Refund of Corporate Tax: Article 49 of Corporate Tax Law

refund of corporate tax article 49 of corporate tax law

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Refund of Corporate Tax Article 49 of Corporate Tax Law

When can the Application for Refund of Corporate Tax be Made?

As per Article 49 of corporate tax Law, there may be instances where a taxable person has paid more than the corporate tax due under the law to the FTA through withholding or actual payment. In such a case, the taxable person can claim a corporate tax refund.

The Taxable Person may apply to the FTA for a refund in line with the requirements of the Tax Procedures Law in the following instances:

Withholding Tax Credit exceed Corporate Tax Payable

  • If the withholding tax credit exceeds the corporate tax payable under the UAE CT Law

Corporate Tax Paid More Than Tax Actually Payable

  • If the taxable person has paid corporate tax in excess of its corporate tax liability

Situations when Refund of Corporate Tax is Not Available

There are some specific cases when a person can’t apply for a refund as mentioned below:

Amount of Tax disputed

It finds that there are other disputed tax amounts in relation to that taxpayer

Taxable Person is subject to Tax Audit

If the taxable person is subject to a tax audit, and the conditions set out in a decision of FTA’s board of directors have been met

Order of Competent Court

In accordance with an order of the Competent Court

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Revision of Application for Refund of Corporate Tax

Tax Refund Procedures defined as per cabinet Decision no. 74 of 2023 are mentioned below:

The Taxpayers entitled to a refund under the Corporate Tax Law can submit a formal application to the FTA in the form and manner determined by the Authority.

Upon receipt of the Refund application, the FTA will assess it within 20 business days from the submission date. This timeframe may be extended if additional information is required, with due notification to the taxpayer.

Upon approval of the refund application, the FTA will initiate the repayment process within 5 business days of notifying the taxpayer in accordance with the repayment mechanism determined by the Authority.

The FTA may defer processing a refund request if the taxpayer has outstanding tax returns. Once all due returns are submitted, the refund, including any resulting excess amount, will be processed.

Set-off and Intimation by FTA

The FTA shall set off the amount requested to be refunded against any non-disputed tax or administrative penalties payable by the applicant taxpayer before refunding any amount.

Case Study

Green Tech FZ, a Dubai Media City company, discovers they overpaid corporate tax due to qualifying R&D expenses. Here’s how the revised refund process helps them:

  • Eligibility Check: They confirm that R&D expenses qualify for a tax deduction, potentially leading to a refund.
  • Application Submission: They gather documents (financial statements, tax calculations, R&D expense proof) and submit an electronic application through the FTA website (format defined by Decision No. 74).
  • FTA Review: The FTA reviews the application within 20 business days (extendable) and may request additional information.

Possible Outcomes:

  • Approval of Refund: If the claim is valid, the FTA initiates the refund process within five business days using their designated mechanism (e.g., bank transfer).
  • Deferment of Refund: The FTA may defer the refund process date if additional clarity or documents are needed from Green Tech FZ.
  • Denial of Refund: The FTA may deny the refund if R&D expenses don’t meet deduction criteria. Also, for this FTA, we will provide a detailed explanation of the decision.

Seeking Professional Help for Claiming Refund of Corporate Tax

A tax consultant can be helpful in the following manner:

  • Expertise in Tax Law: They stay updated on complex tax regulations and deductions and ensure the organisation’s refund claim aligns with current UAE Corporate Tax Law.
  • Identifying Refund Opportunities: Their experience helps uncover potential deductions businesses might miss while applying for refund amounts.
  • Streamlining the Process: They handle the application process efficiently and prepare all necessary documentation to minimise delays.
  • Communication with FTA: They act as your intermediary and communicate effectively with the FTA on your behalf. They also resolve any questions or requests for clarification.
  • Minimal Risk of Errors: Their expertise helps to avoid errors in your application and minimize the chance of rejection and potential penalties.

Conclusion:

The tax refund procedures mentioned within the UAE Corporate Tax Law establish clear guidelines for eligible taxpayers seeking refunds under specific circumstances, such as overpayment or withholding tax credits exceeding the original tax liabilities.

After the taxpayer’s refund application is made, the Federal Tax Authority (FTA) conducts a thorough assessment within a defined timeframe and ensures transparency and adherence to regulations. After successful assessment and approval, refunds are promptly processed, but sometimes, they are also delayed if there are outstanding tax returns.

It’s important to note that non-compliance with tax regulations may incur penalties. Furthermore, the FTA’s authority to set-off refund amounts against outstanding tax or penalties emphasizes the government’s commitment to maintaining fiscal integrity.

Overall, these procedures describe the UAE’s dedication to a fair, efficient, and compliant corporate tax environment.

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FAQs?

Yes, GAAR (General Anti-Avoidance Rule) provisions can be applicable for claiming a refund of Corporate Tax under the UAE Corporate Tax Law.

When evaluating a refund request, the FTA will consider the primary purpose behind the transactions or arrangements leading to the overpayment. If the main goal was to take undue advantage of the tax refund procedures and to avail fake refund benefits, then in such case, a GAAR challenge will apply.

No, the UAE Corporate Tax Law does not currently specify a minimum refund amount

A taxpayer shall apply for a refund.

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Determining a Non-Resident Person’s Nexus in UAE for Corporate Tax Purposes

Determining a non resident persons nexus in UAE for corporate tax purposes

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Determining a non resident persons nexus in UAE Corporate Tax Purposes

The Corporate Tax Law has been introduced in the UAE and provides special treatment for the non-resident person’s taxation. Here is the article dealing with determining a non-resident person’s nexus in UAE.

Non-Resident Person’s Nexus in UAE: An Overview

Who is considered a Non-Resident Person?

As per the UAE CT Law, a Non-Resident Person is:

I. Natural Person who is not a Resident but

  1. Has a permanent establishment (PE) in the United Arab Emirates Or
  2. Derives state-sourced income

An individual who is not a resident but has a Permanent Establishment (PE) in UAE and an annual turnover of AED 1 million or more attributable to PE is considered a Non-Resident Person.

II. A Juridical Person incorporated outside of UAE and not effectively managed and controlled in the UAE will be regarded as a Non-Resident Taxable Person to the extent:

  1. It has a Permanent establishment in UAE
  2. It derives income from the UAE
  3. It has a nexus in the United Arab Emirates by way of earning income from immovable property in the United Arab Emirates

When shall a Non-Resident Person be said to have a Nexus in the UAE?

Any non-resident juridical person would be treated as having a UAE nexus if he earns income from “immovable property” in the UAE.

A non-resident juridical person with a UAE nexus must register with the Federal Tax Authority ( “FTA”) and obtain a Tax Registration Number.

Income Attributable to Immovable Property:

Taxable income attributable to Immovable Property includes “income derived from the right in rem, sale, disposal, assignment, direct use, letting, including subletting and any other form of exploitation” of Immovable Property located in the UAE.

What shall be the Taxable Income if there is a Nexus in the UAE?

Income attributable to a Permanent Establishment or nexus:

  • Taxable Income derived from inside and outside the UAE by a Non-Resident Person from the Permanent Establishment or nexus in the UAE is subject to Corporate Tax.
  • Taxable Income is calculated for a Tax Period from the adequate standalone Financial Statements prepared by accounting standards accepted in the UAE.

Business or Business Activities of a non-resident natural person that are subject to Corporate Tax:

Non-resident individuals deriving income from the UAE are subject to Corporate Tax if annual turnover attributable to their Permanent Establishment in the UAE exceeds AED 1,000,000.

However, the corporate tax does not apply to income earned by salary, wages, income from personal investment, real estate investments without a license, etc.

State Sourced Income:

Article 13(1) of the Corporate Tax Law defines instances under which an income is considered State Sourced Income. Such State-Sourced Income earned by a Non-Resident Person is subject to Corporate Tax.

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How to determine the Permanent Establishment in UAE

  • The concept of a Permanent Establishment is used in tax regimes worldwide to determine if and when a foreign juridical person has established sufficient presence in a country to warrant the direct taxation of their profits in that country. Mainly, the term ‘Permanent Establishment’ is defined under the OECD and UN model convention and the international agreements entered between two contracting states to avoid double taxation.
  • Generally, a country only has the right to tax the profits of a foreign business if that business has a Permanent Establishment in that country.

The definition of ‘Fixed Place PE’ refers to the following essential criteria:

  • Existence of a ‘place of business’, i.e. a facility such as premises or, in certain instances, machinery or equipment
  • The place of business must be ‘fixed’, i.e. it must be established at a distinct place with a certain degree of permanence;
  • The enterprise carries on the business through such a fixed place of business

Places that constitute Fixed Place PE:

Article 14(2) defines permanent establishments where business operations occur. These include: 

  • ‘Place of effective management,’ where critical decisions are made. 
  • A branch, office, factory, or workshop. 
  • Real property like land and buildings. 
  • Installations for natural resource exploration. 
  • Mines, oil or gas wells, quarries, or extraction sites, including related vessels and structures. 
  • Building sites, construction projects, or assembly/installation places lasting over six months, including activities by the non-resident person’s related parties. 

Explanations:

Place of Effective Management (PoEM):

Place of Effective management is an internationally recognised test for determining the residential status of a company incorporated in a foreign jurisdiction. A Fixed Place PE is where essential day-to-day business decisions are made. While international terms use “Place of Management,” UAE CT refers to “Place of effective management,” defined in the explanatory guide as daily operational decisions, not just strategic or board meeting decisions.

Business Premises:

Branches, offices, factories, workshops, land, buildings and other real estate property are also examples of fixed-place permanent establishments

Installation or Construction PE:

Any installation for natural resource exploration, including mines, oil or gas wells, and quarries, creates a PE. A PE is also formed if a building site, construction project, or related activity lasts over six months. This includes not only construction but also infrastructure projects and equipment installation. The ‘six-month’ duration considers all sites, projects, and activities, including time spent by related parties. This threshold is sometimes exploited for tax avoidance, with work distributed among related entities to stay within the limit.

Dependent Agent Permanent Establishment

Multinational companies often appoint dependent agents in the UAE to conduct business and avoid creating a Fixed Place Permanent Establishment.

As per Article 14(1)(b), Where a Person has and habitually exercises the authority to conduct a Business or Business Activity in the State on behalf of the Non-Resident Person, such non-resident person is said to have a nexus in UAE.

‘Habitually exercising authority’ means consistently finalising or negotiating contracts leading to non-resident approval without significant changes. If an agent in the UAE routinely handles orders approved by the non-resident, they are deemed a dependent agent PE. T Independent agents, promoting goods without contract conclusions, are not considered dependent agents.

Preparatory or Auxiliary Activities do not constitute PE:

If a fixed place of business in the UAE is used only for the following specific purposes, it does not create a permanent establishment, including:  

  1. Storing, displaying, or delivering goods for the non-resident. 
  2. Keeping goods for processing by another party. 
  3. Purchasing goods or collecting information for the non-resident. 
  4. Engaging in preparatory or auxiliary activities for the non-resident. 
  5. Combination of all the above activities, as long as the overall activity is preparatory or auxiliary. 

For instance, if an Indian company sells goods directly from India but maintains a warehouse in the UAE for quick deliveries, the warehouse does not create a permanent establishment in the UAE under these rules.

Use of place for job work:

Sometimes, a non-resident utilises job work services from providers in a different country. The non-resident sends and stores goods in the job work service provider’s location. This storage, specifically for processing by another party, does not create a permanent establishment.

Use of place for procurement:

If a non-resident uses a fixed place of business only for buying goods and does not conduct sales operations there, it doesn’t create a permanent establishment.

Any other place used for similar purposes:

If a place of business in the UAE is used for preparatory or auxiliary activities or a combination of such activities, it won’t create a permanent establishment. The place of business should not provide services to any other entity. Also, if someone outside the area uses the location for their specific activities, it doesn’t count as a permanent establishment.

Comprehensive Example:

Fixed Place Permanent Establishment:

XYZ Engineering Inc., an international firm, forms a subsidiary, XYZ Engineering Middle East LLC, in Sharjah, UAE, for a significant infrastructure project, which is responsible for making critical managerial and commercial decisions necessary for the successful execution of the project. The Sharjah branch is a fixed place Permanent Establishment (PE) per Article 14(1)(a) of the UAE Corporate Tax Law.

Dependent Agent Permanent Establishment:

ABC Tech Innovations, a foreign IT company, hires Mr. Khalid in the UAE as a consultant. Mr. Khalid, with the authority to negotiate and close deals, consistently secures new tech projects for the company. This makes him a dependent agent PE under Article 14(1)(b) of the UAE CT Law.

Exemptions for preparatory or auxiliary activities:

ABC Tech Solutions, a tech company in Dubai, leases a warehouse in the city to store its IT equipment. An external logistics provider manages the warehouse. This storage arrangement is considered a preparatory or auxiliary activity, per Article 14(3)(a) of the UAE Corporate Tax Law. Consequently, the warehouse does not qualify as a permanent establishment.

Exceptions to Exemption for Preparatory or Auxiliary Activities:

XYZ Tech Solutions has two offices. 1) in Dubai, UAE, and 2) has its principal office and research facility in Abu Dhabi. The research facility has been actively involved in significant activities related to the main office for more than six months. This collaboration goes beyond just supporting activities and forms a united business operation. According to Article 14(4)(b) of the UAE Corporate Tax Law, both places could be considered permanent establishments, meaning both the Dubai office and the Abu Dhabi facility may be liable to pay corporate taxes.

Other UAE Corporate Tax requirements for a Non-resident person

Record keeping and preparation of Financial Statements:

  • If the non-resident person has a business presence in the UAE, they have to calculate their taxable income. Non-residents must keep their tax records for seven years after the tax period ends.
  • Moreover, if a non-resident person registers for corporate tax, they need to follow the same rules as a Resident person.

Tax Return submission:

Both Resident and Non-Resident individuals must submit a Tax Return to the FTA and settle Corporate Tax within nine months after the relevant Tax Period ends.

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Application of General Anti Avoidance Rules (GAAR) provisions

The Corporate Tax Law’s Permanent Establishment rules have an anti-fragmentation provision to prevent abuse.

While there is an exemption from PE for activities of a preparatory and auxiliary nature, the CT law takes into account Action Plan 7 of the OECD’s BEPS Project on anti-fragmentation where a non-resident or its related party carries out activity in the UAE through another PE in the UAE and on the combined basis the otherwise auxiliary activities form a cohesive business operation of non-resident in the UAE.

This rule is a measure to prevent abuse where a unified business activity is intentionally broken into smaller parts. This rule ensures that businesses cannot claim each fragment as having only preparatory or auxiliary significance. Factors like geographical coherence, the nature of the activity, and the commercial reasoning behind outsourcing or fragmenting determine if the combined activities qualify as preparatory or auxiliary.

Examples:

For instance, if Company ABC from Country X expands to UAE and splits its operations into manufacturing, sales, and customer service in Country Y, the anti-fragmentation rule would assess the geographical connection, nature of activities, and reasons for division. If these fragmented operations still form a substantial business presence, they could be treated as a Permanent Establishment, subject to tax.

In summary, this law prevents businesses from exploiting tax loopholes by artificially fragmenting their operations, ensuring the genuineness and coherence of business activities.

Conclusion

  • In simple terms, understanding the relationship between Non-Resident Persons and the UAE is critical to making sense of Corporate Tax. These individuals, who could be natural or legal entities, have tax responsibilities based on their Permanent Establishment or connection in the country. For individuals, the main concern is if their business turnover goes beyond AED 1,000,000. For legal entities, the focus is on having a permanent establishment, earning state-sourced income, and creating a connection. 
  • The idea of Nexus in UAE, especially for non-resident legal entities, is mainly about income from Immovable Property. This covers a wide range, from land and buildings to fixtures and equipment. The tax rates on such income are set, with no tax on the first AED 375,000 and a nine per cent rate after that. Those who qualify as Free Zone Persons have specific rules under the Free Zone Corporate Tax system. 
  • Taxable Income, whether from a Permanent Establishment or connection, is determined based on Financial Statements that follow UAE accounting standards. Resident and Non-Resident Persons must submit Tax Returns within nine months of the relevant Tax Period and keep records for seven years. 
  • Deciding if a Permanent Establishment exists in the UAE involves various factors, including the type of business premises, installations, and dependent agents. The idea goes beyond physical locations to include effective control, like in a ‘Fixed Place PE.’ For a ‘Dependent Agent PE,’ regular contract finalisation and consistent authority in conducting business activities for the non-resident entity are essential. 
  • To stop misuse and fragmentation, the UAE Corporate Tax Law includes measures against avoidance. The case of Company ABC shows how anti-fragmentation rules work, highlighting the need for genuine and coherent business activities. The goal is to ensure businesses can’t exploit tax loopholes by artificially splitting their operations. 
  • In short, to understand the connection of Non-Resident Persons in the UAE, it’s essential to follow tax rules, understand the criteria for Permanent Establishment, and be aware of provisions against avoidance. The UAE’s tax system aims to balance the promotion of foreign investments with the prevention of misuse, emphasising the importance of compliance for all entities operating within its borders. This balance is crucial for maintaining a fair and effective tax system. 

FAQs?

No, NRIs don’t pay double tax as Article 25 of the DTAA between India and UAE provides for the measures that can help eliminate double taxation on the same income for citizens of both countries:

An Indian resident who has capital or earns income as per the convention may have to pay taxes in the UAE. However, they can get a deduction of the income tax paid in the UAE, but the deduction can’t be more than what they would owe in India before the deduction.

Similarly, if a UAE resident has to pay taxes in India under the agreement, they can get a credit for the income tax paid in India from their UAE tax obligation.
Yes, a Double Taxation Avoidance Agreement (DTAA) exists between India and UAE. The India-UAE Double Taxation Avoidance Agreement (DTAA), formed in 1993, has been crucial in preventing double taxation and fostering economic collaboration. This pact addresses different taxes like income, wealth, and capital gains, offering clarity and relief to taxpayers in both countries. The agreement has enhanced the strategic and economic ties between India and the UAE by easing investment, technology transfer, and job creation.

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