VAT

Maximum Amount of Cash Refund Under the Refunds of VAT for Tourists Scheme

alnuaimi August 25, 2022

317 Closed

Maximum Amount of Cash Refund Under the Refunds of VAT for Tourists Scheme

The Chairman of the Board of Directors of the Federal Tax

Authority has decided:

– Having reviewed the Constitution,

– Federal Decree-Law No. 13 of 2016 on the Establishment of the Federal Tax Authority, and its amendments,

– Federal Decree-Law No. 8 of 2017 on Value Added Tax,

– Cabinet Decision No. 52 of 2017 on the Executive Regulation of the Federal Decree-Law No. 8 of 2017 on Value Added Tax, and its amendments,

– Cabinet Decision No. 41 of 2018 on Introducing the Tax Refunds for Tourist Scheme,

– Federal Tax Authority Decision No. 2 of 2018 on the Tax Refunds for Tourists Scheme,

– Federal Tax Authority Decision No. 1 of 2019 on the Maximum Amount of Cash Refund Under the Refunds of Value Added Tax for Tourists Scheme,

– Decision of the Chairman of the Board of Directors of the Federal Tax Authority No. 9 of 2021 on the Delegation to the Vice Chairman of the Board of Directors of the Federal Tax Authority, and

– Pursuant to the approval of the Board of Directors of the Federal Tax Authority on the memorandum on the Study of the Maximum Amount of Cash Refund of Value Added Tax Under Refunds of Tax for Tourists Scheme, at its 21st meeting held on 23/06/2022,

Article 1 – The Maximum Amount of Cash Refund

The maximum cash refund of Value Added Tax under the Tax Refunds for Tourists Scheme shall be AED 35,000 per overseas tourist per 24 hours.

Article 2 – Cancelation of Conflicting Provisions

Any provision contrary to or inconsistent with the provisions of this Decision, as well as the Federal Tax Authority Decision No. 1 of 2019 on the Maximum Amount of Cash Refund Under the Refunds of Value Added Tax for Tourists Scheme, shall be abrogated.

Article 3 – Application of the Decision

This Decision shall come into effect as of 1 September 2022

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audit, News

Dubai Customs Voluntary Disclosure Program “Self-Audit Finding Service”

alnuaimi August 19, 2022

394 Closed

Dubai Customs Voluntary Disclosure Program “Self-Audit Finding Service”

To improve Dubai-based business’s customs compliance levels and reinforce trust, transparency, and engagement, Dubai customs on August 11th, 2022, launched a new voluntary disclosure program (“Self-Audit Finding Service”), that aims to encourage importers and exporters to voluntarily disclose errors and report irregularities that may have been committed while writing import and export declarations.

One of the main benefits of using the Self-Audit Finding service is the possibility to avoid the penalties corresponding to the disclosed errors, in cases where the Self-Audit Finding has been initiated before notice or commencement of a customs audit process.

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Tax, Uncategorized

UAE: VAT Return and Excise Tax Return Filing Deadlines

alnuaimi August 11, 2022

464 Closed

UAE: VAT Return and Excise Tax Return Filing Deadlines

The Federal Tax Authority of the United Arab Emirates announced the final deadline for filing VAT returns and excise tax returns:

Type of Return	Deadline
VAT return	29 August 2022
Excise return	15 August 2022

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Highlights of comprehensive economic partnership agreement with India

News, UAE INDIA

UAE’s comprehensive economic partnership agreement with India

alnuaimi August 10, 2022

476 Closed

Highlights of a comprehensive economic partnership agreement with India

The United Arab Emirates (UAE) and India Comprehensive Economic Partnership Agreement (CEPA), which aims to strengthen economic ties and boost trade and investment between the two countries, entered into effect on 1 May 2022. Through this CEPA, both the UAE and India are expected to achieve significant economic benefits in the form of liberalization of customs tariffs, more straightforward customs formalities and procedures, more accessible access to relevant markets, and ease of movement of skilled labor to support the economic initiatives. The UAE Ministry of Economy has launched a web page that provides details of the CEPA.

A CEPA is a trade agreement between two countries that provide preferential trade terms, tariff concessions, services and investments, and other areas of economic partnership. A CEPA also considers factors such as trade facilitation and customs cooperation, competition, and access to countries’ intellectual property rights.

The UAE-India CEPA covers 11,908 items and includes goods in various sectors. The CEPA also specifies rules of origin, along with minimum required information, and covers product-specific rules for the import of specific products under CEPA. Some of the main businesses set to benefit from the CEPA are:

Energy
Environment
Digital trade
Intellectual property rights

The CEPA also covers 11 sectors and 100 sub-service sectors that will benefit from this agreement.

The UAE proposes to double its economy in the coming decade and attract top human capital; foreign trade will be an integral pillar of this development, and this is where the CEPA is expected to play a pivotal role. India is the UAE’s largest trading partner in terms of exports and the ninth largest recipient of foreign direct investment from the UAE. The CEPA will enhance this existing long-standing relationship and is expected to boost the merchandise trade between the two countries to USD 100 billion over the next five years.

Comments

The CEPA will promote economic benefits in various sectors, such as the following:

Increased investment flows, lower tariffs, and new opportunities for key sectors in India and the UAE such as aviation, environment, hospitality, investment, financial services, digital trade, etc.;
Boost the national economies of both countries; and
Make it easier for small and medium-sized enterprises to go global by granting them access to new customers, networks, and avenues of collaboration. The private sector will benefit from the agreement as it remains at the forefront of innovation and economic growth.

CPAs or trade agreements are considered to be central to the UAE’s efforts to build the economy over the next 50 years and solidify its position as a global economic hub. The UAE has signed several free trade agreements with countries and trade groups across the world to enhance its position as a global trade hub and significant destination for investments (click here for a list of the UAE agreements).

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VAT

VAT Fixed Establishment Risks in the UAE: Employer Record

alnuaimi August 6, 2022

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VAT Fixed Establishment Risks in the UAE

The risk of Fixed Establishment (FE) exposure to the Overseas company based on the UAE VAT regulations may result into a VAT registration.

Employer of record (EoR) – A UAE company [licensed to provide manpower and similar services] that serves as the legal employer of the employee on behalf of another UAE company/ Overseas company.
Fixed Establishment (FE) – Any fixed place of business, in which business is conducted regularly or permanently and where sufficient human and technology resources exist to enable the person to supply or acquire Goods or Services.

How We Can help?

Determine if an Overseas Company with an EoR structure qualifies as FE.
If qualifying as FE, the Overseas company should register for VAT based on the VAT registration threshold.
After obtaining a VAT registration, ensure VAT is charged to customers for the supply of goods and services.

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News, Tax, VAT

VAT: Incurring a financial loss by forgoing input credits?

alnuaimi August 5, 2022

497 Closed

Incurring a financial loss by forgoing input credits?

VAT: Incurring a financial loss by forgoing input credits?, Businesses often forgo input VAT credit if the purchase/expense invoice is more than 6 months old (or, 2 months in the case of monthly tax periods). Needless to say, such a tax position results in a financial loss to the business. Alternatively, the buyers could strain the business relations with the suppliers by asking to reissue a current dated invoice.

Such a practice to forgo credit is not just incorrect but also contrary to the specific clarifications issued by the Federal Tax Authority (FTA).

Input VAT credit may be recovered by a recipient/buyer in the VAT return of the tax period in which both of the following conditions are satisfied:

i) the buyer receives and keeps the valid tax invoices; and

ii) the buyer pays for the supply or intends to make the payment within 6 months from the due date of the payment.

If the buyer fails to recover the input tax credit in the first relevant tax period, then the credit can be recovered in the subsequent tax period. FTA has also clarified that input tax is only recoverable during the first two periods once the aforesaid two conditions are satisfied.

However, businesses incorrectly count the two tax periods from the date of the invoice. The two tax periods start only when both the conditions are satisfied.

Date of the invoice is not relevant

The first condition refers to the tax period in which the tax invoice is received and kept by the buyer. It does not refer to the date of issue of the invoice.

To illustrate, a tax invoice dated 25/02/2022 is received by the buyer on 15/04/2022. Assuming the quarterly tax periods of Jan-Mar, Apr-Jun and onwards, the first tax period in which the invoice is received is Apr’22-Jun’22.

Condition (i) is satisfied in the tax period Apr’22-Jun’22 even though the invoice is dated 25/02/2022.

FTA has reaffirmed the aforesaid position by clarifying that if the buyer has not received the tax invoice in the tax period when the supply was made, they may deduct the input tax in the tax period in which the tax invoice is received.

As disruptive as it may sound, the date of the invoice is not relevant for recovering input VAT credit. It is the date of the receipt of a tax invoice that is relevant.

The buyers also often ignore that the tax invoice should be in the correct format. In our previous Tax Conversation on 18 Dec 2021, the importance of a correct tax invoice containing the mandatory particulars was discussed.

Importance of intention to pay

The second condition requires that the customer should pay for the invoice or has the intention to pay within 6 months from the due date of the payment.

FTA understands the practicality of business processes. A company may receive a tax invoice but may not have an intention to make the payment until the internal approval process for the invoice is completed.

In the public clarification VATP017, FTA has clarified that the second condition will only be met when the buyer completes the internal approval process and forms an intention to make the payment within the prescribed period.

In other words, the second condition gets satisfied not on the receipt of the invoice or on the date of the invoice. It is satisfied when the internal approval process is completed and the intention to pay is formed by the buyer.

Where a tax invoice is received in one tax period and the intention to make the payment is formed in a later tax period, the two tax periods to recover input tax starts from such a later tax period.

Reduce your financial losses

Forgoing eligible input VAT credit is just a financial loss to a company. Business owners should ensure that the eligible input VAT credit is not let go of an incorrect understanding of the law. The correct tax position in summarised in the attached graphic timeline.

For any input VAT credit forgone in the past, the business owners could evaluate the option to submit a Voluntary Disclosure to recover such credits and financial gains.

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News Courtesy: khaleejtimes.com

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Tax, VAT

Businesses must prepare for official FTA audits in 2022

alnuaimi August 3, 2022

320 Closed

Businesses must prepare for official FTA audits in 2022

MBG Corporate Services UAE and Khaleej Times are organizing a webinar titled, ‘Changing Landscape of Tax Compliances & Audit frameworks in UAE’ on January 26, 2022.

January 2022 marks four years since the value-added tax (VAT) was implemented in the UAE. The Federal Tax Authority (FTA) is increasingly introducing measures that affect how companies should manage and deal with their data and maintain their records.

MBG recommends that businesses must prepare for official FTA audits in 2022, as there is no need for a specific reason for the FTA to conduct an audit of a company. It can happen whenever the FTA decides to with five days issued notice.

Hosted and moderated by Sandhya D’Mello, senior business reporter at Khaleej Times, the webinar will have experts from MBG Corporate Services — Vipin Ahuja, associate partner; Deepak Variyan; associate director; and Laila Aziki, tax agent. The panel will focus on topics like recent tax legislative changes; tax audit framework; probable factors for tax audit selection; FTA tax audit process; common mistakes in VAT return filing & VD submission; significant Impact of administrative Penalties (before & after audit); and analysis before commencing the tax Audit by the FTA; and appeal process.

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VAT

8 Things You Didn’t Know About VAT In UAE

alnuaimi August 1, 2022

396 Closed

8 Things You Didn’t Know About VAT In UAE

Value added tax (VAT) in UAE was implemented on 1st January 2018 to diversify the income resources and boost the economy. VAT consultancy quickly became the most sought-after service in the country. Companies started seeking the help of tax specialists to ensure they transition smoothly to the new tax system.

While the first day of VAT was met with confusion, people and businesses now have a basic understanding of how it works.

However, there are a few things businesses need to know in order to ensure compliance and implement best practices in their organizations. Here is a rundown of the 8 things you probably didn’t know about VAT in UAE.

1. PRICE HIKES COULD LAND YOU IN HOT WATER

Reports started to emerge in January that many companies were hiking the prices of their products and services. For example, some retailers raised the prices of their goods by 5%, in addition to the 5% VAT.

The Department of Economic Development proactively penalised companies engaging in such practices, and consumers are encouraged to report them. Your business should have a clear pricing structure that makes sense to the consumer. Increasing the prices of your goods without explanation can cause you to lose customers and may even land you in trouble.

2. YOUR BUSINESS CAN GET VAT EXEMPTIONS

This is important information for companies that want to set up their business in UAE. So far, there are three VAT categories; standard (5%), zero-rate and exempt. Companies registered as zero-rated can reclaim their VAT contribution for the goods and services they provide.

Companies that are exempt are either not registered for VAT, or cannot reclaim the VAT contribution. If you plan to start a free zone company, please note that you will be liable to pay VAT on the purchase of goods and services from outside the free zone.

3. VAT ON HOSPITALITY AND ENTERTAINMENT IS NON-RECOVERABLE

Should you get VAT recovery on entertaining guests at your business event? Article 53 of the tax law can be confusing for many businesses, so it’s normal to seek clarification on what is considered a business expense and what constitutes as entertainment.

Basically, VAT incurred on genuine business expenses is recoverable, such as food and beverages provided at a business meeting. However, if entertainment or hospitality is the purpose of a meeting, event, or gathering, VAT cannot be recovered.

4. SECOND-HAND GOODS SUBJECT TO VAT CAN BE SUBJECT TO A PROFIT MARGIN SCHEME

According to the Federal Tax Authority (FTA), second-hand goods which had previously been subjected to VAT can be considered eligible goods under the profit margin scheme. VAT is applicable on the full sales price of all goods that were purchased before VAT implementation.

Businesses that deal in second-hand goods should be careful when recording the sales of eligible and non-eligible items as it can impact their books of accounts. Items should be segregated based on eligibility to eliminate errors when filing for VAT recovery.

5. MAINTAIN ACCOUNTS AND RECORDS FOR AT LEAST 5 YEARS

According to the law, you are required to retain accounting and bookkeeping records for 5 years after the end of the tax period. These include records of imports, exports, tax credit notes, tax invoices, outward supplies, and more.

So if a tax invoice is issued on 20th January 2018, it belongs to the tax period January – December 2018. This means the invoice should be retained till 31st December 2023. Records for capital assets should be retained for 10 years while records for real estate should be retained for 15 years minimum from the end of the tax period.

6. VAT TO REMAIN THE SAME

When it was announced that VAT will be introduced at 5% from 2018 onwards, many businesses and consumers feared that the rate will increase over time. Despite initial fears, the UAE government has shown no indication of increasing the VAT anytime soon. Additionally, at 5%, UAE has one of the lowest VAT rates in the world.

While businesses can reclaim VAT, their major concern is how it affects the buying power of the consumer. With the VAT remaining constant, businesses, especially in the service industry, can keep their prices competitive and benefit from consumer retention.

7. TOURISTS CAN NOW GET A VAT REFUND

Starting Q4 of 2018, non-resident tourists can get a VAT refund on purchases they make from participating retailers, provided that the goods they purchase are not tax exempt. This is a good move by the government as the tourism sector is one of the largest contributors to the economy.

In fact, 11.3% of the GDP came from tourism in 2017, amounting to AED 154.1 billion. While this rule does not affect businesses directly, it can help VAT-registered retail and service companies to better market and sell their products to tourists.

8. YOU CAN SEEK VAT CONSULTANCY

Despite VAT being new, there are certified tax specialists in the UAE who can help you manage your accounts and books for compliance. Our team of certified tax specialists can assist you in properly recording and filing VAT to avoid penalties associated with noncompliance.

We are here to help you identify the challenges your business faces with VAT and guide you in overcoming these challenges. Get in touch with us today to get VAT consultancy and ensure you are doing business legally and lawfully in the UAE.

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UAE's Federal Tax Authority increases inspections visits 104% in 6 months

Uncategorized

UAE’s Federal Tax Authority increases inspection visits by 104% in 6 months

alnuaimi July 29, 2022

352 Closed

UAE’s Federal Tax Authority increases(FTA) inspections visits 104% in 6 months

UAE’s Federal Tax Authority increases(FTA) inspections visits 104% in 6 months: During the first half of this year, the FTA carried out 9,948 inspection visits in local markets across the country in collaboration with the Ministry of Economy, the Federal Authority for Identity, Citizenship, Customs, and Port Security, and various departments of Economic Development across the country

The Federal Tax Authority (FTA) significantly expanded its efforts in collaboration with various government departments, ministries, and authorities to protect consumers from non-compliant products, combat tax evasion, and ensure compliance with tax legislation and procedures.

During the first half of this year, the FTA carried out 9,948 inspection visits in local markets across the country in collaboration with the Ministry of Economy, the Federal Authority for Identity, Citizenship, Customs, and Port Security, and various departments of Economic Development across the country.

Inspections conducted in the first half of 2022 increased by 104 percent compared to 4,878 inspections conducted in 2021 during the same period.

In a press statement, the authority confirmed that the campaigns aim to strengthen market control through intensified market inspections across all the emirates. The FTA’s plans aim to ensure laws, legislation, and tax procedures are followed to guarantee the protection of the national economy, provide the highest levels of protection for consumers, combat commercial fraud, and prevent the trade of inferior and counterfeit products that harm the public health and the national economy.

The authority explained that the control efforts resulted in the seizure and confiscation of nearly 5.5 million pieces of tobacco products that did not conform to specifications and do not carry “digital tax stamps”, in addition to the seizure of nearly 1.07 million packages violating other selective goods, which include soft drinks, energy drinks, and sweetened drinks. The total value of tax liabilities seized during these inspection visits amounted to AED130.4 million.

Inspections resulted in the seizure of 5.5 million packages of tobacco products not bearing “Digital Tax Stamps”. A further 1.07 million packages of selected goods, including soft drinks, sweetened beverages, and energy drinks, were valued at AED130.4 million in tax liabilities.

The authority indicated that the effective control of the markets contributed to the detection of facilities violating tax laws, as 1,213 violations were issued during the field inspection visits carried out in the first half of 2022, while 404 notices of non-registration were sent to violating entities.

The FTA reaffirmed that the implementation of the Excise tax had achieved remarkable success over the nearly five years since its application. The Excise tax has contributed positively to achieving social targets, reducing the consumption of harmful products by the public, and improving the environment. In addition, the tax has played a considerable role in increasing the government’s financial resources to support endeavors toward serving the public and enhancing the quality of life.

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Tax, VAT, VAT Registration

VAT Registration: The biggest error made by service exporters

alnuaimi July 27, 2022

317 Closed

VAT Registration The biggest Error Made by Service Exporters

VAT registration threshold

To check the threshold, the laws require to aggregate inter-alia the turnover of ‘taxable supplies’ of the last 12 months or of the next 30 days. The turnover needs to be aggregated on a rolling basis and not on a calendar year basis.

It is the usage of the expression ‘taxable’ which leads to confusion for the business owners. As no tax is payable on zero-rated supplies, business owners incorrectly assume that the VAT registration is also not applicable to them as if their supplies are not taxable.

Taxable supplies, the common mistake

The expression ‘taxable supplies’ has been defined to mean a supply of goods or services for consideration by a person conducting business in the UAE and does not include exempt supply.

All supplies except the exempt supplies are treated as ‘taxable supplies. In other words, ‘zero-rated’ supplies are also taxable supplies.

“If you allow me to use tax jargons, it is not that the zero-rated supplies are not taxable. Such supplies are taxable at 0 percent VAT rate”, I continued while reviewing their past revenue numbers.

It is a common mistake to assume that zero-rated supplies are not taxable supplies.

Exception from VAT registration

UAE VAT law is very pragmatic and supports ease of doing business. If 100 percent supplies of a business are zero-rated, the law does not mandate to burden the business owners with periodic VAT compliances.

In the VAT-registration application itself, the applicant has an option to request an exception from registration as 100 per cent of its supplies are exported (zero-rated).

FTA is not obliged to accept such requests and acceptance is at the FTA’s discretion. If the request for exception is approved by FTA, the business/applicant will not be required to submit periodic VAT returns. The applicant is granted a Tax Identification Number (TIN) instead of a Tax Registration Number (TRN). A TIN Is also a 13-digit number suffixed with the letters ‘XC’.

Requesting such an exception is purely optional. A business owner may decide to go ahead with the normal registration and periodic VAT compliances.

But in either situation, timely submission of a VAT registration application is necessary.

Penalties

Once the taxable supplies (including the zero-rated supplies) exceed the registration threshold, a business owner is required to make an application to FTA for VAT registration. The registration application should be made within 30 days.

A Delay in the submission of the registration application (beyond 30 days) could attract a penalty of Dh10,000.

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News Courtesy: khaleejtimes.com

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Motor Insurance, VAT

UAE’s motor insurance payments have many VAT-linked pros and cons

alnuaimi July 26, 2022

302 Closed

UAE’s motor insurance payments have many VAT-linked pros and cons

One of the most principles of VAT is neutrality, which means that VAT should apply uniformly across goods and services. This is ensured through a standard VAT regime coupled with the right of deduction on intermediate consumption.

An exemption regime, such as that applied to financial and insurance services, goes against VAT neutrality because it restricts the right of deduction for non-taxed activities. This results in a cost impact on business structures, competitive disadvantages, etc.

Life insurance services are exempt from VAT in the UAE, while general insurance attracts VAT at 5 percent. Insurance companies providing vehicle cover are liable to charge VAT at 5 percent on the premium. We will discuss the nuances of VAT around non-life insurance in general and, more specifically, motor insurance.

Settlement claims

Under a general insurance contract, a settlement made by the insurer in respect of a claim may either be by way of financial indemnification (payment of a monetary claim) or in-kind, where the insurance company agrees to arrange for repairs or agrees to replace the vehicle. In principle, settlements made by the insurer in respect of an insurance claim are outside the scope of VAT.

Excess or deductibles

An excess, or deductible, is the amount the insured must bear in the event of loss as a threshold before the insurer will pay the settlement claim. The amount paid by the insurer will be the claim amount less the excess amount. The excess or deductible is not a consideration for any supply by the insurer, and as such, should be out of scope for VAT purposes.

Subrogation or reinsurance

There could be cases of reinsurance, subrogation, fraud, etc. under which an insurance company can recover part or whole of the cash payment made under the contract from another person.

Reinsurance is the practice of insurance companies to insure their risk of paying claims to insured in the event of a vehicle loss. The reinsurer will charge a premium for covering the insurance company’s risk and pay an agreed amount for any covered losses by the insurer, like any other insurance contract.

Subrogation is a term describing a right held by most insurance companies to legally pursue a third party that caused an insurance loss to the insured. In most subrogation cases, an insurer pays its client’s claim for losses directly and then seeks reimbursement from the other party’s insurer.

The amount received by the insurer under reinsurance or subrogation is not a consideration for any supply by it, and as such, should be out of scope for VAT purposes.

VAT on disposal of salvaged vehicles

The views on the applicability of VAT on the disposal of salvaged motor vehicles are divided. Several countries treat it as a taxable supply, whereas a few treat it as being outside the scope of VAT.

Such disposal by an insurance company is an incidental part of the insurance business. While the transfer of title to the salvaged vehicle from the insured to the insurer could be out of the scope of VAT, the sale to a third party could be treated as a supply of goods. It may be noted that the transfer of title to the salvaged vehicle by the insurer to a third-party customer is not covered by the terms of the insurance contract between the insured and the insurance company. Hence, it could be treated on par with the normal supply of goods and could attract VAT.

One could also argue that there is no transfer of legal ownership of the salvaged vehicle from the insured to the insurance company upon indemnification of the loss. The insurer is merely disposing of what would have otherwise been disposed of by the insured.

The property – the vehicle – is not transferred or registered in the name of the insurer, at the time of disposal. As such, the disposal is not a supply in the hands of an insurance company for VAT purposes. This is also in line with the doctrine of subrogation. Thus, the insured may be required to discharge VAT, if applicable.

Input VAT on expenses

In a case where the insurer agrees to pay for repairs, a third-party workshop would provide repair services to the insured but would get paid by the insurance company. In such cases, the insurance company is not eligible for input VAT in relation to payments of monetary claims paid to the insured.

Generally, insurance contracts with VAT-registered persons who are eligible for input VAT charged by the third-party vendor will state that claims will be paid exclusive of VAT. Whereas, for other persons, either not registered or not eligible for input VAT, the insurance claims will be paid inclusive of VAT.

News Courtesy: gulfnews.com

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Tax

UAE Free Zones – How Tax Exempt Are They?

alnuaimi July 25, 2022

312 Closed

Freezone benefits under the CIT law and the Designated Zone benefits under the VAT law in the UAE. How do they compare and how will they impact your business?

With the Corporate Income Tax (CIT) regime planned to be introduced in the United Arab Emirates (UAE) next year (2023), many businesses are examining the impact of the reforms on their existing business structures.

Free Zones have played a large part in the economic development of the UAE, attracting foreign businesses with relaxed requirements and tax benefits. The tax regime applicable to Free Zone businesses has evolved greatly in the last years, with the introduction of VAT in 2018 and CIT planned to be introduced in 2023 respectively.

What is the applicable regime? We provide you with a recap in this article.

Highlights of the proposed UAE CIT system

The CIT system will be implemented with effect from June 2023. The headline rate will be 9% for taxable income earned in a year exceeding AED 375,000 (slightly above $100,000). This is globally a very competitive rate, and even within the Gulf states, it is the lowest among states that have a CIT regime.

The Public Consultation Document issued by the Ministry of Finance states that the CIT regime will apply to the following persons

UAE companies and other legal persons incorporated in the UAE.
Foreign legal entities that have a Permanent Establishment (PE) in the UAE.
Individuals (natural persons) engaged in a business or a commercial activity in the UAE.

The calculation of taxable income would be aligned with the international accounting standards. Like most tax systems, the taxpayer would be able to deduct most expenses that are incurred in the process of generating revenue, subject to expense deduction limitations. Likewise, losses can also be generally carried forward from one year to the next and set off against future profits.

UAE resident companies will generally be subject to CIT on their worldwide income, including capital gains. There are certain exceptions to this rule.

To retain and further develop the UAE’s status as an international financial and regional hub, the UAE has proposed many reliefs intending to reduce the effective tax rate or simplify matters administratively for businesses.

Amongst others, it has envisaged adopting a so-called ‘participation exemption’ which is relatively common. Here, a UAE Corporate shareholder would generally be exempt from CIT on dividends received and capital gains earned from the sale of shares of a subsidiary company, subject to fulfillment of both of the following two conditions:

The UAE Corporate shareholder owns at least 5% of the shares in the subsidiary company.
The (foreign) subsidiary is subject to CIT at least 9%.

Finally, we come to grouping options available under the proposed regime. Such grouping may reduce the effective tax rate of a group containing several businesses. The objectives of providing the grouping facility are:

To allow one group member’s loss to be set off against another group member’s profits.
To treat the whole tax group as a single taxable person, with the parent company responsible for the administration and payment of CIT on behalf of the tax group.
To ignore the transactions between the members of the tax group.

A UAE resident group of companies can elect to form a tax group if the parent company holds at least 95% of the share capital and voting rights of the subsidiaries.

Where the parent company does not meet the 95% criteria and instead holds 75% of the ownership of the subsidiaries, it can still seek to transfer losses from a loss-making group company to a profit-making group company, as long as both the following conditions are met:

The company transferring losses is neither exempt nor benefits from the 0% Free Zone regime.
The total tax loss offset ought not to exceed 75% of the taxable income of the company receiving the tax losses for the relevant period.

In addition to the above-mentioned facilities, the proposed UAE CT regime will also allow for an exemption or deferral of CT in respect of the transfer of assets or liabilities between members of a group, to avoid triggering an unnecessary tax charge when businesses reorganize themselves. The CT regime would also allow some corporate reorganization transactions (e.g., mergers) to be undertaken on a tax-neutral basis.

What about the Free Zone tax exemption and Corporate Income Tax?

Companies and branches that are registered in a Free Zone (Free Zone Persons) are within the scope of the CIT regime and subject to filing requirements.

The UAE Government has committed, however, that the tax exemptions will continue to apply to Free Zone Persons provided they (i) maintain adequate substance, (ii) comply with all other regulatory requirements, and (iii) income is earned from transactions with businesses located outside the UAE, or from trading businesses located in the (same or any other) Free Zone.

The complications start when Free Zone businesses interact with businesses located in Mainland UAE (Mainland Persons). Let’s consider a few scenarios here:

A Free Zone business (that does not have a branch in the Mainland) transacting with a Mainland business:

– If the income is passive (like interest, royalties, dividends, and capital gains from owning shares in Mainland Persons) – 0% CIT.

A Free Zone business (that has a branch in the mainland):

– Taxed on the Mainland Sourced income.

– Not taxed on its other income.

A Free Zone business transacting with a (group company) Mainland business:

– 0% CIT, but

– Payments made by the Mainland business to its group company in Free Zone will not be deductible.

A Free Zone business located in a Designated Zone for VAT purposes earning income from the sale of goods to a Mainland business:

– 0% CIT, if

– The Free Zone business is the importer of record of those goods.

A Free Zone business earning income by transacting with a Mainland Person (not covered in any of the above four scenarios):

– Such a Free Zone Person will have its 0% CIT privilege disqualified for all of its Income.

Fair to say, that there are a number of complexities involving Free Zones.

UAE VAT

VAT was introduced in the UAE on 1 January 2018 at a standard rate of 5% on the supply of goods and services.

VAT is a broad-based consumption tax levied on almost all supplies of goods and services in the UAE, including deemed supplies, as well as the importation of goods into the UAE.

Like most VAT systems, VAT in the UAE avoids a cascading effect on tax (tax on tax) by allowing the Input tax to be subtracted from the output tax liability. Generally, Input tax can be recovered (subtracted from output tax) when goods or services are (intended to be) used for making taxable supplies in the UAE or supplies outside the UAE.

The term ‘goods’ here refers to all types of physical property. Any supply that does not constitute a supply of goods, is a supply of services.

The provisions relating to place of supply and valuation of supply are mostly in line with international standards. Some benefits are offered to supplies made in certain Free Zones (referred to as Designated Zones) discussed in the next headline.

UAE VAT and Free Zones

When the UAE Government introduced the concept of Free Zones, it did not envisage the requirement of a VAT system at that time. Accordingly, to ensure that the UAE continues to remain a competitive trading and investment destination even after the introduction of the VAT law, some relief is available for the sale of goods. For the supply of services, however, there are no exceptions made to the regular VAT system, except for the shipping of goods from a Designated Zone, if supplied by the same supplier of the goods.

Some businesses in some Free Zones benefit from an exception. These Zones are referred to as ‘Designated Zones’. The list of Designated Zones that are effective as of date is provided in Appendix 1.

Designated Zones are defined as a specific fenced geographic area and have security measures and Customs controls in place to monitor the entry and exit of individuals and the movement of goods to and from the area.

Designated Zones are treated as being outside the State for VAT purposes for certain supplies of goods. This means that a supply of goods within a Designated Zone is treated as made outside the UAE, and therefore, outside the scope of VAT in the UAE.

Even though Designated Zones are considered to be outside the State, a sale from Mainland UAE to the Designated Zone is taxable at the standard rate of 5%.

The situations involving a Designated Zone where VAT liability generally become due (treated to be imported into the UAE) are either of the following:

Goods are consumed within the Designated Zone.
Goods are rendered unaccounted for.
Goods are taken out of a Designated Zone and into Mainland UAE (including Free Zones not considered as Designated Zones).

In short, the VAT implications of transactions with entities in the Designated Zones can be summarized below:

Domestic sale from the UAE to a Designated Zone – 5%.
Domestic sale from Designated Zones to the UAE Mainland – Import taxable at 5%.
Domestic sales from Designated Zones to Designated Zones – VAT is not applicable.
Domestic sales within the same Designated Zone – VAT is not applicable (except for retail sales).
Export from Designated Zones to GCC countries/non-GCC countries – VAT is not applicable (outside the scope of VAT).

For more information on these services, please contact us:

Tel: +971 43 23 1183
Mob: +971 55 899 5971
E-mail: mail@alnuaimiauditors.com

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Author: alnuaimi

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