The UAE Ministry of Finance cancels Economic Substance Regulations

UAE Ministry of Finance Cancels Economic Substance Regulation

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UAE Ministry of Finance Cancels Economic Substance Regulation

The UAE Ministry of Finance cancels Economic Substance Regulations

With the Introduction of Federal UAE CT Law, the UNITED ARAB EMIRATES MINISTRY OF FINANCE issued Ministerial Decree No. (239) of 2023 on the Reconstitution of the Standing Committee to Follow Up the Implementation of Economic Substance Requirements

Consequently, The Ministry of Finance, with the approval of council of ministers have issued Cabinet Resolution No. (98) of 2024 (the resolution) amending some provisions of Cabinet Resolution No. (57) of 2020 concerning the Determination of Economic Substance Requirements – The Economic Substance Regulations

The Economic Substance Regulations (ESR)

The UAE introduced Economic Substance Regulations to honor the UAE’s commitment as a member of the OECD Inclusive Framework on BEPS, and in response to a review of the UAE tax framework by the EU which resulted in the UAE being included on the EU list of non-cooperative jurisdictions for tax purposes (EU Blacklist). The issuance of the Economic Substance Regulations on 30 April 2019 (the Regulations), and the subsequent release of the Guidance on the application of the Regulations on 11 September 2019, was a requirement for the removal of the UAE from the EU Blacklist on 10 October 2019.

On 30 April 2019, the Cabinet of Ministers of the United Arab Emirates (“UAE”) issued Cabinet Resolution No. 31 of 2019 Concerning Economic Substance Regulations (“Resolution 31”). On 10 August 2020 amendments were introduced to Resolution 31 by the Cabinet of Ministers by way of Cabinet of Ministers Resolution No. 57 of 2020.

The Regulations required UAE onshore and free zone companies and certain other business forms that conduct any of the defined “Relevant Activities” to maintain and demonstrate an adequate “economic presence” in the UAE relative to the activities they undertake (“Economic Substance Test”).

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Cabinet Resolution No. (98) Of 2024 

The new resolution defines the period for applicability of the Economic substance Regulations (ESR). It provides information on the Fiscal years for which ESR compliance were required to be met and also confirms the cessation of Economic substance Regulation in the UAE.  

It cancels the requirements for UAE entities falling under the Scope of ESR (Licensees) to submit Economic substance notification and Economic substance Report for financial years ending after 31 December 2022. 

Article I and Article II of the Cabinet Resolution No. (98) of 2024 are discussed below in details 

Article I – Applicability of Cabinet Resolution No. (57) of 2020

A new article No. (2) bis – Scope of Application shall be added to the aforementioned Cabinet Resolution No. (57) of 2020

As highlighted above, The Ministry of Finance has restricted the scope of application of Cabinet Resolution No. (57) of 2020 only until the fiscal year ending on 31/12/2022. Accordingly, the provisions of this resolution shall apply to the fiscal years commencing from 01/01/2019 to the fiscal year ending on 31/12/2022 – The ESR Period

Will the Entities need to file ESR Notification and Report on for FY starting on or after 01 January 2023?

The UAE Entity that meets the definition of Licensee post the ESR Period- starting on or after 01 January 2023- will no longer be required to comply with the ESR reporting obligations or demonstrate adequate substance in the UAE. We can conclude that ESR regime in the UAE stands cancelled from financial years starting on or after 01 January 2023

For the ESR filings that have been already submitted by Licensees for Financial years falling after the ESR Period – a further clarification is expected from the authorities

ESR filings done for applicable ESR period – 01/01/2019 to 31/12/2022, can be assessed by the National Assessing Authority – FTA. ESR Audit for the effective period has already been started by FTA for quite a sometime now (Refer our detailed article on ESR AUDIT)

Therefore, Entities should maintain proper documentation and be prepared for ESR Audits for ESR period 01/01/2019 to 31/12/2022.

Article II – Administrative fines stand cancelled

So, what happens to the administrative penalty for non-compliance levied on any financial years commencing after the ESR Period? The decision clarifies that such administrative penalties will be cancelled by FTA and the amounts collected will be refunded

The procedure to apply for refund in this regard is expected by the authorities

Key Takeaways

  • Scope of Cabinet Resolution No. (57) of 2020 concerning the Determination of Economic Substance Requirements shall remain applicable only for fiscal years commencing from 01/01/2019 to the fiscal year ending on 31/12/2022. The ESR regime in the UAE has been withdrawn for Financial Years starting after 31/12/2022
  • The Entities should maintain the proper documentation with regards to ESR submissions done for effective ESR period – FY starting on or after 01/01/22019 till Financial Year ending on or before 31st December 2022 as FTA may conduct ESR Audit
  • To that effect, administrative fines imposed post this effective period shall be ineffective and the authority shall refund the fines paid by the Licensees for fiscal year ending after December 31, 2022. All the grievances filed for fiscal year ending after December 31, 2022 shall be ended. If your entity being a licensee has filed any appeal request or paid any fines pertaining to fiscal years ending after December 31, 2022, such entity shall be eligible for refund towards fines paid and their grievances filed with National Assessing Authority shall be cancelled

With the End of ESR Period, the UAE Entities can now focus on UAE CT Regime and clarifications from the Authority are expected for administrative procedures post ESR Period for Administrative penalties Levied or already paid and ESR Filings done for Post ESR Period 

Have you checked your eligibility for refunds after the ESR update? Act now to secure your refund
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UAE VAT Amendments: Cabinet Decision No. 100

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The FTA has introduced an amendment to the Executive Regulations of the UAE VAT law through cabinet decision no.100 of 2024 which is amending cabinet decision no 52 of 2017. 

These changes will be effective from 15th November 2024 (unless otherwise specified in the article of this decision) 

Key Amendment’s and their implications are discussed below

Financial Services

Article 1 includes definition of Virtual Asset. Virtual Asset are defined as “Digital representation of value that can be digitally traded or converted and can be used for investment purposes and does not include digital representations of fiat currencies or financial securities”. 

Article 42- Tax Treatment for financial service

Article 42(2) has been amended to include the following within the definition of financial services,

  • Providing investment fund management services independently for a fee, for funds licensed by a competent authority in the state, including but not limited to managing fund operations and managing investments for the benefit of the fund or on its behalf and monitoring and improving fund performance;
  • Transferring ownership of virtual assets, including virtual Currencies;
  • Conversion of Virtual Assets;
  • Keeping and managing Virtual assets and enabling control over them

Article 42(3) exempt following financial services from VAT retrospectively from 1st Jan 2018,

  • Transferring ownership of virtual Assets, including virtual currencies.
  • Conversion of Virtual Assets

Impact– It brings clarity to the taxation of virtual assets. Investment fund management services, virtual currencies considered as exempt financial services from VAT.  

Another important amendment is introducing exceptions for the supply effective from 1st January 2023: 

  • Transfer of ownership or disposal rights of government building between government entities 
  • Transfer of ownership or disposal of real estate asset between government entities 
  • Above also covers the right to use or exploit those assets. 

Impact – Significant impact for government entities transactions like transfer, lease of these assets will no longer considered to be supply hence such transactions are not subject to VAT. 

Article 5 – Exceptions related to Deemed Supply

Exceptions related to Deemed Supply, now has extended to the following supply as well:

Where both the Supplier and Recipient are either government entity or charitable organization then, up to AED 250,000 for each supplier within 12-month period are also falls under exception to deemed supply.

Impact –  Encouraging activities between government entities and/or charitable organizations without the burden of VAT. 

Article 14 – Tax Deregistration

Clause 9 has been added which states that deregistration does not absolve a Person from having to comply with the provisions of the Decree-Law and this Decision, including filing another Tax Registration application when the Tax Registration requirements are met.

Article 14 (bis) – Tax Deregistration to Protect the Integrity of the Tax System (Newly Added Provision) 

The Authority may deregister a Person for Tax if the Authority determines that maintaining such Tax Registration may prejudice the integrity of the Tax system, provided any of the following conditions is met; 

  • The Registrant no longer meets the Tax Registration requirements  
  • The Registrant has not submitted tax deregistration application to the Authority, or the Registrant has initiated a Tax deregistration application with the Authority but has not completed such application

 Article 29-Profit Margin Scheme 

In a further effort to clarify VAT calculations, Article 29 has defined “Purchase Price” will include all costs and fees incurred when purchasing goods. 

Impact – Clarified that for calculation of profit margin under the scheme, whole cost associated with the acquisition of goods are considered.  

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Proof for Export of Goods

Article 30 – Zero-rating the export of goods 

FTA Specifies the documents which are required for Zero rating the export of goods. The FTA has clarified that any of the following documents would be acceptable to prove the export as zero-rated supply, 

  • A Custom declaration and commercial evidence proving the export 
  • A Shipping certificate and official evidence proving the export 
  • A Custom declaration providing the custom suspension if the goods are under custom suspension 

The clarification provided by FTA for “official evidence” and “commercial evidence” 

Official Evidence  

A certificate of export issued by the custom in the state or a clearance certificate issued by those authorities or the competent authorities (Exit Certificate) in the state regarding the goods leaving the state after verifying that the goods have left the state, or a document or clearance certificate certified by competent authorities in the destination country indicating that the goods have entered it. 

 

Commercial Evidence  

A document issued by shipping or air transport companies or agents proving the transportation and departure of goods from the state to outside the state, including any one of the following documents: 

  • Airway Bill or Air cargo manifest 
  • Bill of lading or Sea cargo manifest 
  • Land transport bill or Land cargo manifest  

In amended provision the term “Shipping certificate” has been clarified which states that certificate issued by shipping or air transport companies or agents equivalent to commercial evidence if it is not available. 

Summary 

Documents required for Zero rating the export of goods (Till 15th November 2024) 

Business must require all the documents mentioned below for export of goods 

Options
Particulars
Option 1
Exit Certificate, Custom declaration, Airway bill or bill of lading
Option 2
Custom declaration providing the custom suspension if the goods are under custom suspension

Documents required for Zero rating the export of goods (From 15th November 2024) 

Business can retain documents based on any of the following option for export of goods 

Options
Particulars
Option 1
Custom declaration and Bill of lading or Airway Bill
Option 2
Exit Certificate or Entry certificate of destination country and shipping certificate
Option 3
Custom declaration providing the custom suspension if the goods are under custom suspension

Impact – These clarity helps the exporter to understand the process and documents require for business applying zero rate on exports.  

Article 31- Zero-Rated Services 

Amendments have also been made regarding the zero-rating of specific services. Services listed in clauses 3 to 8 of Article 30, and Article 31 of the VAT Decree Law will be subject to the standard rate of VAT if the place of supply is within the UAE, even if they are considered exports of service. 

Key Services Affected 

  • Installation Services: Related to goods supplied by others, taxed at the place where the service is performed. 
  • Transport Services: Provided to lessees who are not taxable persons, taxed where the means of transport are made available. 
  • Hospitality Services: Restaurant, hotel, and catering services are taxed at the location of service performance. 
  • Cultural and Educational Services: Taxed where the services are performed. 
  • Real Estate Services: Taxed based on the location of the real estate. 
  • Transportation Services: Taxed where the transportation begins. 
  • Telecommunications and Electronic Services: Taxed based on where the services are enjoyed. 

Clarifications on Repair and Maintenance Services 

Article 35(1)(b) further clarifies VAT treatment for repair, maintenance, and conversion services for means of transport: 

  • Repair Services: If performed onboard the means of transport. 
  • Maintenance Services: Includes inspection, testing, cleaning, and similar services if carried out onboard. 
  • Conversion Services: Should maintain compliance with conditions of Article 34 on post-conversion.

Impact –  These clarifications provide a clear understanding of VAT treatment for these specific services, facilitating better compliance and planning for businesses involved in the transport sector. 

Article 38- Zero-rating of Buildings Specifically Designed to be Used by Charities 

The definition of “Relevant Charitable Activity” has been deleted.  

Article 46- Tax on Supplies of More than One Component 

When supplies don’t have a principal component, VAT treatment will be based on overall nature of the supply. 

Impact – These changes provide clarity on how to treat composite supplies in VAT 

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Input VAT Recovery on Health Insurance for dependent

Article 53 – Non-Recoverable Input tax  

Allow recovery of input VAT for health insurance, including enhanced health insurance for employees and their dependents within the limit of one spouse and three children under the age of 18. 

Nature of Expense
Input tax recovery (Till 15th November 24)
Input tax recovery (After 15th November 2024)
Employee Health Insurance
Yes, business can recover input VAT
Yes, business can recover input VAT
Dependent Health Insurance (Within limit specified)
No, business can’t recover VAT Input tax
Yes, business can recover input VAT

Impact– This amendment relieves businesses, as it allows them to recover VAT on the insurance of dependents. 

Article 55-Apportionment of Input Tax

Tax year for the following cases has been amended:

  • where a Taxable Person applies for Tax deregistration, the Tax year shall end on the last day such Person was a Taxable Person,
  • where a member joins a Tax Group, the Tax year shall end on the last day before joining the Tax Group, or
  • where a member leaves a Tax Group, the Tax year shall end on the last day such Person was a member of the Tax Group.

If the tax year is shorter than twelve months, the limit of AED 250,000 mentioned in clause 11 shall be proportionate to the length of such tax period.

Article 58-Adjustments under the capital Assets Scheme

Clause 17 is included in the article which states that the first tax year for a self-developed capital asset is the year it is first used.

Article 59- Tax Invoices

  • The timeline for issuing Tax invoices has been changed in specific scenarios, such as simplified and tax invoices.
  • If the tax invoice is a simplified tax invoice (invoice amount up to AED 10,000), the registrant must issue the simplified tax invoice on the date of supply itself.
  • Business has 14 days to issue the tax invoices (invoice amount over AED 10,000) from the end of the calendar month that includes the date of supply.
  • Where an agent who is a Registrant makes a supply of Goods or Services for and on behalf of the principal of that agent, that agent may issue a Tax Invoice in relation to that supply as if that agent had made the supply, provided that the principal shall not issue a Tax Invoice, subject to:
    • The agent retaining sufficient records in such a manner as to determine the name, address and Tax Registration Number of the principal supplier,
    • The principal supplier retaining sufficient records in such a manner as to determine the name, address and Tax Registration Number of the agent
  • The Authority may specify the cases in which a Tax Invoice must be issued, even if one of the cases provided for simplified tax invoice of this Article applies.

Impact – These updates aim to streamline compliance and reduce penalties

Article 69 – Foreign Governments

The VAT refund request for foreign governments, international organisations, diplomatic bodies and missions must submit within 36 (thirty-six) months from the date the official incurred such Tax or during any other period specified under the provisions of any international treaty or other agreement in force in the State

Impact – This amendment introduced a timeline for foreign governments for applying for VAT refund.

These changes enhance clarity and flexibility for businesses across various sectors. It is an ideal time to review your VAT practices and ensure compliance with the new regulations. 

With the recent amendments to the VAT law, it’s crucial to reassess your VAT practices. FAME Advisory can help you navigate the implications.
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Postponement of the Deadline to File a First Tax Return and Settle the Corporate Tax Payable for new companies incorporated on or after 01 June 23.

Federal Tax Authority (FTA) released decision no.7 of 2024

On 26 September 2024, the Federal Tax Authority (FTA) released decision no.7 of 2024 stating the Postponement of the Deadline to File a Corporate Tax Return and Settle the Corporate Tax Payable for Certain Tax Periods for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses and its amendments.

This decision states that the deadline to file the Corporate Tax Return and settle the Corporate Tax liability has been extended to 31 December 2024 subject to the fulfillment of all the following conditions :

  • Entities that are incorporated, established or recognised on or after June 2023 and
  • Entities have a tax period ending on or before 29 February 2024.

Don’t miss this critical deadline. Ensure compliance and avoid penalties by filing and settling your Taxes on time. Act now to avoid last-minute stress!

In conclusion, businesses meeting the criteria must ensure they file their Corporate Tax Return and settle liabilities by 31 December 2024. This extension highlights the importance of timely Corporate Tax Registration through the EmaraTax portal to avoid penalties and ensure compliance with the Federal Tax Authority’s requirements.

Note - Failure to file a Corporate Tax Return and Pay Corporate Tax Liability before 31 December 2024 shall attract a penalty of AED 500 for each month for the first twelve months and AED 1,000 for each month from the thirteenth month onwards.

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The UAE Federal Tax Authority (FTA) issued Decision No. 5 of 2024 on July 19, 2024. The decision, effective from August 1, 2024, sets out the conditions under which fees paid for private clarification requests will be refunded. 

Key Provisions of the Decision

The decision outlines specific circumstances under which the FTA will refund fees for private clarification requests: 

  1. Withdrawal of request Within Two Days: If the applicant withdraws their private clarification request within two business days of submission, they will be eligible for a refund. 
  2. Persons not registered under the Corporate Tax: Private Clarification Requests submitted by individuals or entities not registered under the corporate tax and requests are not related to the inquiry about tax registration. 
  3. Tax Audits: Applicants undergoing a tax audit at the time of submitting the private clarification request will receive a refund. 
  4. Post-Decision Procedures: Private clarification requests are related to the decision issued by the FTA after submitting the request. 
  5. Duplicate Requests: If the duplicate private clarification request is submitted by the same applicant on the same subject, the fee will be refunded. 
  6. Legislative Review: If the private clarification requests are related to the subjects under review for legislative amendment in coordination with the Ministry of Finance (MoF) will qualify for refunds. 

Refund Process

Refunds will be processed based on the nature and scope of the private clarification request: 

  • Full Refund: If the FTA decides not to issue a clarification for a request covering one or more taxes, the entire fee will be refunded. 
  • Partial Refund: For requests involving multiple taxes where a clarification is issued for only one tax, a partial refund will be given. The refunded amount will be the difference between the fee for a single tax clarification and the fee for multiple tax clarifications. 
Don't know how to submit your Private Clarification Request under the new refund policy? Our team is ready to assist you in the submission process.
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Positive Implications of the Policy

This refund policy has several positive effects: 

  • Encouraging Proactive Guidance Seeking: By reducing the financial risk associated with seeking private clarifications, more taxpayers may actively seek guidance on complex tax issues. This can lead to better compliance and fewer errors in tax filings. 
  • Enhancing Trust and Cooperation: Providing clear guidelines and fair treatment helps to build trust and cooperation between taxpayers and the FTA. This can lead to smoother tax administration and more effective dispute resolution. 
  • Supporting SMEs: Small and Medium Enterprises (SMEs), which often have limited resources, will benefit significantly from this policy. It makes obtaining clarifications easier and less costly, ensuring that SMEs meet their tax obligations correctly without incurring excessive expenses. 
  • Improving Request Quality: With clearer guidelines and the possibility of refunds, taxpayers are more likely to submit accurate and complete requests. This diligence reduces the administrative burden on the FTA in processing and responding to requests. 

Conclusion

The UAE FTA’s new refund policy for private clarification requests offers taxpayers several benefits. By providing refunds under specific conditions, the policy aims to reduce financial risks and encourage proactive guidance seeking. The policy enhances trust between taxpayers and the FTA, fostering a better quality in clarification requests and supporting efficient tax administration.  

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Taxability of Director’s Services under UAE VAT: Key Insights 

Taxability of directors service

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Taxability of directors service

Effective Date for Checking Taxability of Director Service – 01 January 2023 

Basic Rule for Taxability of Directors Service

Director services were Taxable where the Director performed the services on a regular, ongoing, and independent basis, and the total value of taxable supplies and imports made by the Director, not limited to but also including the Director services, exceeded the mandatory registration threshold. 

Performing the Function of Director on a Board of Directors by a Natural Person

Performing the Function of Director by any person on a Board of Directors was considered as supply of service and was Taxable but as per the new clarification issued by FTA if the performance of a  Director’s function After 01 January 2023  by a natural person in Board of Directors of any government entity or of any private sector entity then performance of those Director’s function will not be considered as Supply of Service therefore will not be Taxable whereas if the Director Service is given by either natural person or legal person to Public Joint Stock entity then it will be considered as supply of service and will be Taxable, also Directors Services Provided Before 01 January 2023 is taxable. 

Director’s function means services performed in the formal capacity as Director only which means Only Director services performed by any natural person in the formal capacity as director will not be considered as supply of service for the purpose of VAT  and will not be taxable i.e. if any other professional Services are provided by director in individual capacity then it will be considered as supply of Service and will be taxable only when the Director is a Taxable person (i.e. Director is registered under VAT). 

If any Director who is not the Resident of UAE providing director Service as above then those services will also not be considered as supply of service. There will be no application of the reverse charge mechanism or need for the natural person to register in the UAE for VAT purposes. 

If Services performed as a member of a committee derived from the same Board as above on which the Director serves then such services will also be not considered as supply of service for Vat purpose but other services provided by the member, are considered to be supplies of services for VAT purposes and may be taxable subject to meeting conditions for taxable supplies as stated in the VAT legislation 

How will a natural person decide VAT Obligation before January 1 2023 or on or after January 1 2023?

If any natural person provides both director service and other professional service then he will have to check the Date of Supply of director service.  

If date of supply of director service is before 01 January 2023 then all services by that natural person will be considered as supply of service and will be taxable if meeting the requirements for mandatory registration  

But if date of supply of director service is on or after 01 January 2023 then directors service will not be considered as supply of service and will be excluded from calculating the mandatory registration threshold. 

If a natural person is registered for Vat and date of supply for director service is on or after 01 Jan 2023 as a result if that person is not meeting the requirements for mandatory registration any more then such natural person must deregister from VAT.

Taxability of Director Service Vs Non-Taxability of Director Service

Sr. No.
Particulars
TAXABLE (All Conditions to be Fulfilled)
NON-TAXABLE (All Conditions to be Fulfilled)
1.
Date of Supply
Date of Supply of Director Service is Before 01 January 2023
Date of Supply of Director Service is On or After 01 January 2023
2
Type of Person
The director is either a Natural Person or a Legal Person
If the Director is a Natural Person (Either Resident or Non-Resident of UAE)
3
Board of Directors
If Director services performed as Director on a “Board of Directors” of a Government Entity or a Private establishment or Any Other Establishment.
If Director services performed as Director on a “Board of Directors” of a Government entity or Private establishment only
4
Type of Service
Any Service provided by the Director- If the Total value of All taxable supplies and imports made by the Director, also including the Director’s services, exceeded the mandatory registration threshold.
AED 10,000 + VAT Only the services performed in the formal capacity as the Director
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How to determine the Date of Supply for Director Services

The date of supply is determined either as per the general rules or the special rules, depending on whether there will be periodic payments or consecutive invoices.

General Rules

Rule No. 1- Normal for supply of Services –

Date of supply shall be the earliest of any of the following dates: 

  1. The date on which the provision of services was completed.
  2. The date of receipt of payment or the date on which the tax invoice was issued.

Rule No. 2- Supply of Services for any contract that includes periodic payments or consecutive invoices -

The date of supply shall be the earliest of any of the following dates: 

  1. The date of issuance of any tax invoice. 
  2. The date payment is due as specified on the tax invoice. 
  3. The date of receipt of payment. 
  4. The date of expiration of one year from the date the services were provided. 

Special Rules for determining the Date of supply for the Board fees paid to Independent Directors-

Rule No. 3 -

If fees for the Independent Directors are not known in the beginning and are determined only upon the conclusion of the Annual General Meeting, the date of supply would be triggered when such fees are known. 

Rule No.4 -

If fees for the Independent Directors are known in the beginning then date of supply will be as per Rule No. 1 and Rule No. 2 as above.

Examples for Better Understanding of Taxability or Non-Taxability of Director Service

Example 1 Natural person performs the function of Director for the calendar year 2022 whereby fees for the services were known at the beginning on 1 January 2022, no payments were released to the natural person during 2022 and no Tax invoices were issued, what will be the Date of Supply in this case? (Refer Rule No.1 & Rule No.4 Above) 

In this scenario, the date of supply will be the date of actual completion of the services, and the Director’s services will be considered as Supply of Service and will be taxable regardless of whether payment was made in 2023 or not. 

Example 2 The natural person is appointed as Director for 2 consecutive calendar years, i.e., 2022 and 2023. Fees for services to the Board, and any committee derived therefrom, are fixed and known as on 01 January 2022 and automated payments are made on the first business day after the end of each calendar quarter (1 April 2022, 1 July 2022, 3 October 2022, 2 January 2023, 3 April 2023, 3 July 2023, 2 October 2023 and 2 January 2024). It is also agreed between the Director and the entity that the Director issues his/her tax invoice after receipt of the payment, what will be the Date of Supply in this case? (Refer Rule No. 2 & Rule No. 4 Above) 

In this scenario, the date of supply will the date of receipt of payment, being the earliest of the dates mentioned in Rule No.2 above. Hence, the payments received on 1 April 2022, 1 July 2022 and 3 October 2022 will be considered as triggering the date of supply for Director’s service which will be considered as a supply of services and will be taxable  

But the other payments received on 2 January 2023, 3 April 2023, 3 July 2023, 2 October 2023 and 2 January 2024 will not be considered as Supply of service and will not be taxable because the Date of supply is on or after 01 January 2023. 

Example 3 The natural person provide the Director Service for the calendar year 2022 but the fees allocated for that calendar year are only determined after the conclusion of the Annual General Meeting, to be held on 31 March 2023. (Refer Rule No. 3 Above) 

In this scenario, the Directors fees was not known on 01 January 2022, the Fees will be known upon the conclusion of AGM on 31 March 2023 despite the fact that the provision of the services may have been physically completed earlier. 

Date of supply will be 31 March 2023 which is after 01 January 2023 therefore this service will not be considered as Supply of Service and will not be taxable.  

Formal Capacity as Director

Some of the Examples of Director performing the Services in the formal Capacity of Director –

  • Director Participating in board meetings to take some strategic decisions, 
  • Director Managing the day-to-day affairs of the company,  
  • Director approving the financials or any other documents of the company as an Authorized Signatory Director providing any compliance services in a capacity of director to the company  

Some of the Examples of Director performing the Services in Individual Capacity as a professional which will not be considered as Director Performing the Services in the formal Capacity of Director-

  • Director providing any Professional Services to the company as a freelancer for which issuing Separate Invoices for the Services Rendered.  
  • Director representing the company in a court as lawyer in an individual capacity  
  • Director providing any consultancy services to the company in an individual capacity as a Chartered Accountant. 
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Navigating Estate Succession in the UAE: Options for Non-Muslim Expatriates

Navigating Estate Succession in the UAE Options for Non Muslim Expatriates

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Navigating estate succession in the uae options for non-muslim expatriates

The concept of Wills is fairly common in most countries around the world. Wills offer individuals a legitimate way to have their estate distributed after their demise. It is very important to note that a Will does not have an effect until the testator dies and can be modified at any point of time during the life of the testator. It is also pertinent to note that the distribution of the estate may be handled by an executor of your choice under Wills as opposed to leaving the same in the hands of an authority of the State. 

navigating estate succession in the UAE

Non-Muslim expatriates in UAE may find the available platforms for their Will registration particularly handy owing to the fact that the absence of a Will leaves the distribution of their estate to be done under Shariah law, which may not be their preferred means of distribution. Wills registered with various authorities in UAE provide the much-needed flexibility to non-Muslim expatriates to choose how exactly their estate will be distributed. 

We will be exploring the distribution of the estate after the demise of a non-Muslim expatriate in UAE. In this article, we will be delving into the avenues available to non-Muslim expatriates to legitimately plan their estate succession in the UAE for after their demise. 

Different Avenues of Wills' Registration

1. DUBAI COURTS

Non-Muslim expatriates may register their Wills with the Dubai Courts Notary if they wish their Will to be governed under the Civil Law Jurisdiction of Dubai. The Will shall be drafted in the Arabic language by a sworn translator. The Will ensures that Shariah law is not applicable and the testator has the right to distribute their assets in any manner they wish. Estate to be distributed can be anywhere across the seven Emirates in the UAE. It is pertinent to note that Dubai Courts Notary Will also provides for guardianship of minor children in the event of the demise of either one or both parents/caregiver(s). 

2. DIFC WILLS

The DIFC Wills and Probate Registry operates under a unique system, granting individuals the autonomy to choose the governing law for their Will. This flexibility allows for the application of either their home country’s legal code or the legal code of another preferred jurisdiction.  

The DIFC Courts Wills Service offers five distinct Will categories: 

Full Will: This comprehensive Will encompasses the distribution of all movable and immovable property within the UAE, along with the designation of temporary and permanent guardians for minor children residing in Dubai or Ras Al Khaimah (if applicable). 

  1. Guardianship Will: Focused solely on child custody, this Will specifies guardians for minor children. 
  2. Property Will: This online template Will facilitates the distribution of up to five real estate properties situated within the UAE. 
  3. Business Owners Will: Another online template Will; this document addresses the distribution of up to five shareholdings in UAE-based companies. 
  4. Financial Assets Will: Limited to online templates, this Will allows for the designation of beneficiaries for up to ten bank and/or brokerage accounts held at UAE branches. 

3. ADJD WILLS

Similar to the approach followed by Dubai Courts, the Abu Dhabi Judicial Department (“ADJD”) allows non-Muslim expatriates to register their Will within the Civil Law jurisdiction of Abu Dhabi. ADJD ensures that UAE Shariah shall not be applicable to individuals who register their Wills with them and state their needs. The assets in the Will can be from any of the seven (7) Emirates in UAE. The Will must be drafted in the Arabic language or translated by a sworn translator for the same to fall within the purview of the on-shore courts of Abu Dhabi. 

One notable modus operandi followed in ADJD is that the testator need not be physically present for the registration of their Wills. The same can be done by utilising virtual platforms. 

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Dubai Courts Will Vs DIFC Will Vs ADJD Will: Difference Matrix

While the three jurisdictions for Wills’ registration have their own advantages and disadvantages, please find below some of the key differences we have observed to be material when selecting a jurisdiction for estate succession: 

Sr. No.
Scope
Dubai Courts
DIFC
ADJD
1.
Jurisdictions Covered
All seven (7) Emirates
Only Dubai and Ras Al Khaimah
All seven (7) Emirates
2
Language
Arabic or Bilingual (Arabic translation by a sworn translator)
English
Arabic or Bilingual (Arabic translation by a sworn translator)
3
Governing Law
Law No. (15) of 2017 Concerning Administration of Estates and Implementation of Wills of Non-Muslims in the Emirate of Dubai
DIFC Wills and Probate Registry Rules
ABU DHABI LAW NO. 14/2021 On Civil Marriage and its Effects in the Emirate of Abu Dhabi & Regulation 8/2022
4
Cost of Single Full Wills
AED 2,167
AED 10,000 + VAT
AED 950
5
Cost of Mirror Full Wills
AED 4,334
AED 15,000 + VAT
AED 1,900
6
Cost of Other Wills
N/A
Property Single Will: AED 7,500 + VAT Property Mirror Wills: AED 10,000 + VAT Business Owners Single Will: AED 5,000 + VAT Business Owners Mirror Wills: AED 7,500 + VAT Financial Assets Single Will: AED 5,000 + VAT Financial Assets Mirror Wills: AED 7,500 + VAT
N/A

Procedural Guidelines for Executors Post-Testator Demise

The implementation and execution of the registered Will shall be handled by the Executor(s) nominated in the Will itself. It is ideal to appoint not just one Executor (primary Executor) but alternate Executor as well to provide for any and all contingencies. 

The process to be followed by Executors at the time of implementation of the Will is as follows: 

1. Obtain Probate

The executor will be responsible for initiating the legal process to validate your will and authorise the management of your estate. The specific procedures will depend on where your Will is registered. If it’s registered with the Notary Public, a local lawyer will be needed to handle the process. However, if it’s registered with the DIFC Courts Wills Service, the Executor can either handle it directly or through a probate specialist. 

2. Take Inventory of Assets

The Executor will create a detailed list of all your assets. 

3. Settle Debts and Expenses

The Executor will identify and pay all the outstanding debts and related costs on behalf of the Testator. 

4. Distribute Assets

Once all debts, expenses, and specific gifts mentioned in your will are paid, your executor will divide the remaining assets among your beneficiaries as outlined in your will. The exact distribution process will vary depending on whether your will is registered with the Notary Public or the DIFC Courts Wills Service. 

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CONCLUSION

In conclusion, the UAE offers non-Muslim expatriates several avenues to establish their desired estate distribution post-demise. By registering a Will with Dubai Courts, DIFC Wills and Probate Registry, or ADJD, individuals can effectively bypass the application of Shariah law and exercise control over their assets. 

While each jurisdiction presents distinct advantages and costs, the ability to choose the governing law and specify beneficiaries provides invaluable peace of mind. It is essential to carefully consider factors such as jurisdiction, language requirements, and associated costs when selecting the most suitable option. 

By understanding the available platforms and the processes involved, non-Muslim expatriates can proactively plan for their future and ensure their wishes are honoured, providing comfort and security to both themselves and their loved ones. 

FAME ADVISORY’S PROVISION OF SERVICES

We can provide you with a wide variety of services from the stage of drafting the particulars of the Will to getting the same executed. 

If you would like our assistance with succession planning, please do not hesitate to contact us. 

FAQs

No, the Executor need not be a UAE resident for the implementation of DIFC Wills. 

The minimum age of a Testator must be 21+ years. 

Ayushi Agrawal
Ayushi Agrawal

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Qualifying Public Benefit Entity: Registration and Exemption under UAE Corporate Tax 

Qualifying Public Benefit Entity Registration and Exemption under UAE Corporate Tax

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Qualifying Public Benefit Entity Registration and Exemption under UAE Corporate Tax

 

Public benefit entities are set up for the welfare of society, focusing on activities that strengthen the UAE’s social fabric. The term “public benefit entity” refers to an organization formed by private individuals or government or non-governmental bodies for the purpose of carrying out charitable, social, cultural, religious, or other public benefit activities without the motive of making a profit for distribution to private Persons. 

Each Emirate in the UAE has established a Cultural Development Authority (CDA). Non-profit organizations get themselves to register with the CDA to get the necessary approval and licenses for cultural activities. Similarly, the Chamber of Commerce issues licenses for trade and industry growth. 

To qualify for corporate tax (CT) exemption, these entities shall comply with Article (9) of the Corporate Tax Law and adhere to all relevant federal and local regulations. Organizations engaged in social, cultural, religious, charitable, or other public benefit activities can apply for a corporate tax exemption. If approved, they will be listed in a cabinet decision requested by the Minister of Finance. Only public benefit entities listed by the Cabinet are eligible for the tax exemption. 

 

What are Qualifying Public Benefit Entities?

Qualifying Public benefit entities (QPBE) are those entities which are established and operated exclusively for any of the following activities:  

  • Religious 
  • Charitable 
  • Scientific 
  • Artistic 
  • Cultural 
  • Athletic 
  • Educational 
  • Healthcare 
  • Environmental 
  • Humanitarian 
  • Animal Protection; or 
  • Other similar purposes 

Conditions for Qualifying Public Benefit Entities to be Exempt from Corporate Tax

The following conditions need to be satisfied by the qualifying public benefit entities to be exempt from corporate tax:

  • It shall not be engaged in a business or business activity. But it can carry on such activities that directly relate to or are undertaken for fulfilling the various public benefit purposes for which the entity is established like it should be established for any of the following purposes: 
    • exclusively for religious, charitable, scientific, artistic, cultural, athletic, educational, healthcare, environmental, humanitarian, animal protection or other similar purposes, or 
    • as a professional entity, chamber of commerce, or a similar entity operated exclusively for the promotion of social welfare or public benefit. 
  • The income and the assets of the entity should be exclusively used in the furtherance of the purpose for which it is established or for the payment of any associated necessary and reasonable expenditure incurred. 
  • No part of its income or assets should be utilised for the personal benefit of the shareholder, member, trustee, founder or settlor of the public benefit entity. 

  • The Cabinet may prescribe further conditions for eligibility of an entity to claim exemption.  

The entity shall make an application to the relevant local or federal government entity with which it is registered in the prescribed manner to claim exemption from the corporate tax. 

The exemption would be available from the beginning of the tax period in which the Cabinet approves the application, or any other date determined by the Minister. 

The relevant government entity will consider the application and may request evidence or ask to prove that the conditions as set forth in the Corporate Tax Law are properly satisfied. On successful verification, authority will refer the case to the Ministry of Finance for inclusion in a memo from the Minister to the Cabinet. Following the issuing of such a decision the entity will qualify to be exempt from Corporate Tax. 

The definition of Qualifying Public Benefit Entity in the Corporate Tax Law requires that in addition to meeting the conditions in Article 9 of the Corporate Tax Law, the entity must be listed in a decision issued by the Cabinet at the suggestion of the Minister.  

Cabinet Decision No. 37 of 2023, issued on 7 April 2023, sets out a list of entities that are to be considered as Qualifying Public Benefit Entities for the purposes of the Corporate Tax Law. The Cabinet has the power to amend the list in the future at the suggestion of the Minister, making either additions or deletions to it. 

Payments to a Qualifying Public Benefit Entity

A Taxable Person who makes donations, grants or gifts to a Qualifying Public Benefit Entity which is listed in a Cabinet Decision can claim a deduction for Corporate Tax purposes. No deduction is allowed for donations, gifts or grants made to an entity that is not a Qualifying Public Benefit Entity. 

Compliance and Record Keeping

Qualifying Public Benefit Entities listed in Cabinet Decision No. 37 of 2023 must still register with the FTA for Corporate Tax purposes and obtain a Corporate Tax Registration Number (“TRN”). The application to register for Corporate Tax purposes for Qualifying Public Benefit Entities has been made available from 1 October 2023. 

Qualifying Public Benefit Entities are not required to file a Tax Return. Instead, they are required to submit an annual declaration to the FTA, no later than 9 months from the end of the relevant Tax Period.  

They are required to maintain records which evidence their exempt status for 7 years from the end of the Tax Period to which they relate. This includes any information, accounts, documents and records to enable the Exempt Person’s status to be readily ascertained by the FTA. For example, for a Qualifying Public Benefit Entity, this could include books and records to demonstrate that its resources were used only for its stated public benefit purpose, copies of agreements entered into, and details of its employees, officers and fiduciaries. 

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Implication of Breach in Conditions

Failure is of temporary nature which is promptly rectified:

If an Exempt Person breaches the conditions to be followed, they may continue to be deemed as an Exempt Person where all of the following conditions are met: 

  1. The failure to meet conditions is due to unforeseen circumstances beyond the Exempt Person’s control, which they could not reasonably predict or prevent. 
  2. The Exempt Person must apply to the FTA within 20 business days of failing to meet the conditions to remain exempt. The FTA will review and notify the decision within the same period or a reasonable time thereafter. 
  3. The Exempt Person must rectify the failure within 20 business days of applying. An additional 20 business days may be granted if the rectification is beyond their reasonable control. 
  4. Upon request by the FTA, the documentation should be provided to the FTA within 20 business days from the date of the request by the FTA, or any other period as may be determined by the FTA. 

Failure to obtain Corporate Tax advantage:

The Exempt Person shall cease to be an Exempt Person starting from the day they fail to meet the conditions in case it can be reasonably concluded that the main purpose or one of the main purposes of this failure is to obtain a Corporate Tax advantage specified under the General Anti-abuse Rule that is not consistent with the intention or purpose of the Corporate Tax Law. 

Seeking Professional Help for Registering Qualifying Public Benefit Entity

Following is the way how tax consultants like FAME can help qualified public benefit entities in registration under the corporate tax law and in legal compliance: 

Expert Guidance on Regulatory Compliance:

Tax consultants specializing in non-profit entities understand the complex requirements set out by the Ministry of Finance and local authorities. They can ensure that your entity meets all necessary criteria for registration and exemption, and adherence to Article 9 of the Corporate Tax Law. 

Streamlined Application Process:

Professionals can help prepare and submit the application to the Ministry of Finance or relevant governing bodies in the correct format and with all required documentation. This reduces the risk of delays or rejections due to incomplete submissions. 

Representation on behalf of QPBE:

In case of audits or queries from tax authorities, tax consultants can serve as an authorized representative for the entity and can play the role of an important bridge between the entities and authority.  

Conclusion

Qualifying Public benefit entities in the UAE serve a crucial role in enhancing societal well-being through activities that include charitable, cultural, and humanitarian domains. Known by their non-profit nature and commitment to public service, these organizations seek exemption from corporate tax under stringent criteria as defined in Article 9 of the Corporate Tax Law. To qualify, such entities shall have to apply to the authority and get approval according to the guidelines provided in the law. To qualify for an exemption such entities shall satisfy certain conditions like  they shall not be engaged in a business or business activity and shall exclusively carry on the religious, charitable, scientific, artistic, cultural, athletic and educational kind of activities. The income and the assets of the entity should be exclusively used in the furtherance of the purpose for which it is established etc.  

While a Qualifying Public Benefit Entity may qualify for exemption from corporate tax, but it would still be required to maintain financial records and follow prescribed guidelines and compliance requirements. 

Get in touch with us to establish a Qualifying Public Benefit Entity in UAE and claim various tax exemptions available under the UAE corporate tax laws. 

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Navigating the Legal Landscape of DIFC Foundation Wealth Distribution  

Navigating the legal landscape of DIFC Foundation Wealth Distribution

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Navigating the legal landscape of DIFC Foundation Wealth Distribution

The concept of a Foundation finds its roots within civil law jurisdictions, offering a familiar legal framework for countries within the GCC region that share a similar heritage. Unlike a trust, a Foundation operates as an independent legal entity, distinct from its Founder. This distinction safeguards the Founder’s personal assets, ensuring the Foundation’s holdings remain separate. We offer services for forming a Foundation in Dubai International Financial Centre (DIFC).  

This article will delve into the nuances of wealth distribution from the perspective of Foundations. 

What is a DIFC Foundation?

Similar to a company, a Foundation possesses its own legal personality, allowing it to enter into contracts and hold property. However, a key distinction lies in its purpose. A Foundation is not driven by shareholder interests or profit generation. It lacks the ability to issue shares or engage in commercial activities beyond those directly supporting its stated objectives. 

The core of a Foundation revolves around its objects, which define its purpose(s) and may identify specific Beneficiaries. These objects, along with the Founder’s wishes, are enshrined in the Foundation’s Charter and By-laws, serving as the Foundation’s guiding constitution. Management is entrusted to a Council, mirroring the structure of a company board with its Council Members. Such foundations governed by the DIFC Foundations Law of 2018 are referred as DIFC foundations.

Foundations offer a versatile tool for a variety of applications: 

Family Wealth/Succession Planning: ​

Foundations provide a structured framework for wealth transfer across generations, ensuring the continued fulfilment of the Founder’s wishes. 

Asset Protection: ​

By separating assets from the Founder’s personal wealth, Foundations offer a layer of protection in case of unforeseen circumstances. 

Commercial Transactions: ​

Foundations can be employed to facilitate complex commercial transactions. 

Securitization Structures: ​

Foundations can act as vehicles for securitization, a financial structuring technique. 

Long-Term Business Holding: ​

Foundations possess the ability to hold assets and businesses for extended periods. 

Anti-Hostile Takeover Instruments:​

Foundations can be strategically utilized to deter unwanted corporate acquisitions. 

Charitable Purposes: ​

A cornerstone application, Foundations serve as a conduit for philanthropic endeavours. 

Letter of Wishes: Non-Binding Expressions of Intent

While Wills hold legal weight, Letters of Wishes serve a distinct purpose. These documents express the testator’s wishes and preferences regarding estate distribution beyond the legally binding directives outlined in the Will. Letters of Wishes provide valuable guidance to executors and/or trustees in managing the estate, potentially including suggestions for charitable donations or preferred asset allocation among beneficiaries. Unlike Wills, Letters of Wishes are not legally enforceable. However, their flexibility is a key advantage, allowing for modification or revocation at any time without the formalities and costs associated with amending a Will. 

In conclusion, navigating estate planning within the DIFC requires an understanding of the distinct legal frameworks governing Foundations. This knowledge empowers individuals to make informed decisions regarding the distribution of their assets and the expression of their wishes for the future management of their estate. 

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Legal Directives for DIFC Foundation Wealth Distribution

legal directives for DIFC Foundation Wealth Distribution

The effective distribution of a Foundation’s wealth upon its dissolution is a critical consideration for Founders.  

Directive I: Charter and By-laws: Defining Default and Qualified Recipients

The Foundation’s Charter and By-laws serve as its primary governing documents. Within these documents, Founders can designate beneficiaries for the Foundation’s assets. Two primary categories exist: 

  • Default Recipient: This recipient receives any unallocated assets upon the Foundation’s termination. 
  • Qualified Recipient: This recipient holds a legal entitlement, as specified in the By-laws, to a predetermined share of the Foundation’s wealth upon dissolution. 

Beyond these default categories, Founders have the flexibility to establish more nuanced distribution models within the Charter and By-laws. Careful legal drafting is essential to ensure compliance with the relevant Foundation law. 

Directive II: Tailored Distribution Provisions

Our experience demonstrates a need for distribution models beyond the default and qualified recipient structures. Founders may wish to: 

  • Designate additional beneficiaries beyond the initial and qualified categories. 
  • Specify precise distribution ratios for various beneficiaries, ensuring a non-equal distribution. 

Such specific distribution instructions can be incorporated into the Foundation’s Charter and By-laws, fostering a more customized approach to wealth allocation. 

Directive III: Letters of Wishes: Providing Non-Binding Guidance

Letters of Wishes offer a complementary tool for Founders. Unlike Wills, they are non-binding documents. However, they serve a valuable purpose by expressing the Founder’s wishes for the distribution and future management of the Foundation’s wealth. Letters of Wishes can specify: 

  • The desired timing of asset distribution. 
  • The intended purpose for which the wealth should be used. 
  • Specific allocations of certain assets or investments to designated recipients. 

This flexibility allows Founders to address intricacies and complexities beyond the scope of legally binding documents like the Charter and By-laws of the Foundation. 

Case Study

On many instances, clients have approached us with concerns relating to the distribution of their Foundation Wealth both during their subsistence and after their demise. Both in tailor made ratios or in such a manner as to give certain types of wealth, i.e. investments to one heir and other fixed assets to the other heir at different circumstantial intervals. 

We have trained professionals equipped to provide the best possible advice with regard to situation specific concerns. 

Conclusion

The distribution of Foundation wealth requires a thoughtful approach. By strategically utilizing Charters and Letters of Wishes within the legal framework of DIFC, Founders can ensure their philanthropic or wealth distribution goals are effectively realized upon the Foundation’s dissolution. 

This article summarizes all the practical aspects that we have dealt with so far, with regard to wealth management of Foundations. You can keep this as your guide to further wealth distribution plans you may have with regard to your respective Foundation(s). 

FAME Advisory's provision for DIFC Foundation Wealth Distribution

We can provide you with a wide variety of services from the stage of drafting the particulars of the Foundation Charter and By-laws or Letter of Wishes to getting the same attested. 

If you would like our assistance with wealth planning and Foundations, please do not hesitate to contact us. 

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FAQs

Letter of Wishes are not legally binding. It is recommended to create a Letter of Wishes in order to provide guidance to the Executors when following the directions contained in the Foundation By-laws when distributing the wealth. 

Insertions to the Charter and By-laws and drafting of a Letter of Wishes can be made at any stage of the Foundation’s subsistence. 

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Tax Loss Relief under UAE’s Corporate Tax Law: Key Factors 

Tax loss relief under UAE's Corporate Tax Law: Key factors

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Tax loss relief under UAE's Corporate Tax Law: Key factors

What Is Tax Loss and Tax Loss Relief Under UAE Corporate Tax Law?

Businesses may experience losses during the initial startup phase while it is investing in growing their Business, or sometimes mature businesses may make a loss over a period because of a temporary, adverse trading environment.  

UAE Corporate tax law recognizes this very well and that’s why corporate tax is calculated on a company’s overall profitability throughout its existence and not just on a single year’s income.  

It is also in line with international practice across the world that allows the taxable person to offset its loss incurred in one period against the taxable income of future period.

What is Tax Loss?

A tax loss refers to a loss, as per the tax laws, that a business incurs in a particular tax period. It occurs when a Taxable Person’s deductible expenses under the tax law exceed its income in a particular financial period. 

What is Tax Loss Relief?

As per Article 37, Tax loss relief in the UAE’s corporate tax law allows businesses to offset losses from one tax period against taxable income in subsequent tax periods to arrive at the taxable income for that subsequent tax period.

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Circumstances of Non-availability of Tax Loss Relief Under UAE Corporate Tax Law

Under the following circumstances, tax loss relief is not available:

  1. Losses incurred before the date of commencement of UAE Corporate Tax Law 
  2. Losses incurred by a Person before becoming a Taxable Person under the UAE Corporate Tax Law.   
  3. Losses incurred from an asset or activity, the income of which is exempt under the UAE Corporate Tax Law. 

Limitations for Tax Loss Relief Under UAE Corporate Tax Law

Tax Loss Relief Maximum Amount:

A Taxable Person can carry forward Tax Losses and offset them against Taxable Income in subsequent Tax Periods, subject to meeting certain conditions.  

The amount of tax loss that is allowed to offset against the taxable income of that subsequent period cannot exceed 75% of the taxable income of that subsequent period before claiming any tax loss relief against the taxable income. 

Tax Loss Relief Maximum Period:

The CT law does not provide any restriction on the number of years for which the tax relief would be set off. Accordingly, the tax loss can be carried forward for an indefinite period.  

This implies that every profit-making business would be liable to pay tax on the remaining twenty-five per cent of the income after adjustment of losses or full profit if there are no previous losses, while loss-making businesses will carry forward their losses for an unlimited time. 

Can Tax Loss Relief Under UAE Corporate Tax Law be Carried Forward for an Indefinite Period?

According to Article 37 of the UAE CT Law, the tax losses can be carried forwarded to subsequent tax period for set off.  

 However, Article 39 imposes certain restrictions on the carry and forward of the utilization of the Tax Loss. Tax losses can be carried forward from one Tax period to a subsequent tax period only if the following conditions are satisfied: 

Continuity of Ownership Requirement:

The UAE CT Law discourages the trading of loss. Acquisition of an entity just for the purpose of utilization of its tax loss is not permissible under the Act.  

The CT law allows carry forward and set off of loss only if the same person or persons continues to hold at least 50% ownership interest in the taxable person throughout from the beginning of the tax period in which the tax loss is incurred to the end of the tax period in which the tax loss or part thereof is offset against taxable income. 

For example, Company ABC and Company DEF are unrelated entities. Company ABC, incorporated in the UAE, incurs a tax loss of 2 million AED in its tax period. Company DEF approaches Company ABC with the intention of acquiring it solely for the purpose of utilising Company ABC’s tax loss. 

  • In the above situation, Company DEF’s acquisition of Company ABC solely for the purpose of utilizing its tax loss would not be permissible under the UAE CT Law. 

Continuity of Business Requirements:

In case of a change in ownership interest, the taxable person shall be allowed to carry forward and set off the losses only if the taxable person continues to conduct the same or similar business or business activity in which the loss was incurred. The following factors would be relevant to determine the continuity of the same or similar business or business activity. 

  1. The taxable person utilises some or all the assets as before the change in ownership 
  2. The taxable person has not made any significant changes to the core operations or identity of the business 

The loss can be allowed to be carried forward and set off in case of change in the core identity or operations of the business, if the changes are resulting from of the exploitation or development of services, assets, resources etc. that existed before the change in ownership. 

Special Conditions for Listed Companies:

The limitation on tax losses carried forward as per Article 39 will not apply where the shares of the Taxable Person are listed on the Recognised Stock Exchange.  

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Transfer of Tax Loss between the Taxable Persons

As per Article 38 of the UAE CT Law, The Tax Loss may be transferred between the two Taxable persons where all of the following conditions are satisfied: 

1. Both the taxable persons, transferor and transferee, should be juridical persons

Transferor
Transferee
Is transfer allowed?
Company
Company
Yes
Company
Shareholder
No
Shareholder
Company
No
Mother
Son
No

2. Both the taxable persons should be tax residents of the UAE.

Transferor
Transferee
Is transfer allowed?
Resident
Resident
Yes
Resident
Non-Resident
No
Non-Resident
Non-Resident
No
Non-Resident
Resident
No

3. Common Ownership Interest:

The taxable person should have an ownership interest of at least 75% in another taxable person directly or indirectly. Thus, a subsidiary can also transfer the tax loss to a parent company or vice versa, subject to the fulfilment of 75% ownership criteria. Further, the transfer of loss is allowed to a sister concern, commonly controlled by a third person directly or indirectly. 

For example, X Ltd., an Indian company, holds 80% of two UAE-based companies, Y Ltd. and Z Ltd. Y Ltd. and Z Ltd. can transfer the tax loss internally as both the companies are controlled by a common ownership interest to the extent of 75% or more by a common company X Ltd. 

4. Continuous Ownership Interest:

The ‘common ownership’ of 75% in both taxable persons should exist from the start of the tax period in which the tax loss is incurred to the end of the tax period in which the loss is transferred.

5. Both Taxable Persons are not Exempt Persons

  1. Both Taxable Persons are not Qualifying Free Zone Persons 
  2. Both the Taxable person’s financial year should end on the same date 
  3. Both Taxable Persons prepare their Financial Statements using the same accounting standards 

Case Study

Here is the case study which calculates the maximum amount of loss which can be transferred and utilised as per the facts provided: 

AXE Ltd. holds 77% shares of WYE Ltd. 

  • In tax period 1, AXE Ltd. suffered a tax loss of 200,000 AED. 
  • In tax period 2, AXE Ltd. generated a taxable income of AED 60,000. 
  • In tax period 2, WYE Ltd. earned a taxable income of AED 75,000. 
Tax Period
AXE Ltd. Tax Loss
AXE Ltd. Taxable Income
Loss Set-off
WYE Ltd. Taxable Income
Max. loss transferrable to WYE Ltd.
Loss Carried Forward
1.
200,000
–
–
–
–
200,000
2.
–
60,000
45,000 (60,000 X 75%)
75,000
56,250 (75,000 X 75%)
98,750 (200,000-45,000-56,250)

In the above scenario, AXE Ltd. has brought forward a loss of AED 200,000 in tax period 1, which shall be carried forward to tax period 2. As per Article 37(4), the brought forward loss shall be utilised first against the taxable income of AXE Ltd. Accordingly, the maximum loss which can be offset against the taxable income of tax period 2 is 45,000 AED (75% of 60,000 AED).  

Since AXE Ltd. owns more than 75% of shares of WYE Ltd., a resident taxable person, the tax loss of AXE Ltd. can be transferred and utilised to offset the taxable income of WYE Ltd. However, the quantum of loss cannot be more than 75% of the taxable income of WYE Ltd. Hence, AXE Ltd. can transfer a tax loss of up to 56,250 AED. (75% of 75,000 AED). 

The remaining tax loss of 98,750 AED (200,000 AED – 45,000 AED – 56,250 AED) can be carried forward by AXE Ltd. to the tax period 3. 

Seeking Professional Help to Manage Your Tax Loss Relief

The UAE Corporate Tax Law provides various tax loss relief provisions that can be strategically utilised to minimize a company’s tax burden. However, understanding these regulations can be complex, especially for businesses which are unfamiliar with UAE tax law.  

However, a tax consultant can help in the following manner: 

Maximizing Tax Loss Relief:

A consultant can make sure that the business claims all eligible tax losses and understands the rules of carry-forward of losses and their limitations. 

Compliance with Ownership and Business Continuity Rules:

Tax consultants can advise on maintaining the required ownership structure and business continuity to qualify for tax loss relief. 

Optimizing Loss Transfer Between Group Companies:

Consultants can guide businesses on fulfilling the conditions for transferring tax losses between group companies under the 75% ownership rule.

Mitigating Tax Risks:

Tax Consultants can help in identifying potential issues and ensure that tax loss claims made by the company is as per the UAE Corporate tax law’s regulations and provisions. 

Conclusion

Tax loss relief provisions under Articles 37, 38, and 39 of the UAE Corporate Tax Law serve as vital tools for businesses to manage their tax liabilities effectively. By allowing the offsetting of losses against future taxable income, UAE CT Law promotes investment, entrepreneurship, and economic growth. 

However, it’s crucial to understand the conditions and limitations drafted in these provisions. The requirement for continuity of ownership and business activities ensures that tax relief is granted within a legitimate business context, and it strongly prevents the abuse of this mechanism to gain any kind of false advantage by way of availing of the wrong tax loss relief.  

Also, the ability to transfer tax losses between related entities under certain conditions helps the business in strategic tax planning within the corporate groups. 

Compliance with these regulations demands a deep understanding of UAE tax law and due to such complexities taking professional assistance from tax consultants is very much required. FAME being a leading Tax consultant in UAE,  offers expertise in maximizing tax loss relief, ensuring compliance with ownership and business continuity rules, optimizing loss transfers between group companies, and also mitigating tax risks. 

Unsure about UAE Tax loss relief regulations? Navigate the regulatory framework and stay compliant with us.
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UAE Corporate Tax Group: Pros, Cons, and Considerations

UAE Corporate Tax Group Pros Cons and considerations

Insights

Home Tag Archives: Insights
UAE Corporate Tax Group Pros Cons and considerations

In the UAE Corporate Tax Law, a tax group refers to a special arrangement where two or more resident companies can come together to operate as a single taxable entity, subject to the conditions of Article 40 of the Corporate Tax Law.

This means If the companies meet the requirements to form a UAE Corporate Tax Group, and their application to form such Tax Group is approved by the Federal Tax Authority, they can file a single UAE CT return covering all the members of the Tax Group.

Who Can Form a UAE Corporate Tax Group?

A resident parent company, along with its one or more subsidiaries, resident in the UAE (taxable person), can form a tax group, functioning as a single taxable entity for corporate tax purposes.

What Conditions Need to be Fulfilled to Form a UAE Corporate Tax Group?

The following conditions need to be fulfilled to form a UAE Corporate Tax Group:

Juridical persons

Each person forming part of the ‘Tax Group’ should be a juridical person. The natural persons (Individuals) cannot constitute a ‘Tax Group’.

Tax Residents

All members of the group must be resident companies in the UAE. Non-resident persons or foreign companies cannot be added to the tax group.
Parent Company
Subsidiary
Allowed?
Resident
Resident
Yes
Resident
Non- Resident
No
Non- Resident
Non- Resident
No
Non- Resident
Resident
No
A foreign juridical person effectively managed and controlled in the UAE would be treated as a resident person for the purpose of tax grouping subject to maintenance of the following documentation that such an entity is not a resident in any other country:
(a) A confirmation from the relevant tax authority of the other country; or

1. The parent company should own at least 95% of the ownership interest

A confirmation from the relevant competent authorities for the purpose of the application of tax treaties in force supporting non-residency in another country.
A Parent Company can form a tax group with its resident subsidiary if it meets the Ownership Requirement as stated in Article 40(1) of the Corporate Tax Law, accordingly – the parent company must hold, directly or indirectly, at least 95% of the following in each subsidiary:
  • Share capital
  • Voting rights
  • Entitlement to profits and net assets

2. None of the company is an Exempt Person:

Neither the parent nor any subsidiary can be an exempt person or a Qualifying Free Zone Person (QFZP).
  • Exempt persons include public charities, government entities, and certain specialized activities.
  • QFZPs are companies operating in designated free zones with their own tax regimes

3. Shared Financial Year and Standards:

To ‘Tax group’, the CT Law mandates that the financial year of each taxable person should end on the same date. The Parent Company and subsidiaries cannot follow two different financial years. Also, each tax group should have prepared their financial statements using the same accounting standards.
To ‘Tax group’, the CT Law mandates that the financial year of each taxable person should end on the same date. The Parent Company and subsidiaries cannot follow two different financial years. Also, each tax group should have prepared their financial statements using the same accounting standards.
Confused about where to begin with your UAE Corporate Tax Group journey? Uncover the essentials of forming a UAE Corporate Tax Group with expert guidance.
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Pros of Forming a UAE Corporate Tax Group

Single filing required

  • The tax group is required to file only one consolidated tax return under UAE Corporate Tax Law.
  • This will significantly simplify the tax compliance compared to filing of individual returns for each member separately.

No applicability of Arm’s length principles and Transfer Pricing Documentation

Transactions between group members are exempt from arm’s length requirements and transfer pricing documentation. This significantly reduces the burden and complexity of proving fair market value for intra-group transactions

Losses of one company set off in the same year with another company leading to cash benefits

Losses incurred by one group member can be used to offset the profits of other members in the same tax year. This allows profitable companies to utilize the losses of loss-making companies within the group, potentially reducing the overall tax liability and generating immediate cash flow benefits

Lower compliance burden due to single Corporate Tax return

Under the UAE Corporate tax law, tax group to apply for only one corporate tax registration on behalf of all the companies of tax group and such tax group is required to file only one consolidated return instead of filing separate returns for every member company of the Tax Group. This will simplify the overall administration part for the tax group, and it also reduces the compliance cost as well.

Cons of Forming a UAE Corporate Tax Group

Single exemption limit irrespective of tax group members

  • Under the UAE Corporate Tax Laws, once the tax group is formed, the threshold of AED 375,000 applies collectively to the entire tax group rather than to each member individually.
  • Under the UAE Corporate Tax Laws, once the tax group is formed, the threshold of AED 375,000 applies collectively to the entire tax group rather than to each member individually.

Mandatory to prepare consolidated financial statements

  • The Formation of Tax groups mandatorily requires the preparation of consolidated financial statements in accordance with applicable accounting standards.
  • This will make the overall accounting process complex and lead to higher compliance costs compared to the preparation of individual financial statements.

Triggers joint as well as several liabilities

  • All members of a tax group share joint and several liabilities for the entire tax group’s corporate tax liabilities. This implies that group members are collectively and individually responsible for meeting corporate tax obligations.
  • So, in case any member denies making the payment of their individual share, other members can be held responsible for the payment of the entire corporate tax liability.

Potential complications on engaging in M&A activity

  • Joining or leaving in the tax group may lead to complications during mergers and acquisitions (M&A) activities.
  • Changes in the overall group composition can have implications on tax positions and restructuring among the group members might be required during the mergers and acquisitions.

Limited to parent-subsidiary relationships, resident, and taxable persons

  • The formation of a UAE Corporate Tax Group is limited to parent-subsidiary relationships, and it applies to only entities that are residents and taxable persons.
  • Due to such restrictions, certain types of business entities cannot form a Tax group to enjoy the benefits of group taxation.
Ready to set up your UAE Corporate Tax Group? Explore the Tax Group framework with our support.
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Conclusion

What is tax group is one of the most frequently asked questions. A Tax Group is a specialized arrangement wherein two or more resident companies consolidate their financials and operate as a single taxable entity. Key prerequisites for tax group registration in UAE include the following: each member should be a juridical person, each participant should be a UAE tax resident and not exempt under UAE CT Law, the parent company should own at least 95% of the ownership interest, and shared financial years and accounting standards are mandated among all the subsidiaries of the Tax Group.

As an entity, a Tax Group enjoys multiple benefits, including a simplified tax group registration process, consolidated tax filing, exemption from transfer pricing documentation, and the flexibility to offset losses against profits within the group. However, Tax Groups face various challenges, including a collective exemption limit for the entire group, mandatory preparation of consolidated financial statements, joint and several liabilities for tax obligations, complexities during mergers and acquisitions, and limitations to parent-subsidiary relationships among resident and taxable entities.

Forming a UAE Corporate Tax Group can offer several advantages, but careful analysis of UAE CT treatment to group structure is crucial before deciding. An assessment of the potential benefits against the drawbacks, considering your specific group structure, financial situation, and future plans, is essential.

FAME is one of the best corporate tax consulting firms in UAE. We help businesses with tax group registration, impact assessment, and tax compliance services.

FAQs

Being owned by a foreign parent company does not preclude UAE subsidiaries from forming a Tax Group, but the UAE subsidiaries must be held by an intermediary UAE parent company that will be the “parent” of the Tax Group for UAE CT purposes.
Yes. The AED 375,000 threshold for Taxable Income subject to the 0% Corporate Tax rate will apply to the Tax Group as a single Taxable Person, irrespective of the number of entities in the Tax Group.
Pre-Grouping Tax Losses are Tax Losses that are accrued by a Taxable Person before joining or forming a Tax Group.

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