I’d like to welcome everyone to Creation Business Consultants tax updates my name’s Scott Cairns I’m Managing Director of Creation Business Consultants I’m joined by my colleague Steven Island who’s our Head of Tax as everyone would know I’m sure a bit of a bombshell last week from the UAE government that we’re going to be facing corporate income tax in the coming years so there are two certainties in life death and taxes so the second one is assured what we’re going to be doing today is Steven will be giving an overview of tax that we understand as of today and doing some Q&A at the end now we’ve turned off the Q&A for the presentation what we’d like everyone to do is to use Slido so if you haven’t used it before if you can just open up a browser on your phone and go to www.slido.com
And if you enter the hashtag #creationtax we’ll be able to collate all of your questions there and you can then if you see another question that’s similar to yours you can vote on it and there that’ll put your question towards the top so that we can address that to at the end so if you can also scan that QR code and that will take you directly into this okay so we’ve got a few people we might just wait another minute or two I think we’ve got a quite a few more people that were waiting to register we’ve got a few messages there just logging in now so give us about one more minute and we’ll kick off
Ok so we might kick off then so I would like to introduce Steven Island our Head of Tax Steven has been in the region for more than 15 years he’s a tax professional with more than 20 years fine accounting finance and tax experience he has worked on M&A deals he’s lived in Saudi and the UAE for quite a while and dealt with taxes in both regions and he’s also got big four pedigrees so Steven is very well placed to talk to you guys today about the new tax update so I’ll hand over to Steven from you Steven
Thank you very much right thank you very much Scott good afternoon everyone I hope everyone’s well welcome to the webinar I know a few of you are still working from home so I hope this webinar will break the board and we have based our slides on the frequently asked questions published on their ministry of finance websites there are still a number of unknowns but we will provide our initial views which will hopefully answer some of your questions up front
Just to give you a bit of background about why corporate tax has been introduced the UAE is a signatory to the OECD’s global tax deal which means that it must introduce corporate tax otherwise there would be a risk that it would be added back to the EU blacklist again the global tax deal is a measure designed to stop tax avoidance and tax evasion by global organizations it’s part of UAE’s commitment to avoid harmful tax practices and decreases the risk of the UAE being seen as a tax haven
The effective date is the first of june 2023 but it’s only relevant for accounting periods which start on or after that date so for most businesses with a calendar year end then there will be subject to corporate tax from the first of January 2024.
So the OECD established the base erosion and profit shifting or bets project to address growing global concern over tax avoidance strategies to artificially shift profit to low or no tax jurisdictions in 2017 the european union coded conduct group targeted countries with no on loan tax following a review of the UAE tax framework by the EU the UAE was initially added to the EU black list of non-cooperative tax havens in December 2017
In response to this, the UAE joined the OECD inclusive framework on beps and committed to meet the standards required by the EU which led to it being removed from the EU blacklist in 2019 the UAE introduced two of the four million standards of debts economic substance regulations and country by country reporting.
As mentioned on the previous slide last year the UAE joined OECD’s global tax deal to introduce a global minimum tax of 15 the multinational groups that have consolidated global revenue in excess of 750 million euros. So it was exactly one week ago that the UAE ministry of finance announced the introduction of corporate tax.
No legislation has been published yet but it is expected to release this summer so I’ve mentioned previously this will come into effect from the 1st of June 2023 and the first corporate tax return is due in 2025.
So businesses will be subject to federal corporate tax which will apply across all emirates and will apply to businesses that are undertaking a trade or any kind of commercial activity in the country the only exception is for businesses engaged in the extraction of natural resources which will continue to be subject to emerald level corporate tax branches of foreign banks are currently subject to tax of 20% under their local emirate level tax decrees but in future they will be taxed like other UAE entities
Individuals income from employment bank deposits personal investments will not be taxable if an individual is required to obtain a permit to carry out an activity then they may be subject to corporate tax so for example if an individual owns a property and wants a list of property on say airbnb dubai then they must get a permit from the upon of economy and tourism so this may mean that that individual will need to register for corporate tax
Foreign entities and individuals will be subject to UAE corporate tax if they conduct a trade or business in UAE in an ongoing or regular manner
Yeah just a point on residents so if you have a foreign company which is controlled in the UAE then it will be subject to corporate tax in the UAE so many UAE groups have their ultimate holding company in the BVI or Cayman so that will mean that these companies could be subject to UAE corporate tax if they are controlled in the UAE
So just a bit about the free zones because this is quite a common question that we were getting asked it was originally thought that entities registered in the finance in the federal financial free zones ADGM and disc will have preferential treatments but they will be treated the same as all entities in the other era level free zones
So all free zone entities will be required to file a tax return
However the UAE will continue to honor CT incentives currently offered to freeze any companies which is generally a 50-year up to a 50-year tax holiday provided they comply with regulatory requirements that do not conduct trade or business with mainland UAE so if reasons free zone companies were created to allow 100 foreign ownership and are not allowed to trade within the UAE mainland so conducting business on the mainland would mean that the entity would be subject to corporate tax so if a company is in a free zone or operating operating like a mainland entity then there may be no difference in the way corporate tax applies to it some free zones offer a dual license regime which allow them to operate on mainland so they will be operating within their regulatory requirements but it just remains to be seen whether there will be any relaxation of the rules for these type of entities
The ministry of finance has confirmed that no withholding tax will apply any domestic and cross-border payments and there will be no withholding tax on outbound dividends interest loyalties and other payments the UAE will continue to be a very tax efficient headquarter or holding from the jurisdiction given that it will also have a participation exemption which means that no corporate tax will apply in dividend income and capital gains so the UAE has signed off 137 double tax treaties 104 of which are currently in force a double tax treaty generally reduces or eliminates withholding tax on foreign dividends interest capital gains and other income from subsidiaries
We will continue to see a lot of multinational groups having their regional headquarters in the UAE and this will cement UAE’s position as a regional and international report as I mentioned earlier many UAE groups have their ultimate holding company in the BVI or Cayman there are economic substance regulations of the BVI in Cayman which are similar to the regulations we have seen in UAE it’s becoming difficult for groups to put substance in these countries so what we are seeing in practice is that many of these groups are re-domiciling their BVI and Cayman entities into the DIFC or ADGM
So the starting point for computing the taxable profits is the accounting net profit as reported in the financial statements prepared in accordance with international acceptable accounting standards so for us or UK.
Headquartered groups it remains to be seen whether it will be acceptable to use US or UK gap or will they need to be converted to IFRS.
So when can you when computing profits subject to tax then you have to disallow disallow certain items so some examples include penalties for late filings entertaining expenses personal expenses salaries paid to family members disallowance of sponsorship fee paid to local shareholder disallowance of excessive salary paid to director shareholders also in interest deductions are likely to be limited to between 10 or 30 profits in line with bets action form also all the related party expenses that are not on an hours-left basis will be added back finally the tax law will specify the tax depreciation rates of different type of assets so the depreciation for the accounts will be added back and then there will be a deduction for the tax depreciation.
I mentioned in the previous slide that UAE will have a participation exemption so capital gains and interest sorry capital gains and dividends received by UAE businesses from qualifying shareholdings will be exempt so what does uh qualifying shareholding mean so many european countries have similar participation exemptions and to qualify you will need to hold at least five percent of the shares in the resident of non-resident subsidiaries and usually these subsidiaries will need to be held from the minimum period of say one or two years there will also be exemptions for qualifying interview transactions and restructurings so what are qualifying interview transactions this refers to the fiscal consolidation regime so similar to what we’ve seen in a back room intergroup transactions will be disregarded if a group tax return is filed for all the UAE entities.
Qualifying share restructurings means that if a UAE group company or asset is transferred to another green company then there should be no corporate tax on any capital gain. There were finally there were no special exemptions from UAE or GCC nationals like we have seen in other GCC countries such as Qatar Saudi Arabia.
So moving on to tax losses so tax losses can be carried forward and offset against taxable profits in future years the results of the year will be driven by the financial statements of the previous year so if an entity is expected to incur losses in the first period or is an asset intensive business then I would say it’s very important that entity is subject to a financial audit during the previous year so there can be at least uncertainty on the closing balances in 2023 and losses in 2024 can be offset against profits in future years you don’t want to be getting into disputes with the FTA in a few years down the line when you utilize the losses and the FTA are arguing that they are not available there is a possibility to create a tax unity or UAE based entities under common ownership of control the group will be treated as a single tax entity and may file a single tax return
Where UAE businesses are part of the same tax stream then the losses of one group entity can be offset against the taxable profits of another green entity so the minimum ownership requirements for group relate relief would typically range between 75 and 100 percent so I can imagine many large groups which have many UAE entities would consider this as a as a benefit however uh there may be challenges with the 51 49 percent shareholding structures and entities where the legal and economic ownership is different so they may not qualify to be part of the same task room
So just moving on to the rates so there is a three-tier rate so first of all you have an exempt threshold if you’re earning tax lincoln up to 375 000 endearings which is approximately a hundred thousand dollars taxable income above that amount will be subject to a 9 corporate tax rate so if you ignore the country no corporate tax then this will leave the UAE with the lowest global corporate corporate tax rate alongside hungary and montenegro who share a corporate tax rate of nine percent all all over the GCC countries except for Bahrain already have a corporate tax system guitar has a corporate tax rate 10% Kuwait and Oman have a tax rate 15% and Saudi Arabia has a tax rate of 20% so if you ignore Bahrain then it will still be the lowest tax rate in the middle east region.
If you take into account additional exemptions the effective tax rate could well be below the statutory rate of max 9. Finally there is an additional tax rate of 15% for large multinationals which has followed the UAE’s commitment to global minimum tax by having this position in the tax law then it should stop other countries from taxing UAE businesses in the future
So foreign tax credits currently foreign tax credit applies restrictively only to foreign corporate tax paying however we also expect there to be credit for foreign withholding tax I mean this will be great news for UAE companies which receive income that has been subject to foreign withholding tax as it should be possible to offset the withholding tax against the against its corporate tax liability
So moving on to transfer pricing so what is transfer pricing
This is the process used to set prices where one related party supplies goods or services to other related parties to in order to ensure that correct quantum and profits is attributed to each party to the transaction only applicable transactions between is only applicable to transactions between related parties for example entities within the same group or entities or common ownership transfer pricing is important also from a customs duty perspective for example if the pricing of goods from one from another country is too low then this will result in an increase in the customs duty liability on the implication of goods into the UAE I suspect there will be a lot more information sharing between the FTA and customers authorities in the future and then and I suspect that we will eventually see a merger between the FTA and the customs authorities in the near future just like we have seen in ksa believe that small companies with limited related parts of transactions will be exempt from transfer pricing requirements
So moving on to the administration you’ve only seen the FTA website being updated for corporate tax registration will all entities that are registered for VAT automatically registered for corporate tax we have seen something similar in saudi arabia where existing registered entities which were registered for corporate tax purposes were automatically registered for VAT purposes.
There are no provisional or advanced corporate tax filings or advanced tax payable however I believe that at some point in the future large taxpayers will be required to make quarterly payments.
It remains to be seen whether the UAE will scrap the economic substance regulations we have seen qatar introduce economic substance regulations last year which are applicable to entities registered in their financial free zones so we may see the UAE following the same approach.
Finally will financial statements be required to be submitted with the tax return just like you see with some jurisdictions across the middle east.
So there are a lot of lessons learned here in the country following the introduction of VAT 2018 so the UAE has given plenty of time to prepare for this corporate tax so what we would strongly recommend that you don’t wait until the legislation is released before carrying out an initial impact assessment so this assessment should just be done as soon as possible this will help you to identify the high impact areas which you can start focusing in on now so that you’re ready to restructure when the actual law comes in as i mentioned earlier it’s important to understand.
Supported to understand which accounting standards you you will follow for UAE accounting purposes so many entities on mainland have not been preparing any financial statements so it’s very important for those entities to start preparing financial statements for the current year.
We’ve already seen mainland businesses you know looking that operate purely on mainland looking to set up in a in a free zone especially if we’ve already got customers there or if they’ve got international customers then it would probably make sense then for them to look at that.
So I’ve already mentioned it’s important to maintain proper financial statements along with that it’s also possible we would also recommend you maintain a fixed asset register so that you can reconcile between the tax base and the accounting dates.
Yeah finally I mean this could be done probably at a later stage but we would recommend you know especially those medium or large businesses if you haven’t got already got transfer pricing documentation place then you start to prepare that documentation.
So the key takeaways then so corporate tax will be applicable uh to all UAE entities including free zone entities but the UAE should continue.
To respect the free zone holidays if they operate just within the free zone or with international clients so there’s a nine percent corporate tax rate which is the lowest globally and also the lowest in the middle east there’s no withholding tax on outbound dividends interest rates and other payments there’s an exemption for dividends and capital gains we see from qualifying shareholdings also foreign tax will be allowed to be credited against the UAE corporate tax payable and finally the first tax return period for most companies will be the year ending 31st of December 2024.
So as i mentioned earlier there’s a lot of work which needs to be done between now and the first of June 2023 so we would recommend that you carry out the initial impact assessment as soon as possible I’m just a bit conscious of time now so I’ll just move on to the Q&A.
You know I’ll do my best to answer any questions but feel free to reach out to me directly if you have any further questions once the webinar has been completed okay so thanks Steven obviously there’s a lot of information there and not long to get ready I think is one of the key takeaways from this we’re just going to pull up the slide with slido so if people want to ask questions just to recap the you can scan this code this QR code and punch your question in there have a look at the other questions we’ve already got a lot of questions on there and we’ll run through them so in no particular order other than the most popular Steven so for free zone companies will corporate tax be applicable on all revenue or just the revenue coming from mainland yeah i mean that’s like the number one question we gave at the moment so yeah it just remains to be seen whether a few transactions with name and error entities will disqualify you from benefiting from the the tax holiday that’s available in the free zone or will there’s some be some sort of pro-watering where just those invoices addressed to mainland UAE entities will be subject to corporate tax
We still need further clarification around that yeah I think that’s a wait and see once we get a little bit more guidance from the FTA on that one we have will a permanent establishment to be taxable in the UAE yeah so if you’ve got a foreign company that’s operating in the UAE well generally you’d have to be licensed to do business in the UAE that have to be licensed so you probably you know have to register a legal presence and then that will trigger a corporate tax filing in there so the absolute question is yes but I guess that’s also for people from overseas doing business here without an incorporated entity they better be aware that the FTA probably will start looking for them in the future because there’s a reason to look for them
Would companies that own UAE real estate be subject to tax and would mortgage interest relief apply rather specific?
Yyeah well based I mean we unfortunately don’t have the detailed regulations and the law so but based on my experience yeah if you’ve got a company that owns real estate yeah then that rental income will be subject to corporate tax and if you want my view on the adult ability of interest then I believe there will be production abduction available but it just needs to be well if it’s with a third-party bank then you’d expect a full deduction to be available but if it’s from a related party like like you mentioned earlier there may be some restriction in the interest.
So cash or accrual basis so we’ve got a question on taxes are usually on a cash basis and books are maintained on an accrual basis for IFRS how would you reconcile those so which which do you think the taxes will be based on cash or accrual basis on accruals basis and I think you know it’s something that the companies are going to have to look at because previously they were not used to including any tax provisions in the financial statements but they will now need to include a corporate tax position a deferred tax permission after considering timing differences and you know permanent differences so yeah so and that’ll be on these provisions will be on an accruals basis and I think that’s going to be a big one too people actually as you mentioned earlier having to prepare accurate financial statements in accordance with actual accounting standards will be a big change for a lot of businesses who probably haven’t done so to date yeah agreed and yeah those listed companies as well you know they’d be required to prepare for the financial statements so in those statements you know you’ll need to can you compute the corporate tax position and defer to yourself.
Will free zones have to pay taxes for profit accrued from offering services to clients outside of the UAE?
I think that goes back to your your answer earlier yeah I mean if the if the entity is dealing with only international customers and clients then yeah I mean that there should be um the entities should be able to continue to benefit from the 50-year tax holiday or whatever it is.
Ok we’ve obviously got someone from the construction industry how will bad debt provisions be traded for tax purposes again we don’t have the detail yet but based on my experience you know the jurisdictions if you’ve got a specific provision against a bad debt then generally that will be that will be taken into account but where you’ve got just a general bad debt position so if it’s a policy to provide against all age debtors over say six months that will be a general position and then what I’ve seen in European for jurisdictions then this general provisions basically disallowed so it’s only specific provisions debts that you know will be an allowable deduction yeah here’s a good question will all businesses need to get their accounts audited so I guess the first part just for me to jump in quickly is the commercial company’s law has always said that mainland companies especially needed to prepare accounts a lot of free zones do require audited accounts to be launched especially in Dubai but what’s your take on it now with a new tax regime yeah I mean I believe that I mean there may be some like we see in the UK there may be some exemptions from all the requirements for the small companies but like i mentioned earlier it’s very important now to companies start to start preparing proper accounts and to give you more comfort that they’ve been prepared in accordance with international accounting standards then you know we always recommend it’s always best practice for the you know for those financial statements then to be subject to an order because you just got a bit more certainty then and because that’s very important like I mentioned earlier the starting point for preparing a corporate tax compensation is the is the profit per the financial statement so it’s very important that you get that right otherwise you know you may have issues with the FTA later on down the line because they have become more sophisticated
I think on the corporate tax side given that you know you know if we recruited heavily in the last few years then I suspect you know you’re gonna see audits you know we won’t be waiting for three years to send the first order you know it’s gonna be all it’s gonna be conducted within the first couple of years so yeah that’s right yeah and I think also too on the the preparation of the accounts I think we’re going to see a lot of the large sort of older family businesses the ones that have sort of grown organically over time they’re going to have a hell of a time trying to pull apart their individual businesses to basically take out individual expenses and personal expenses personal assets and actually start building them into tax I guess groupable areas because I’ve seen some company groups that are very intertwined with family investments and personal investments and a lot of personal expenses so i think there’s going to be a lot of work to be done even before we get to the taxes just to get their accounts cleaned up yeah agreed and also what we see we have family groups they’ve often got a large number of UAE entities some of those abdomens so you know it probably makes sense for some sort of entity rationalization so it’s one less company then to worry about because
If for some reason you don’t file a group tax return and each entities files corporate taxes on an individual basis which could happen with some family groups because because of the different shareholdings then it would make sense to rationalize those entities and you know start liquidating those entities before they go live game another question here what documentation will be required for transfer pricing so in line with global standards so local file master file whether they actually have to be submitted to the FTA remains seen but what we’ve seen for the jurisdictions in the middle east is that you know the tax authorities could request this transfer pricing documentation any time and then we’ve got to make that available within say 30 days a very short period I mean it normally takes you over 30 days to prepare this documentation so again it’s always good practice to make sure you have this transfer pricing documents and documentation in place so it’s ready to share with the tax authorities so if you’re able to share it straight away with the tax abilities then more often than not then the tax authorities think you’ve got your books in order and more often not will just just go away so yeah is withholding tax applicable to management fees or consulting services
Yeah I mean it depends if you’re talking about outbound then know that there is no withholding tax on any management fees or any other payments made outside of the UAE
Yes that could be the next big there was in the detail with this so who knows what will come in the future but for the moment there’s no withholding checks being announced yeah your right Scott you expect withholding taxes to be the next tax to be introduced which is in line with other jurisdictions within the middle east yeah so back on the transfer pricing and the ESR do we need to take precautions for related party transactions yes yes definitely
A lot mentioned earlier it’s only transactions that being on an arms-length basis will be an allowable deduction for tax purposes so it makes sense now just to make sure all the pricing is on an hour’s date basis so you don’t have to worry about that additional adjustment when it comes to filing your tax return will there be a separate registration requirement for all businesses within the scope of corporate tax or do they need to register for corporate tax only if tax is payable no so all entities even in the free zones will need to register for corporate tax whether they end up paying any taxes it depends on you know their transactions so if it’s all international transactions or within the same free zone or with customers in other free zones then you know they should continue to benefit from a tax holiday in which case you’ll just be filing a mill return
Okay all right we’re just about out of time now so steven so any final words of wisdom or encouragement to you know soften the blow for everyone who’s now been living tax-free for such a long time and is now staring down the barrel of being a genuine taxpayers yeah I mean it’s nothing you know the UAE has given us plenty of time to prepare for this so I don’t think there’s you know need to panic there is plenty of time but yeah I mean the sensible thing will like I mentioned earlier just to you know we’ve got a lot of information already so it does definitely make sense to at least conduct a initial impact assessment and then once the law and regulations have been released then you can then tweak update that impact assessment report and if necessary start restructuring your group so what in terms of least structuring have to say that’s definitely important to start as soon as the legislation is released because that is quite a time-consuming process if you’re opening companies liquidating companies so yeah yeah and I’d say my two cents on this two is there is going to be a mad rush towards the end we all saw it with ESR and VAT so I would suggest that people where possible do start thinking about this sooner rather than later and definitely do not leave it to the last minute because people will be harder to find to assist you and if there’s any changes that need to be made I think changes sooner rather than later would be a wiser choice so all right well I think that’s it from us I’d like to say a big thank you to Steven that was fantastic very informative and educational and well done on the Q&A I know there were some good questions in there if anyone there has any questions that they would like to shoot across you can book an appointment with Steven and have a quick chat to him or myself and we’ll see how we can help this is obviously only the first part of the information that we have regarding corporate tax so we will be providing regular updates where we can so we’ll try and keep them short and punchy I will try and answer people’s questions as and when we can and as we get in more information you’ll be hearing more from Steven helping people out so I’d like to thank you all for joining today and wish everyone a great afternoon thanks guys thanks everyone have a great day