be referred to as unrealized gain/loss:
- Provision for expected credit loss;
- Provision for slow-moving inventory;
- Derivate financial instruments;
- Impairment of property, plant and equipment;
- Impairment of investment property;
- Unrealized foreign exchange gain or loss;
- Financial assets or liabilities carried forward at fair value through profit or loss (FVTPL) – forward exchange contracts not used for hedging;
- Investment property fair value changes;
- Adjustment for loss on revaluation of intangible assets.
- Adjustment for loss due to revaluation of property, plant and equipment;
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What will treating the Unrealized Gains and Losses Under UAE Corporate Tax be?
While computing taxable income for the relevant tax period, a taxable person who prepares their financial statements using the accrual basis of accounting may elect the following option:
Option 1: No Election
Unrealized gains/losses on assets and liabilities held on both capital and revenue accounts will be treated as taxable or deductible as they arise. i.e., on” Accrual Basis. Accordingly, no corresponding adjustment for provisions shall be made while computing taxable income.
Option 2: Election to recognise gains or losses on a “Realisation Basis” for UAE CT Purpose for all assets and liabilities
The Taxable Person can elect to recognise gains and losses on a ‘realisation basis’ for UAE Corporate Tax purposes for all assets and liabilities that are subject to fair value or impairment accounting – that is, any and all unrealized gains would not be taxable (and conversely, any and all unrealized losses would not be deductible) until they are realized. Any unrealized gains or losses on all capital and revenue items need to be adjusted in the computation of taxable income.
Gains and losses incurred with respect to the assets and liabilities which are valued at their fair value or impairment accounting as per the applicable accounting standards shall not be taken into consideration while calculating the Taxable Income subject to the election made to tax gain/losses on realisation basis
- For assets categorised as capital items (property, plant & equipment,) the unrealized gains will not be taxable until they are realised (Ex. At the disposal of assets or investments) subject to the election made to tax gain/losses on a realisation basis.
- Once an option to tax on a realisation basis is elected, the Taxable person cannot claim a tax deduction for unrealized losses on capital items under UAE tax law. The deduction benefit only applies to realised losses when you sell the asset or investment. That means a loss on revaluation of assets that can occur due to a decrease in the asset’s value cannot be claimed as a deduction as there is no actual economic loss. The actual loss incurred at the time of the sale of assets will be allowed as a deduction during the computation of Taxable Income.
Option 3: Election to recognise gains or losses on a “Realisation Basis” for UAE CT Purpose for all assets and liabilities held on Capital Account only
The Taxable Person can elect to recognise gains and losses on a ‘realisation basis’ for UAE Corporate Tax purposes for all assets and liabilities held on capital account only (i.e. not expected to be sold or traded during the regular course of the business operations) – that is, only unrealized gains and losses in respect of all assets and liabilities held on the capital account would not be taxable or deductible, respectively, until they are realised. Any unrealized gain or loss on a capital item must be adjusted in the computation of taxable Income.
Unrealized gains and losses arising from assets and liabilities held on the revenue account, on the other hand, would continue to be included in Taxable Income on a current basis. Any unrealized gain or loss on a capital item needs to be adjusted in the computation of taxable Income.
As per Clause 4 Article 20 of the UAE CT Law,
“Assets held on capital account” refers to assets that the Person does not trade, assets eligible for depreciation, or assets treated under applicable accounting standards as property, plant and equipment, investment property, intangible assets, or other non-current assets.
“Liabilities held on capital account” refers to liabilities, the incurring of which does not give rise to deductible expenditure under Chapter Nine of this Decree-Law, or liabilities treated under applicable accounting standards as non-current liabilities.
Options 2 and 3 mentioned above, as prescribed under Article 20(3) of the CT law, are available only to taxable persons who prepare their financial statements on an accrual basis. Therefore, a taxable person using the accrual method of accounting may choose the realisation basis or decide not to elect any option, which means no corresponding adjustments for provisions will be made while computing the taxable income.
A taxable person, other than a bank or insurance provider, who prepares financial statements on an accrual basis of accounting may elect to consider gains and losses on a realisation basis. The election for the realisation basis must be made by the Taxable Person during the first Tax Period, which will be practically at the time of submitting the first Tax Return. The election to use the realisation basis is irrevocable. However, it may be revoked under exceptional circumstances and approval by the FTA
Adjustments allowed to be made under these methods
As per ministerial decision No. 134 of 2023, In case a Taxable Person who prepares financial statements on an accrual basis may elect to take into account gains and losses on a realisation basis about all assets and liabilities that are subject to fair value or impairment accounting and assets/liabilities held on capital account under the applicable accounting standards, the following adjustments shall be made:
- Exclude depreciation, amortisation, or other change in the value of assets other than financial assets, to the extent adjustment amount related to a change in the net book value exceeding the original cost of the asset;
- Exclude change in value, including amortisation of liability or a financial asset, except gain or loss arising upon realisation of liability or financial assets;
Case Study for Treatment of Unrealized Gains and Losses Under UAE Corporate Tax
This case study covers the important aspects of unrealized gains and losses under UAE Corporate tax taking the example of UAE resident companies.
Adjustment of Taxable Income in case of an asset held on capital account
During the Financial Year ending 31 December 2024, an LLC, a UAE resident company, recognised a revaluation gain in its financial statements of AED 1,000,000 for some buildings, measured at fair value.
The original cost of the building was AED 4,000,000 and after making the revaluation the net book value of the building is AED 5,000,000. The building was not sold at the end of the tax period and, therefore, the revaluation gain is considered ‘unrealised.’
Adjustment to be made while computing the taxable income
During the Financial Year ending 31 December 2024, an LLC, a UAE resident company, recognised a revaluation gain in its financial statements of AED 1,000,000 for some buildings, measured at fair value.
The original cost of the building was AED 4,000,000 and after making the revaluation the net book value of the building is AED 5,000,000. The building was not sold at the end of the tax period and, therefore, the revaluation gain is considered ‘unrealised.’
If no election is made
An LLC would be subject to tax on the unrealized gain of AED 1,000,000 in relation to the Tax Period ending on 31 December 2024.
If election is made
An LLC would be subject to tax on the unrealized gain of AED 1,000,000 in relation to the revaluation of capital assets (i.e. Building) during the Tax Period ending on 31 December 2024.
If election is made
An LLC would be subject to tax on the unrealized gain of AED 1,000,000 in relation to the revaluation of capital assets (i.e. Building) during the Tax Period ending on 31 December 2024.
If the election is made to tax on a realisation basis
the realisation basis in respect of all assets and liabilities that are subject to fair value or impairment accounting (Option 2), then the company would have to exclude the revaluation gain of AED 1,000,000 when calculating their Taxable Income for this Tax Period.
Adjustment of Taxable Income in case of an asset held on revenue account
Company Y specialises in kitchen appliances. Due to shifts in the market, Company Y anticipates the need to discount some of its products to facilitate their sale. Consequently, it created a provision for a slow-moving inventory of AED 100,000 at the end of its fiscal period. At this time, Company Y still holds the inventory, so the loss recorded in its financial statement is considered unrealised
If no election is made or option 3 is elected
If no option is elected or option 3 is elected, then said provision debited to profit and loss shall be allowed as a deduction under CT law while computing the taxable income
If the election is made and Option 2 is elected
If the election is made to recognize the gain or loss on realisation basis for all assets and liabilities including the revenue items (Option 2) then adjustment need to made while computing the taxable income and consequently said provision shall not be allowed as a deduction.
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Conclusion
The treatment of unrealized gains or losses under the UAE Corporate Tax Law significantly impacts the computation of taxable income for businesses.
Understanding the unrealized gains and losses under UAE corporate tax is crucial, as they represent changes in asset values that have not yet been realized in cash.
UAE Corporate Tax law provides options for accounting for these gains and losses, either through the fair value method or by considering assets and liabilities held in capital accounts. The decision to make an election regarding the realization basis must be carefully considered, as it can have long-term implications and is generally irrevocable except under exceptional circumstances
Taxable persons must analyse the benefits and drawbacks of each option to determine the most advantageous approach for their specific circumstances. Furthermore, seeking professional assistance from tax consultants can greatly facilitate the process of calculating taxable income, ensuring accurate classification of assets, and smooth operations while minimising errors.
Ultimately, a thorough understanding of the treatment of unrealized gains and losses is essential for businesses to comply with UAE tax regulations and optimise their tax liabilities
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UAE TRC for Individuals: Essential Documents and Application Process
UAE TRC for individuals is essential for individuals to establish their tax residency status, fulfil other regulatory requirements, and avoid paying double taxes, i.e., paying tax twice on the same income in UAE and any other country, forming part of a tax treaty alliance.
Conditions for Obtaining UAE Tax Residency Certificate for Individuals
- An Individual applying for TRC for Treaty Purpose in the UAE, must have been residing in the UAE for at least 183 days during the requested financial year.
- An Individual applying for TRC for Domestic Purposes can be eligible – if it falls under any of the three conditions as per Cabinet Decision no. 85 of 2022 –
- Spent in UAE – at least 183 days
- Spent in UAE – Less than 183 days but above 90 days
- Spent in UAE – less than 90 days
Let us have a quick overview of the conditions laid down in cabinet decision no. 85 of 2022, which will apply for individuals based on their number of days of stay as listed above:
As per cabinet decision no.85 of 2022, Individuals can obtain TRC for domestic purpose, if
- The Individual has been physically present in the State (UAE) for a period of (183) one hundred and eighty-three days or more, within the relevant (12) twelve consecutive months ; (183 days criteria) (No additional condition to be fulfilled) OR
- Any Individual (being a UAE National or a GCC National or UAE Resident) has been physically present in the UAE for a period of 90 days or more, within the relevant 12 consecutive months and has either a Permanent Place of Residence (i.e. the place located in the UAE and available to the natural person at all times) in the UAE or carries on employment or business in the UAE. (Less than 183 days but above 90 days criteria. OR
- Their usual or primary place of residence and the centre of the financial and personal interests are in the UAE (less than 90 days criteria)
Now, let us see how to make application for TRC –
A Resident Individual can apply online by registering on the Federal Tax Authority’s (FTA) EMARATAX portal.
After successful registration, follow the steps below:
- Select the application type, start date of the required financial year and preferred language for TRC.
- Fill out the details requested in the application form and attach the necessary documents to obtain the TRC.
What’s New in the UAE TRC for individuals?
The portal now allows the applicant to select the Number of Physical copies of TRC required which can be selected at the time of making application as well as after making the application.
Documents Required for Obtaining UAE TRC for Individuals
- Passport
- Emirates ID
- Source of Income/Salary Certificate:
- Self-employed individuals can provide a trade license and share certificate.
- The UAE national, if earning rental income from a property, can provide a lease agreement if the property is leased.
- If the UAE national is retired, provide a letter addressed to the FTA stating that they are using their own savings, bonds, or investments. Additionally, provide an official supporting document.
- Validated bank statements of 6 months from a local UAE bank for the financial year for which TRC is being requested.
- Proof of residence (e.g., Lease agreement, Tenancy Contract, EJARI, Utility Bill)
- Entry and Exit report from the Federal Authority of Identity and Citizenship.
- If a Special Form is required, the applicant can either upload a scanned copy or provide the original document for signing.
Payment and Application Submission
The applicant, prior to submission, must review, confirm, and make payment of the submission fee and submit the TRC application.
Upon receipt of the TRC application form and the corresponding documents, the tax authorities will review the application. The tax authorities may request additional information or documents if required.
When the application is complete in all respects, the FTA will issue the Tax Residency Certificate at the address chosen by the applicant for receipt of the same.
Need a Tax Residency Certificate (TRC) as an individual?
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