VAT

How we can go wrong in determining VAT Treatment

alnuaimi June 27, 2022

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How we can go wrong in determining VAT Treatment

Determining accurate VAT treatment is crucial in every business transaction hence; indispensable care is significant to determine the VAT treatment even if the organization is operating on a small or medium scale.

During my professional career, I came across various scenarios where business owners neglect to take professional advice related to VAT treatment and depend on what similar industry business is following which ends up in an FTA Audit, which obviously concludes with a massive penalty.

Here, I would share a VAT Treatment followed by business entities in the industry.

Introduction

On concurrent reading of Section 2 of Article 45 of the Decree-Law

“International transport of passengers and Goods which starts or ends in the State or passes through its territory, including Transport-related Services. “

And Section 1 of Article 33 of the Executive Regulation

“The supply of international transportation Services for Passengers and Goods and Transport-related Services shall be subject to the zero rates in the following cases:

a. Transporting passengers or Goods from a place in the State to a place outside the State.

b. Transporting passengers or Goods from a place outside the State to a place in the State.

c. Transporting passengers from a place in the State to another place in the State by sea or air or land as part of a supply of international transport of those passengers if either or both the first place of departure, or the final place of destination, is outside the State.

d. Transporting Goods from a place in the State to another place in the State if the Services are supplied as part, or for the purpose, of the supply of Services of transporting Goods either from a place in the State to a place outside the State or from a place outside the State to a place in the State. “

This decree implies that Transportation of goods or passengers from/to the state to/from a place outside the state, for such services of transportation, VAT is applicable at 0%. As well law considered “Transport related services” that will fall under the 0% VAT.

Referring to Sub Section (d) Section 1 of Article 33 of Executive Regulation “The supply of transportation service from/to Port in U.A.E to/from U.A.E mainland is treated as Standard-Rated Supply (5%).”

The falsification followed by interpreting Sub Section (d) Section 33 is that the transportation from port to mainland or vice versa is a part of international transport since the goods arriving from the port or departing from the port are in International transit. Hence, subject to Zero Rate.

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Tax

FTA Clarification Public Tax Excise

alnuaimi June 22, 2022

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FTA: Clarification Public Tax Excise

There are certain limited cases envisaged under Cabinet Decision No. 37 of 2017 on the Executive Regulation of the Federal Decree-Law No. 7 of 2017 on Excise Tax (“the Executive Regulation”), where relief from excise tax is available for excise goods that are found to be deficient, or there is a shortage in their quantity, within an excise tax designated zone.

In addition, there may also be circumstances where a business may seek relief from the Federal Tax Authority (“FTA”) from paying the Excise Tax associated with goods destroyed within a designated zone.

In order to destroy excise goods and obtain the relief mentioned above, the FTA must be notified of the deficiency or shortage, and its approval must be obtained in line with the process outlined in this document.

Summary

In principle, goods that are considered ‘wastage’ or are deficient or there is a shortage of the expected quantity when located within a designated zone, will be treated by the FTA as having been released for consumption and, therefore, will be subject to excise tax.

As an exception to the above provision, the Executive Regulation allows for a relief to be granted from accounting for excise tax on goods located within an excise tax designated zone in certain cases. Such relief is available where the warehouse keeper responsible for the excise goods follows the process outlined in this document.

Relief will only be granted where the FTA is notified by the warehouse keeper within the specified timeframe and accepts that the deficiency in, or shortage of, the excise goods are due to a legitimate cause.

Where a taxable person intends to destroy excise goods located within a designated zone, they must first obtain prior approval from the FTA in order to destroy the goods.

UAE Supreme Court orders cancellation of tax penalties

alnuaimi June 16, 2022

529 Closed

UAE Supreme Court orders cancellation of tax penalties for re-submission of returns

Facts

The taxpayer submitted tax returns for the prescribed tax periods as of January 2018, and these returns included supplies related to real estate owned individually to the taxpayer, as well as real estate owned in partnership with another person.

The taxpayer’s partner was not added to the tax registration from the beginning due to the absence of his name as an owner in all real estate.

The taxpayer registered a new account with the partner on the directives of the Federal Tax Authority during an audit and re-filed the tax returns under the new account.

Penalties

The FTA applied late payment penalties to the taxpayer as the new account required re-submission of the returns that had been filed previously by the taxpayer under the original account.

The FTA considered that the new submissions were the correct submissions as the original submissions were not correct in form and procedure because the account did not include the partner.

The FTA applied the late payment penalties to the new submissions tracing back to January 2018.

Supreme Court order

The taxpayer challenged this up to the Federal Supreme Court.

The Supreme Court found that the reopening of the new account did not result in damages to the State funds because the taxpayer had originally submitted and paid all tax returns, including the real estate in the partnership, on the legally prescribed dates.

The procedural deficiency did not manifest a circumstance where the payments had not been made.

In reasoning, the Supreme Court stated:

“Since this argument is in order, it is decided that tax procedures are not an end in themselves, but rather a means to achieve the goal of the lawgiver in collecting the legally due tax. Allegedly, the tax returns made under the wrong procedure that were subsequently corrected were not taken into account. Rather, the FTA’s right to collect the fine decided by the legislator on the wrong procedure only recedes, without this right going beyond that by imposing other fines for a tax collected on the date specified by the law, even under the aforementioned procedure.”

Significance

This judgment reassures the application of justice and equity in tax dispute proceedings before the Federal Courts of the UAE. Taxpayers must seek learned and practiced counsel when faced with a tax dispute.

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UAE Law

UAE Law on the Signing of Arbitral Awards

alnuaimi June 13, 2022

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UAE Law on the Signing of Arbitral Awards

Rules Applicable to UAE-Seated Arbitral Awards

Historically, there has always been a risk that arbitral awards rendered in onshore UAE-seated arbitrations may be deemed to be unenforceable by the UAE courts if the arbitral tribunal does not sign every page of the award.

Prior to the enactment of the UAE Arbitration Law, the signature of the arbitral award was subject to Article 212(5) of Federal Law No. 11 of 1992 (UAE Civil Procedure Law), which required:

The arbitrators’ decision shall be delivered with a majority of opinions and it should be written together with the contradictory opinion, and it should particularly include a copy of the arbitration agreement and a resume of the litigant parties’ statements, their documents, the decision’s reason and its pronunciation, its delivery date, its delivery place, the arbitrators’ signatures, and if one or more of the arbitrators has refused to sign the decision that should be mentioned therein, and the decision shall be valid if the majority of the arbitrators have signed it.

Although this article did not expressly require a signature on all pages of the arbitral award, the Court of Cassation repeatedly held that the arbitral tribunal should sign both the dispositive section and the reasoning in support of the award and that a failure to do so would render the award invalid. However, the Court of Cassation, in Case Nos. 156/2009 Commercial (dated 27 October 2009) and 251/2010 Commercial (dated 18 May 2011), considered the enforcement of two UAE-seated arbitral awards and held that the signature of the arbitral tribunal did not have to be on every page of the award. In those cases, the Court of Cassation considered that it was sufficient that the arbitral tribunal had signed the dispositive section of the award, which also included, on the same page, part of the tribunal’s reasoning.

In June 2018, Article 212(5) of the UAE Civil Procedure Law was replaced by Article 41(3) of the UAE Arbitration Law, which states:

The award shall be signed by the arbitrators and in arbitral proceedings with more than one arbitrator, the signatures of the majority of all members of the Arbitral Tribunal shall suffice, provided that the reason for any omitted signature is stated.

Similar to Article 212(5) of the Civil Procedure Law, Article 41(3) of the UAE Arbitration Law does not expressly require the arbitral tribunal’s signature on every page of the award, or on the pages containing the dispositive section and reasoning for the award. However, based on the similar language of the laws and considering the decisions issued under the “old” law, the Court of Cassation has maintained the established position that both the dispositive section and the reasoning must be signed, and it has only agreed to enforce arbitral awards, which are not signed on every page, in limited circumstances.

In Case No. 1083/2019 Commercial, the Court of Cassation considered the enforcement of a UAE-seated arbitral award under the UAE Arbitration Law. Consistent with the earlier decisions rendered under Article 212(5) of the UAE Civil Procedure Law, the Court of Cassation held that, if the award is issued as a single document containing both the dispositive section and reasoning for the award, it is sufficient that the arbitral tribunal only signs the dispositive section, provided that the dispositive section contains part of the reasoning. However, the Court of Cassation also held that if the dispositive section and reasoning are contained in separate documents, the dispositive section, and all of the pages of the reasoning, must be signed by the arbitral tribunal.

It is unclear why the Court of Cassation differentiated between an award rendered in a single document and in separate documents in this manner; nonetheless, the Court of Cassation confirmed that it may be sufficient that an award is not signed on every page provided that the tribunal signs the page containing the dispositive section of the award and that page also contains part of the reasoning.

Application of UAE Law to the Enforcement of Foreign Arbitral Awards

In Case No. 403/2020 (dated 15 April 2020), the Court of Cassation refused to enforce an award rendered in a foreign-seated arbitration, which contained the signature of the arbitrator on the last page only and not on the pages containing the reasoning of the award.

In reaching this decision, the Court of Cassation referred to Article III of the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention)—which provides for enforcement in line with the “rules of procedure in the territory where the award is relied upon”—and held that the applicable rules of procedure in the UAE included the provisions of the UAE Arbitration Law. For the purposes of Article 41(3) of the UAE Arbitration Law, the court held that signing the award means signing the dispositive and reasoning sections of the award and, if both sections have not been signed, the award is deemed invalid and enforcement would be contrary to UAE public policy. The court then relied upon Article V(2)(b) of the New York Convention—which provides that enforcement may be refused where the recognition or enforcement of the award would be contrary to the public policy of that country—as a basis for refusing to enforce the award.

In its recent decision in Case No. 109/2022, the Court of Cassation confirmed the position previously taken by the Court of Cassation in Case No. 403/2020. In Case No. 109/2022, the Court of Cassation considered the recognition and enforcement of an arbitral award issued in a foreign-seated arbitration, where the arbitrator had only signed the last page of the award. The Court of Cassation found that the arbitrator’s signature on the last page, which contained the dispositive section but not any part of the arbitrator’s reasoning, did not satisfy the requirements of Article 41(3) of the UAE Arbitration Law. Thus, the award was void and unenforceable as a matter of UAE public policy.

Analysis

The judgment of the Court of Cassation in Case No. 109/2022 reaffirms that, under UAE law, the arbitral tribunal must sign both the dispositive section and the reasoning of the arbitral award. In certain circumstances, the UAE courts may accept a signature on the dispositive section of the award, provided that the signed dispositive section contains part of the reasoning. However, the safest approach is for the tribunal to sign every page of the award in order to avoid the risk of a challenge to enforcement based on whether all of the required pages have been signed.

This case also serves to remind parties that the UAE procedural rules not only apply to arbitrations seated in onshore UAE, but they may also be relevant whenever a party seeks to enforce an arbitral award in the UAE through the onshore UAE courts. This includes foreign-seated arbitrations and arbitrations seated offshore in the UAE, such as the Dubai International Financial Centre of Abu Dhabi Global Market, notwithstanding that the arbitration laws applicable in those jurisdictions may not include the same signatory requirements.

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Tax, VAT, VAT Filing

Input Tax Recovery under VAT in UAE

alnuaimi June 10, 2022

663 Closed

Input Tax Recovery under VAT in UAE

Input tax is the tax paid by a person on purchases or inward supplies. A major element of VAT in UAE is the provision to recover the tax paid on inputs. This means that a person can reduce the value of input tax eligible for recovery from the tax payable and only pay the balance amount as tax. This ensures that tax is paid only on the value-added at each stage in the supply chain. Hence, the amount of input tax eligible for recovery plays an important role in the cash flow and operating expenses under VAT.

Let us first understand how input tax recovery works.

Process of input tax recovery

Example: In January ’18, Jehan & Co, in Abu Dhabi purchased 10 desktop computers @ AED 1,000 each. On this purchase, Jehan & Co. pays VAT @ 5% of AED 500. In the same month, Jehan & Co. supplies 20 desktop computers @ AED 2,000 to a consumer. VAT @ 5% is collected by Jehan & Co. on the supply, amounting to AED 2,000.

Here, the output tax payable by Jehan & Co. for the month of January ’18 is AED 2,000.

Input tax recoverable for the month of January ’18 is AED 500

Tax payable = Output tax payable – input tax recoverable

Hence, tax payable by Jehan & Co. for the month of January, ’18 is AED 2,000 (Output tax payable) – AED 500 (Input tax recoverable) = AED 1,500.

Here, as you can observe, the tax paid on purchase by Jehan & Co. can be used to reduce their output tax payable. Only the balance tax payable is required to be remitted to the Government.

Conditions for input tax recovery

A registered business can recover the VAT paid on the purchase of goods and services used for business purposes and subject to certain conditions. These conditions to be satisfied are:

Should be used to make Taxable supplies

The supplies on which tax is liable to be paid are called taxable supplies (i.e. supplies made at 5% or zero-rated supplies). Input VAT recovery is allowed to be claimed only on inputs used to make taxable supplies, not exempt supplies.

For example, Jehan & Co. purchase 20 units of Item A @ AED 50, for a value of AED 1,000. Out of the 20 units purchased, 10 units are used to manufacture Item B, which is taxable and 10 units are used to manufacture Item C, which is exempt.

Hence, Jehan & Co. can claim input VAT recovery only for the value of input used to make taxable supplies, i.e. 10 units used to manufacture Item B @ AED 50, which is AED 500.

The recipient receives and keeps the Tax Invoice

The recipient claiming input tax recovery on a supply should ensure that the Tax Invoice pertaining to the supply is received and kept in the records. The Tax Invoice should show the details of the supply related to the input tax recovery being claimed.

The recipient pays the consideration for the supply

The recipient claiming input tax recovery should pay or intend to make the payment of consideration for the supply within 6 months after the agreed date of payment for the supply.

Hence, the provision for input tax recovery is a very important component of VAT in the UAE. Businesses need to ensure that they are able to correctly identify supplies on which input tax can be recovered, ensure that they fulfill the conditions for a claim of input VAT recovery, and claim the input VAT recovery on time. This will help in ensuring optimum cash flow and working capital in the business. All this work can be made easier by the use of VAT software which will help automate each of these tasks with respect to input tax credit and leave you with enough time and resources for you to focus on your business.

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UAE Corporate Tax

Recent changes to the UAE legal landscape: March 2022

alnuaimi June 8, 2022

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Recent changes to the UAE legal landscape: March 2022

The United Arab Emirates (UAE), which has made significant updates to its laws governing commercial activity in recent years, has again revised and refined the statutory landscape for companies in the country. The issuance of a new Commercial Companies Law, which entered into force on 2 January 2022, alongside the announcement of the implementation of corporate tax for financial years beginning 1 June 2023, provide businesses operating in the UAE with new elements to consider when charting their course in a post-pandemic world. Here, we summarize the major changes in the new UAE Commercial Companies Law and detail what is currently known about the impending corporate tax regime.

The UAE has seen some significant changes to its legal and social landscape in the last six months. These changes have been much more extensive and swift than anticipated, and illustrate the desire of the UAE to stay at the forefront of development in the region.

We recently detailed some of the adjustments that have been made in the employment sphere, following the entry into force of the new Labor Law at the beginning of February 2022. In this article, we will summarize some of the other newly-implemented changes in the UAE.

Commercial Companies Law

In late November 2021, Federal Law 32 of 2021 on Commercial Companies (the New CCL) was announced, replacing the 2015 law on Commercial Companies (as amended). The 2015 law was itself a landmark piece of legislation, heralding the largest overhaul of commercial regulation in the UAE in more than 30 years, including 2020 amendments, which removed the foreign ownership restrictions on certain onshore entities. The New CCL, which entered into force on 2 January 2022, takes that modernization further, by making the following changes:

Introducing the Special Purpose Acquisition Company (SPAC) as a valid form of entity in “onshore” UAE, along with creating the Special Purpose Vehicle as a separate company type. A SPAC will be classified as a public joint-stock company for the purposes of the New CCL but will be exempt from certain provisions of the new law. SPACs will require the approval of the UAE Securities and Commodities Authority (SCA), which has set out further guidance for the regulation of SPACs in the SCA Chairman of the Board Resolution No 1 of 2022 on the regulations for Special Purpose Acquisition Companies.
Amending certain provisions in relation to limited liability companies, including changes to the notice periods and quorum requirements for shareholder meetings, reducing by half the amount, which must be allocated to a statutory reserve annually, and granting power to the authorities to appoint temporary boards where a company fails to constitute a new board.
Amending certain provisions in relation to joint-stock companies, including removing the prescriptions on the nominal value of shares and the percentage of capital for which the founders are permitted to subscribe, and adjusting director remuneration limits.

The New CCL brings the UAE’s onshore commercial regime further in line with international best practices and shows that the UAE is open to the kinds of transactions being undertaken elsewhere in the world. SPACs, in particular, is a feature of the M&A landscape in many jurisdictions, and it will be fascinating to see the uptake in the UAE.

Corporate Taxation

On 31 January 2022, the UAE Ministry of Finance (MOF) announced that federal corporate tax will be implemented on business profits for financial years, which start on or after 1 June 2023, meaning that the first profits to be taxed will be for financial years ending on or after 31 May 2024. The UAE has hitherto been a jurisdiction in which most companies – with the exception of oil and gas companies and branches of foreign banks – have not been subject to corporation tax. The initial press release contained only limited details, but the salient elements currently known are as follows:

The tax will apply to all businesses and commercial activities, and be levied at 9 percent on profits over AED 375,000 (with zero percent applied to profits under this amount).
No corporate tax will be levied on personal income from employment, real estate, and other investments, or on any other income earned by individuals not arising from businesses or commercial activities licensed in, or permitted to be undertaken in, the UAE.
Companies incorporated in free zones in the UAE, which are the recipients of guarantees to be free of corporate taxation for a period of 50 years from the date of incorporation of that free zone, will continue to benefit from this exemption to the extent that they are in compliance their regulatory obligations, including the proscription on conducting business in mainland UAE.
Generous loss utilization rules will be put in place, which will allow UAE groups to be taxed as a single entity or to apply for group relief in respect of losses and intergroup transactions and restructurings.
The UAE will not impose withholding taxes on domestic and cross-border payments or subject foreign investors who do not carry on business in the UAE to corporate tax.
UAE businesses will be exempt from paying tax on capital gains and dividends received from qualifying shareholdings.
Foreign taxes will be allowed to be credited against UAE corporate tax payable.

The implementation of corporate tax raises a number of questions, particularly following so closely after the removal of the restrictions that required onshore entities to be at least 51 percent owned by UAE nationals or companies classed as UAE domestic entities. The interplay between these two developments will be critical: Will UAE domestic ownership be incentivized, potentially with a reduced corporate tax burden for majority-UAE-owned entities? Will the continued use of nominee structures be considered to be tax avoidance or evasion?

Historically, free zone companies, particularly those providing services, have been operating, and deriving most of their income, from clients in mainland UAE. This has not been policed by the authorities but given the new distinction between a tax-free free zone and a taxed mainland, companies may need to be much more careful in how they operate and serve their clients. It is not clear, for example, if a free zone company’s profit referable to a mainland client will be taxed and, if so, how much profit will be determined and what records will need to be maintained.

Clients will likely need to examine their accounting policies and systems to ensure compliance with their corporate tax obligations, in addition to their reporting obligations in respect of Value Added Tax. We await further legislative issuances on this matter and will provide updates when available.

Other changes

Possibly the most significant change was not a legislative one: the December 2021 announcement that UAE government entities and all schools would transition to a 4-and-a-half-day week, with rest days on Friday afternoons, Saturdays, and Sundays, bringing the Saturday/Sunday weekend in line with much of the rest of the world. This alignment has already positively impacted UAE businesses, while hospitality operators have also reported a boost as a result of the change in the working week, which has been adopted by much of the private sector.

The UAE also announced a wide-ranging social legislative reform program in early December 2021, adopting a new Federal Crime and Punishment law that amended the UAE’s position on social issues. These changes, along with the commercial adjustments examined earlier and employment law changes outlined recently, can be seen as part of a concerted program to align the UAE with much of the rest of the world from both economic and social perspectives. It is clearly hoped that these changes will drive economic activity in the UAE, and cement the country’s place as one of the most prominent international commercial hubs in the next decade and beyond, and we expect these changes to be welcomed by businesses and investors, as well as the individual employees they affect.

Next steps

While the full impact of the myriad amendments to UAE law will not be known immediately, in the short-term businesses may wish to engage advisors in connecting with adjusting their constitutional documents to reflect the provisions of the new CCL. Companies might also consider whether they wish to make any changes to the ownership structures they have in place if these were designed to be in compliance with previous versions of the Commercial Companies Law.

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Tax

UAE’s Corporate Tax Is a Step towards the Future & Global Business Credibility

alnuaimi May 30, 2022

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UAE’s CT (Corporate Tax) Step towards the Future & Global Business Credibility

The United Arab Emirates (UAE) for long had been trapped in the conventional image of an oil-lubricated economy. However, Dubai worked over the years very systematically and helped the nation unshackle to position itself as a modern state with massive investments in the areas of innovation and technology.

The gulf nation since has been in the limelight, kicking in a series of reforms aligning itself with the global community – the latest one being the 9% federal corporate tax thus complying with the international tax standards template set by the Organization for Economic Cooperation and Development (OECD).

Industry experts and financial analysts hail the introduction of corporate tax, and they argue that the move would further add impetus to the UAE – the undisputed economic engine of the Middle East and North Africa (MENA) region – which has been gradually reducing its dependence on the traditional revenue earned from fossil fuel.

“I have seen some arguments that the corporate tax would be a deterrent for investors. They are totally senseless. Instead, I can say the move would strengthen the UAE’s economy manifold as the country would become a fertile soil for well-meaning businesses and corporate behemoths,” former geopolitical and economic advisor, K.V.Mohan Menon told the Economic Times.

An investment banker by profession, Menon who is now the chairman of Kerala-based SDF Industries Ltd had lived and worked in many countries, in particular the gulf region. He says everyone thought Singapore, once a tax haven, was finished when it embraced a 17% tax. “But where is Singapore now? So, I don’t see much merit in these doomsday predictions,” Menon gets candid.

A businessman with global connections and a keen observer of the Middle East region, Menon is not at all surprised by the UAE’s latest move. “The country was a signatory to the global pact last year which set a minimum tax rate of 15% for large corporates and multinationals. So, it is only in anticipated lines. The only surprise, if you call it a surprise, is the UAE fixing the tax at 9%,” he opines.

The new corporate tax introduced by the UAE, experts have pointed out, would bring an additional $ 13 billion in revenue to the government exchequer. Even so, Menon argues, it would not affect the startups negatively since only businesses outside free zones making more than Dh.375,000 in profits come under the tax net.

“I see this as a thoughtful action since Dubai Startup Hub, its key contributions to GDP, and the nation’s thrust on building a knowledge-based economy would continue to remain relevant and unaffected, Menon asserts, adding that the UAE still has the lowest corporate tax, next to Bahrain which still has no corporate tax. This makes the gulf nation still an attractive investment destination.

“At the same time, it also wants to send a strong message to the market that it does not want to be the home for fly-by-night operators. So, I see this as a cautious, calibrated approach. But beyond the tax and compliance structure what will keep Dubai an all-time attraction for investors is its ease of doing business culture,” affirms Menon.

The UAE and Dubai are flexible and pragmatic in their approach and they have always been the first to see the writing on the wall particularly when it comes to diversifying their revenues away from hydrocarbons. “Dubai, in particular, has taken an early and interesting lead in positioning itself as an innovation hub, be it IoT, Blockchain, or AI,” points out Menon.

The future is all about transparency and the UAE knows that it would lose its competitive edge if it remains out of the compliance club. “This is more so at a time when Saudi Arabia is doing everything to attract multinationals to its soil,” says Menon who sees the corporate tax move as a ‘clean-up’ operation that would weed out organizations that do not share the UAE Government’s social vision.

In other words, it means in the long run, the country would be home only to those organizations that even while working for profits would not forget or neglect their social responsibilities raising the economic and global status of the UAE by making meaningful contributions, aligning themselves with the globally accepted best practices and norms. That is what people like Menon argue.

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Federal Tax Authoritys Board of Directors adopts FTAs Financia

Tax

FTA Board of Directors adopts FTA’s Financial Statements for 2021

alnuaimi May 26, 2022

775 Closed

Federal Tax Authority’s Board of Directors adopts FTA’s Financial Statements for 2021, explores development plans

During the meeting held at the Authority’s headquarters in Dubai this morning (Wednesday), the Board reviewed a report on the FTA’s plans to develop and enhance the tax system’s procedures and bring them in line with best practices, as well as to upgrade services offered to customers through fast, accurate, and easy-to-use digital platforms. The report called for implementing a set of procedures and initiatives to further advance the FTA’s performance through continuous follow-up and development in order to raise the efficiency of the tax system to meet taxpayers’ aspirations.

On a different note, the FTA Board of Directors examined the progress in developing the draft corporate tax law.

HH Sheikh Maktoum issued directives to maintain the pace of upgrades made to the FTA’s services, in line with international best practices and digital transformation plans, which were developed to boost the UAE’s competitive edge in terms of services provided, as well as to support the country’s vision to become the world’s highest-ranking government on trust and performance indicators. The directives call for focusing on the customer and enhancing competencies to become a world leader in government services; they draw on the UAE’s principles for the next 50 years and the terms of the new methodology for government operations.

The Happiness of FTA Customers

The reports presented during the meeting demonstrate the FTA’s efforts to maintain high-performance scores across all activities, His Highness asserted, noting the Authority’s plans to elevate its services to ensure satisfaction for all clients from all segments of society. “The Federal Tax Authority is committed to strengthening its relations with all entities involved in implementing the tax system in the government and private sectors, and to fulfilling its role in driving nationwide economic diversification policies through the administration and collection of federal taxes, in line with best practices,” His Highness said.

“The Authority is constantly reviewing the executive regulations it issues for each tax legislation in order to ensure top-level performance and streamlined procedures,” HH Sheikh Maktoum explained. “The stages ahead will witness sweeping developments and upgrades to tax systems and procedures in order to enhance the quality of the FTA’s services.”

The Board reviewed a report that outlines the FTA’s accomplishments over the last year and the first quarter of 2022, documents the progress made on existing projects, and lists statistics regarding Value Added Tax (VAT), Excise Tax, Tax Returns, tax payments, and refund requests that have already been processed. Compliance with tax regulations continued to grow across the UAE, and the number of VAT registrants grew to 367,157 at the end of the first quarter of 2022 compared to 358,468 in 2021 marking an increase of 2.42% within three months. Meanwhile, the number of Excise Tax registrants reached 1,398 compared to 1,357 last year, increasing 3.02%. Also, the number of Tax Agents has increased to 446 compared to 433 with an increase of 3%.

Refund of VAT on Building New Residences to UAE Nationals

The report revealed that the Authority approved new applications from UAE citizens to recover the VAT they incurred on building their new residences; the value of refunds reached AED185,038,134 during the first quarter of 2022, compared to AED118,503,245 in the first quarter of 2021 – a record growth of 56.15%. The significant increase reflects the FTA’s commitment to streamlining online procedures for UAE citizens looking to recover the VAT they incurred on building their new residences, in line with the leadership’s vision to develop a modern housing system for citizens and ensure their wellbeing, given that they are the main objective and beneficiaries from the initiatives and projects implemented by all state institutions.

Furthermore, the report noted the results of the implementation of two phases of the ‘Marking Tobacco and Tobacco Products Scheme’, which aims to halt the sale or possession of all types of cigarettes, waterpipe tobacco (Mu’assel), and electrically heated cigarettes that do not carry the Digital Tax Stamps in local markets.

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News Courtesy: FTA

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Tax, VAT

VAT on supply of mixed use developments

alnuaimi May 21, 2022

882 Closed

VAT on supply of mixed use developments

In our previous articles, we have learnt about the VAT treatment of supply of residential buildings and commercial buildings. There can be practical scenarios where a building or plot of land is used for different purposes, i.e. a portion is used for residential use and another portion is used for commercial use. These kinds of properties are called mixed use developments. In this article, let us learn about VAT on supply of mixed use developments.

What is a mixed-use development?

A mixed-use development is a building or plot of land which has clear and distinct areas which are put to different uses, which would have a different VAT treatment when supplied.

For example: A building which has retail units on the ground floor, office space on the middle floors and residential units on the top floor is a mixed use development.

VAT on Supply of Mixed Use Developments

When a distinct part of a mixed use development is supplied, the VAT liability on the supply depends on the use that particular part of the building is being put to.

If the portion supplied is being used for commercial purposes, the supply will be taxable at 5% VAT, whereas if the portion is being used for residential purpose, it needs to be checked whether the supply is the first supply or a subsequent supply. If it is the first supply of the property within 3 years from its date of completion, the supply will be zero rated. If the supply is a subsequent supply, the supply will be exempt from VAT.

When a mixed use development is sold in its entirety, the consideration received for the supply needs to be apportioned between the different parts of the building supplied. The value of the consideration relating to the residential part of the building will be treated as exempt from VAT (or zero rated, when the supply is the first supply) and the value of the consideration relating to the commercial part of the building will be liable for VAT @ 5%.

For example: Noor Properties, a registered dealer in Dubai, supplies a building to an unregistered dealer, Shaan Spaces, for a consideration of AED 5,00,000. The ground floor of the building is used for commercial purposes, consisting of 2 shops. The first floor of the building is being used for residential purposes, consisting of 2 houses. The property is being supplied for the first time, 6 years after its completion date.

Here, the consideration of AED 5,00,000 received by Noor Properties is for a mixed use development, portions of which are being used for commercial and residential purposes. Hence, Noor Properties has to arrive at the proportion of the consideration being used for commercial and residential purposes. Noor Properties arrives at the proportion of the consideration used for residential purpose, which is AED 2,00,000 and the proportion of the consideration used for commercial purpose, which is AED 3,00,000.

On the proportion of the consideration used for commercial use, i.e. AED 3,00,000, Noor Properties has to pay VAT @ 5%, which is AED 15,000.

The proportion of the consideration used for residential use is AED 2,00,000. Though it is the first supply of the property, it is after 6 years of its completion. Hence, this portion of the consideration will be exempt from tax.

Hence, VAT on supply of mixed use developments depends upon the use that the portion being supplied is being put to. Based on whether the portion is for commercial use or residential use, VAT on the supply will be applicable.

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UAE Corporate Tax

Calculation of UAE Corporate Tax Liability

alnuaimi May 12, 2022

733 Closed

Calculation of UAE Corporate Tax Liability

This section sets out the proposed approach to calculating the CT payable by a business, and how such CT liability may be satisfied.

Applicable CT rates

CT will be charged on the annual taxable income of a business as follows:

0%, for taxable income not exceeding AED 375,000; and
9%, for taxable income exceeding AED 375,000; or

Small business relief

A certain level of complexity is unavoidable in a CT regime for a diversified and innovative economy such as the UAE. Still, the Ministry of Finance intends to keep the UAE CT regime as simple as possible to minimize the compliance cost for business.

While larger businesses would generally incur a higher absolute cost in complying with their UAE CT obligations, in many tax systems around the world, the relative burden of tax compliance is disproportionately higher for small and medium-sized businesses. In fact, in many countries, the majority of the overall tax compliance cost is incurred by small (including micro) businesses.

In order to support start-ups and small businesses in the UAE, and to manage the compliance burden on these taxpayers, the UAE CT regime intends to provide relief for small businesses in the form of simplified financial and tax reporting obligations.

Withholding tax

Given the position of the UAE as a global financial center and an international business hub, a 0% (zero percent) withholding tax will apply on domestic and cross-border payments made by UAE businesses.

The following income shall be subject to 0% withholding tax:

UAE sourced income earned by a foreign company that is not attributable to a PE in the UAE of that foreign company;
Mainland UAE sourced income earned by a Free Zone Person that benefits from the 0% CT regime, unless the income is attributable to a mainland branch of that Free Zone Person; and
Dividends and other profit distributions made by a Free Zone Person benefit from the 0% CT regime to a mainland UAE shareholder in the Free Zone Person.

Given the rate of withholding tax is proposed to be at 0%, UAE businesses will not be required to make any deductions from payments made, nor will there be an obligation to file withholding tax returns.

Calculation of CT payable

The amount of CT payable will be based on the taxable income for the relevant financial period (tax period).

Table [4]: Determination of CT payable

Final taxable income

Final taxable income amount between AED 0 – AED 375,000 – CT @ 0% (A)

When the final taxable income is above AED375,000, the difference between the final taxable income and AED 375,000 – CT @ 9% (B)

CT liability -A + B

Less Foreign Tax Credit

Final CT Payable

Tax Credits

As discussed in section 4.1, UAE resident companies will be subject to UAE CT on their worldwide income, which includes foreign-sourced income that may have been subject to a tax of a similar nature to CT by another country.

To avoid double taxation, the UAE CT regime will allow a credit for the tax paid in a foreign jurisdiction against the UAE CT liability on the foreign-sourced income that has not been otherwise exempted. This is known as the “Foreign Tax Credit”.

The maximum Foreign Tax Credit available will be the lower of:

● The amount of tax that was paid in the foreign jurisdiction; or

● The UAE CT is payable on the foreign-sourced income.

Any unutilized Foreign Tax Credit will not be able to be carried forward or back to other tax periods, nor will the FTA refund any unutilized Foreign Tax Credit.

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UAE Corporate Tax

UAE Corporate Tax regime of Transactions Between Related Parties

alnuaimi May 11, 2022

827 Closed

This section sets out the proposed treatment under the UAE Corporate Tax regime of transactions between related parties.

The UAE CT regime will have transfer pricing rules to ensure that the price of a transaction is not influenced by the relationship between the parties involved. In order to achieve this outcome, the UAE will apply the internationally recognized “arm’s length” principle to transactions and arrangements between related parties and with connected persons.

A related party is an individual or entity who has a pre-existing relationship with a business that is within the scope of the UAE CT regime through ownership, control, or kinship (in the case of natural persons).

There are different rules for determining whether parties involved in a transaction are considered “Related Parties” for UAE CT purposes. These are summarized below.

Table [2]: Related parties for UAE CT purposes

Two or more individuals related to the fourth degree of kinship or affiliation, including by birth, marriage, adoption, or guardianship

An individual and a legal entity where alone, or together with a related party, the individual directly or indirectly owns a 50% or greater share in, or controls, the legal entity

Two or more legal entities where one legal entity alone, or together with a related party, directly or indirectly owns a 50% or greater share in, or controls, the other legal entity

Two or more legal entities if a taxpayer alone, or with a related party, directly or indirectly owns a 50% share of each or controls them

A taxpayer and its branch or permanent establishment

Partners in the same unincorporated partnership

Exempt and non-exempt business activities of the same person

Connected Persons

The absence of personal income taxation in the UAE can generate incentives for individual owners of taxable businesses to erode the UAE CT base by making excessive payments to themselves or persons connected with them.

corresponds with the market value of the service provided; and
Is incurred wholly and exclusively for the purposes of the taxpayer’s business.

Connected Persons are different from Related Parties. A person will be considered as ‘connected’ to a business that is within the scope of the UAE CT regime if he or she is:

Table [3]: Connected Persons

An individual who directly or indirectly has an ownership interest in, or controls, the taxable person

A director or officer of the taxable person

An individual related to the owner, director, or officer of the taxable person to the fourth degree of kinship or affiliation, including by birth, marriage, adoption, or guardianship

Where the taxable person is a partner in an unincorporated partnership, any other partner in the same partnership

A Related Party of any of the above (see Table 2)

Arm’s length principle

All Related Party transactions and transactions with Connected Persons will need to comply with transfer pricing rules and the arm’s length principle as set out in the OECD Transfer Pricing Guidelines.

In order for a transaction or arrangement between Related Parties or with a Connected Person to meet the arm’s length standard, the results of the transaction or arrangement must be consistent with what the results would have been if they had been between parties that are not related to each other.

The arm’s length price will need to be determined using one of a set number of internationally recognized transfer pricing methods, or a different method where the business can demonstrate that the specified methods cannot be reasonably applied to determine an arm’s length result.

Transfer pricing documentation requirements

Where relevant, the business will be required to submit a disclosure containing information regarding their transactions with Related Parties and Connected Persons.

A business will also need to maintain a master and local file (with format and content consistent with the requirements prescribed under OECD BEPS Action 13) where the arm’s length value of their Related Party transactions exceeds a certain threshold in the relevant tax period.

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UAE Corporate Tax

UAE Corporate Tax treatment applies to groups of companies

alnuaimi May 10, 2022

711 Closed

UAE Corporate Tax treatment applies to groups of companies

Groups

This section sets out the proposed UAE CT treatment applying to groups of companies.

Large businesses often conduct their operations through a group of companies, which has a parent company and a number of subsidiaries. These group structures are generally formed to limit or ring-fence liabilities associated with certain activities and facilitate the reporting and management of different business lines.

Large businesses often conduct their operations through a group of companies, which has a parent company and a number of subsidiaries. These group structures are generally formed to limit or ring-fence liabilities associated with certain activities and facilitate the reporting and management of different business lines

Tax groups

A UAE resident group of companies can elect to form a tax group and be treated as a single taxable person if the parent company holds at least 95% of the share capital and voting rights of its subsidiaries. To form a tax group, neither the parent company nor any of the subsidiaries can be an exempt person or a Free Zone Person that benefits from the 0% CT rate, and all group members must use the same financial year.

A subsidiary can also be part of the tax group if it is owned indirectly by the parent company and other subsidiaries own at least 95% of its shares, or if it is a UAE branch of the parent company or one of its subsidiaries.

To form a tax group, a notice signed by the parent company and all subsidiaries will need to be submitted to the FTA. Additional subsidiaries can join an existing tax group by following the same process.

Once formed, the tax group is treated as a single taxable person, with the parent company responsible for the administration and payment of CT on behalf of the tax group. To determine the taxable income of the tax group, the parent company will have to consolidate the financial accounts of each subsidiary for the relevant tax period, and eliminate transactions between the parent company and each subsidiary group member (and amongst the subsidiary group members).

For the period during which the entities are members of the tax group, the parent company and each subsidiary will be jointly and severally liable for the group’s CT. This joint and several liabilities can be limited to one or more named members of the tax group, with approval from the FTA.

Transfer of losses

For groups of companies that do not meet the minimum 95% common ownership requirement or that do not want to form a tax group, the UAE CT regime can allow a transfer of tax losses from one group company to another group company with profits, provided certain conditions are met.

As the transfer of losses would result in a transfer of value from the loss company to the profitable company, one of the main conditions for availing group loss relief will be that the UAE group companies are at least 75% commonly owned, and no loss transfers will be allowed from companies that are exempt or that benefit from the 0% Free Zone CT regime.

The total tax loss offset will not be able to exceed 75% of the taxable income of the company receiving the transferred losses in the relevant period.

Group relief

Businesses organize and reorganize their affairs to improve operational efficiencies, adapt to economic changes or achieve other business objectives.

In the absence of targeted tax rules, undertaking restructuring or reorganization within a group could result in a tax liability arising on the realization of gains on assets or liabilities being transferred.. This is considered undesirable given there is no change in the ultimate ownership of the business or assets being transferred.

Recognizing the importance of allowing businesses to reorganize themselves without triggering an unnecessary tax charge, the proposed UAE CT regime will allow for an exemption or deferral of CT in respect of the transfer of assets or liabilities between members of a group. In addition, the CT regime will allow certain corporate reorganization transactions (e.g., mergers) to be undertaken on a tax-neutral basis, such that no taxable gain or loss arises.

Intra-group transfer of assets and liabilities

Intra-group transfer relief will be available for transfers of assets and liabilities between UAE resident companies that are at least 75% commonly owned, provided the assets and/or liabilities being transferred remain within the same group for a minimum of three years.

Where intra-group relief is claimed, the relevant assets and liabilities will be treated as being transferred at their tax net book value, so neither a gain nor a loss needs to be taken into account when calculating the taxable income of the transferor and the transferee company.

Where the relevant conditions for intra-group relief do not continue to be met, any gain or loss that would have arisen upon the initial transfer will need to be calculated and included in the transferor’s tax return in the tax period in which the conditions ceased to be met.

Restructuring relief

To facilitate mergers, spin-offs, and other corporate restructuring transactions, the UAE CT regime will exempt or allow for a deferral of taxation where a whole business, or independent parts of a business, is transferred in exchange for shares or other ownership interests.

An example of a qualifying restructuring transaction is where a natural person who undertakes a business contributes his business to a newly established company in exchange for shares in the company. The natural person will get an exemption from CT in respect of any gain on the transfer, and the acquiring company will continue with the transferor’s existing tax basis in the transferred assets and liabilities.

Similar to intra-group relief, assets, and liabilities being transferred as part of a qualifying restructuring will be treated as being transferred at their tax net book value, so neither a gain nor a loss needs to be taken into account when calculating taxable income.

Any restructuring relief will be ‘clawed back’ if, within three years of the restructuring, there is a subsequent transfer of the business to a third party. In this situation, any gain or loss that would have arisen upon the initial transfer would need to be calculated and included in the tax return for the tax period of the third-party disposal.

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UAE Corporate Tax treatment applies to groups of companies

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