Download FTA Releases Guide on Free Zone Persons

The Federal Tax Authority (FTA) has finally released the much-awaited Corporate Tax (CT) guide for Free Zone entities on May 20, 2024.

This guide offers comprehensive guidance and clarity on various technical aspects for entities conducting business in a Free Zone in the UAE. It is designed to be read alongside the relevant articles of the UAE Corporate Tax Law, implementing decisions, and other guidance published by the FTA.

Below are some of the key highlights from the CT guide for Free Zone entities:

Here are the main highlights from this CT guide regarding Qualifying activities –

On April 17, 2024, the Federal Tax Authority (‘FTA’) released a Corporate Tax Guide concerning “Business Restructuring Relief” (‘Relief’), with the aim of offering comprehensive direction on the Relief provisions outlined in the Corporate Tax Law (‘CT Law’). This guide is crafted to furnish readers with a broad understanding of the Business Restructuring Relief available under Article 27 of the UAE Corporate Tax Law. It encompasses an overview of the following aspects related to the Relief:  

• Transactions falling within the Relief’s scope, 
• Eligibility criteria for the Relief, 
• Consequences of electing for the Relief, 
• Circumstances when the relief will be clawed back and consequences of clawback of the relief, 
• Compliance prerequisites, and 
• Interplay with other provisions of the UAE Corporate Tax Law. 

The key highlights of the Guide are outlined below: –

General Aspects: 

The Corporate Tax Law includes provisions to eliminates the corporate tax implications of specific transactions involved in business restructuring or reorganization. Typically, such transactions like mergers or demergers could trigger taxable gains or losses, even without a change in ultimate ownership or if the original owners maintain a stake in the restructured entity. To facilitate restructuring for valid commercial reasons, Business Restructuring Relief under Article 27 of the Corporate Tax Law enables certain restructuring transactions to occur without tax consequences. However, this relief is contingent upon meeting specified conditions and requires the Transferor to elect for its application. 

Applicability of Business Restructuring (BR) Relief

BR Relief is specifically applicable in two scenarios: – 

• The first category is where there is a transfer of an entire business or an independent part of the Business from one Taxable Person to another. 
• The second category is where there is a transfer of an entire business from one or more Taxable Persons to another, and the Transferor then ceases to exist.

Consideration for transfer –

1. One of the conditions for Business Restructuring Relief on the transfer of a Business or an independent part of a Business is that the consideration for the transfer is to be received by the Transferor. .

• As an exception, a transfer will still be considered to meet the conditions for the Business Restructuring Relief if the consideration is received by a Person that has a direct or indirect ownership interest of at least 50% in the Transferor. The shareholder of the Transferor who can receive the consideration for a transfer within the framework of Business Restructuring Relief can be a juridical person or a natural person and is not required to be a Taxable Person . 

2. If payment in forms other than shares or ownership interests, like cash, is made, the transfer remains eligible for Business Restructuring Relief provided that the Market Value of this alternative consideration does not exceed the lower of the following-  

• the net book value of the assets and liabilities transferred, or  
• 10% of the nominal value of the issued ownership interest 

Consideration for transfer –

For the relief to apply, all criteria must be met:

• The transfer must comply with the UAE legislation. 
• Both the transferor and transferee must be either resident persons or a non-resident but with a permanent establishment (PE) in the UAE. 
• Neither party can be an exempt person or a Qualifying Free Zone Person (QFZP). 
• The Financial Year and accounting standards of both persons must align. 
• The transfer must be undertaken for valid, non-fiscal commercial reasons that reflect an economic reality. 

Note: There is no condition in respect of the ownership of the Transferor or the Transferee. Thus, the relief covers Business restructuring transactions where a Business is transferred from one Related Party to another and also where the Business restructuring is between third parties.

Exceptions to BR Relief:

• BR Relief is not available for transfers between a Permanent Establishment in the UAE and the head office since a Permanent Establishment and its head office are the same Person. 
• BR Relief is not available if a Non-Resident Person transfers or is transferred a Business or an independent part of a Business which is not attributable to a Permanent Establishment in the UAE. 
• BR Relief is not available for Resident Person that elects for Small Business Relief. 

Consequences of electing for BR Relief:

• For the Transferor: -As the Transfer of assets and liabilities is at net book value, there will be no taxable gain or loss for the Transferor. 
• For Transferee:  
  • In cases other than realisation- The Transferee shall exclude depreciation, amortisation or other change in the value of the transferred assets and liabilities to the extent that they relate to the gain or loss that arose to the Transferor and were not recognised as a result of the Business Restructuring Relief being applied. 
  • In cases upon realization – the Transferee will need to include any amount that has not been recognised for CT purposes. 

Transfer of Tax Losses

Where a Business or independent part of a Business is transferred on a no gain or loss basis, any unutilised Tax Losses incurred by the Transferor in Tax Periods before the restructuring transaction, can be carried forward and are considered as Tax Losses of the Transferee, provided the Transferee continues to conduct the same or a similar Business or Business Activity as the Transferor conducted before the restructuring transaction. 

Clawback of the BR Relief – 

• Business Restructuring Relief shall not apply if any of the following circumstances occur within two years from the date of transfer :- 
  • The shares or other ownership interests in the Transferor or the Transferee are sold, transferred or otherwise disposed of, wholly or partially to a Person that is not a member of the Qualifying Group. 
  • There is a subsequent transfer or disposal of the Business or the independent part of the Businesses originally transferred. 
• The gain or loss on the transfer shall be included in the taxable income of the Transferor in the Tax period in which clawback is triggered. While calculating this gain or loss, market value of assets and liabilities as on the date of the business restructuring will need to be considered, even if this market value if different on the date of the clawback being triggered. 

Other Key Takeaways:– 

• Transferor has to make election for application of BR Relief which implies that BR Relief is not automatic. 
• BR Relief can also apply if assets or liabilities are transferred from one Permanent Establishment in the UAE to another Permanent Establishment in the UAE, if the relevant conditions are met. 
• BR Relief can also apply for a Transferor or Transferee that is a Free Zone Person but not a Qualifying Free Zone Person. 
• If Transferor and Transferee follow the same Accounting Standards, they may follow different accounting policies, provided that such policies are permitted under the relevant Accounting Standards. 
• Both the Transferor and the Transferee are required to maintain a record of the agreement to transfer the asset or liability and evidence of the value. 

Download Synopsis of Business Restructuring Relief Guide

On 19^th April 2024, The Ministry of Finance (MoF) has initiated a public consultation regarding the potential introduction of Research and Development (R&D) tax incentives under the Corporate Tax Law. The aim is to foster innovation, competitiveness, and economic diversity. This consultation paper is split into the consultation questionnaire and guidance paper. 

Key highlights of the consultation are as follows:

• Purpose and Aim: The UAE Government recognizes the significance of R&D in driving innovation and aims to support businesses by potentially introducing an R&D Tax Incentive under the Corporate Tax Law. The consultation seeks feedback to design an effective incentive accessible to a wide range of businesses. 
• Design Features: The consultation seeks input on various aspects of the potential R&D tax incentive, including defining R&D, determining qualifying businesses and activities, identifying eligible expenditure, selecting incentive types, managing unutilized benefits, and establishing administrative measures. 
• Consultation Process: Stakeholders are invited to provide feedback through a consultation questionnaire and this includes a range of questions to understand more about the way in which R&D is currently and/or anticipated to be conducted in your business, what the potential R&D Tax Incentive should cover and how the potential R&D Tax Incentive should be delivered and administered. 

Alongside the consultation questionnaire, a separate Guidance Paper has been prepared which provides details on the internationally recognized definition of R&D provided in the Organization for Economic Co-operation and Development’s (‘OECD’) Frascati Manual. 

The Keys highlight of the Guidance paper are outlined below:- 

• R&D Definition: R&D is characterized by systematic, creative processes aimed at advancing human, cultural, and societal knowledge. It encompasses basic research, application-oriented research, and experimental research. Key R&D characteristics are as outlined: 
  • Novelty: Creating new knowledge or improving existing concepts. 
  • Creativity: Involves human intervention beyond routine changes. 
  • Uncertainty: The outcome cannot be precisely estimated. 
  • Systematic: Conducted in a planned manner with documented processes. 
  • Transferability & Reproducibility: Results should be transferable and reproducible by other researchers. 
• Common R&D Activities: Activities such as transforming research outcomes, modifying product components or processes, conducting tests, and designing tools with new technologies are considered R&D. 
• Excluded Activities: Certain engineering and scientific activities, as well as those related to scientific and technical information services, testing and standards unification, feasibility studies, policies, funding management, and indirect support, are excluded from R&D. 
• Identification of R&D Projects: Criteria for identifying R&D projects include project objectives, novelty, implementation methods, general applicability of outcomes, staff involvement, and classification of research projects and institutions. 

Overall, the R&D tax incentive seeks to aid the private sector by reducing the effective cost associated with conducting research and development, with the goal of making it accessible to a broad array of businesses in the UAE. Stakeholders are urged to offer concise and transparent feedback by May 14, 2024.

Download Key highlight of PCD on R&D Incentive

On 3 April 2024, the Federal Tax Authority (‘FTA’) published a Corporate Tax Guide on “Qualifying Group Relief” (‘Relief’), aiming to provide general guidance on the Relief available under the Corporate Tax Law (‘CT Law’). The objective of the “Qualifying Group Relief” provisions is to facilitate the transfer of capital assets or liabilities between two Taxable Persons within a Qualifying Group, ensuring no gain or loss for CT purposes (transfer is considered at book value). 

The key highlights of the Guide are outlined below:

Assets and liabilities eligible for Qualifying Group (QG) Relief 

• QG Relief is applicable on transfers such as sale, exchange, relinquishment, sale, and lease back, etc. 
• QG Relief applies only to the transfer of assets or liabilities held on capital account and recorded on the balance sheet of the Transferor.  
• The transfer of assets or liabilities which are not held on capital account (for example, inventory transferred as part of regular Business operations) is not within the scope of QG Relief and hence, cannot benefit from the no gain or loss tax treatment. 
• A transfer of assets or liabilities which are not recognised in the Financial Statements of the Transferor (for example, a self-generated intellectual property, such as goodwill, brand or customer lists) would not fall within the scope of QG Relief. 
• Where assets or liabilities are transferred to a Taxable Person as a result of liquidation, dissolution or merger, QG Relief shall not apply.

Consideration for transfer under QG Relief –

• QG Relief does not require any consideration to be paid. Where it is paid, it does not need to be in a specific form. Further, the consideration can be in cash or in kind. 
• Where the Transferee pays consideration in kind in the form of another asset or liability held on capital account, this constitutes an exchange transaction. An exchange of assets or liabilities between two members of the same QG shall be treated as two separate transfers for the purposes of QG Relief. 

Conditions to be a member of a QG 

1. Transferor and Transferee are Juridical Persons such as such as private or public joint stock companies or limited liability companies and incorporated partnerships.

• Natural persons or unincorporated partnerships which do not have separate distinct legal personality do not qualify for the Relief.  
• However, the Relief may be available to a juridical person who is a partner in an Unincorporated Partnership or to a juridical person who is held by an Unincorporated Partnership. 

2. Transferor and Transferee are Taxable Persons. 

• Where the Transferor or Transferee is a Resident Person under the UAE CT Law, they can be a member of a QG. 
• Non-Resident Person with a Permanent Establishment in the UAE can also be a member of a QG. 
• Non-Resident Person with a Permanent Establishment in the UAE transfers assets or liabilities attributable to its Permanent Establishment to or from another Taxable Person within its Qualifying Group, this transfer could benefit from Qualifying Group Relief if the relevant conditions are met. This can also apply if assets or liabilities are transferred from one Permanent Establishment in the UAE to another Permanent Establishment in the UAE. 
• Exceptions:  
• QG Relief is not available for transfers between a Permanent Establishment in the UAE and its head office outside the UAE. 
• Non-Resident Persons which derive UAE sourced income or have nexus in the UAE cannot be member of QG even though they are considered as Taxable Persons as per the CT Law.

3. Transferor or Transferee must hold at least 75% direct, indirect or common ownership interest in the other party, or a third person (not necessarily a taxable person) must hold at least 75% ownership interest in both Juridical Taxable Persons (“Ownership Test”).

• For the purposes of QG Relief, a Taxable Person shall be treated as holding an ownership interest where the following two conditions are met: – 
  • the ownership interest is controlled by that Taxable Person under the Accounting Standards applied by the Taxable Person and  
  • that Taxable Person has the right to the economic benefits produced by the ownership interest under the Accounting Standards as applied by the Taxable Person. 
• The direct and indirect ownership interests held by members of the same Tax Group shall be determined by aggregating the ownership interests of the Parent Company and each Subsidiary that is a member of the Tax Group. 

4. Neither the Transferor or Transferee is an exempt person or a Qualifying free zone person.

5. Transferor and Transferee have the same financial year end and must prepare financial statements based on same accounting standards.

• A Taxable Person has an option to apply to the FTA to change the financial year to align the end date of its financial year with other members of the Qualifying Group subject to certain conditions. 
• Even if all members of the Qualifying Group use the same Accounting Standards, each member may follow different accounting policies, if those policies are permitted under the relevant Accounting Standards.

Note: Where the Transferor and Transferee elect to apply the QG Relief, they must remain members of the same QG for a period of two years from the date of the transfer in order to avoid a clawback of QG relief. Thus, each of the above conditions must be met throughout the relevant two-year period.

Clawback of the QG Relief 

• The QG Relief shall not apply if within two years from the date of transfer: – 
  • there is subsequent transfer of the asset or liability outside the QG. 
  • the transferor or the transferee cease to be member of the same QG. This includes scenarios such as ownership changes, cessation of Taxable Person status, becoming an Exempt Person or QFZP, or financial year does not align with other group members.

However, the claw back is not triggered if the subsequent transfer of the asset or liability is within the Qualifying Group or if the new Transferee joins the Qualifying Group before the transfer of the asset or liability. 

Consequences of election for QG Relief: – 

• For Transferor: Transfers deemed to be done at net book value, Accordingly, at the level of the Transferor, there would be no taxable gain or loss on transfer of the asset or liability. 
• For Transferee:–  
  • In cases other than realisation, the Transferee shall adjust its Taxable Income to exclude depreciation, amortisation or other change in the value of the transferred assets and liabilities to the extent that it relates to the gain or loss that arose to the Transferor and was not recognised for CT purposes as a result of the no gain or loss treatment being applied. 
  • In cases upon realization – the Transferee will need to include any amount that has not been recognised for CT purposes. 

Compliance requirements 

• The no gain or loss treatment within the QG is only available if the Transferor makes an election to FTA which means the QG relief is not automatic. 
• The election should be made in the Tax Return for the Tax Period in which the transfer takes place. 
• Once an election is made by the Transferor, it is irrevocable in the hands of the Transferor and cannot be reversed without the FTA’s approval. 
• Further, the election will apply not only to the specific transfer in respect of which it was made, but instead to all transfers of assets and liabilities held on capital account by the Transferor within a QG which take place in the Tax Period for which the election was made, as well as any transfers in subsequent Tax Periods. 
• Both the Transferor and the Transferee are required to maintain a record of the agreement to transfer the asset or liability and evidence of the value. 

Other Key Takeaways: 

• Resident Persons opting for Small Business Relief cannot claim the QG Relief. 
• A Taxable Person that is a Free Zone Person but not a Qualifying Free Zone Person can be a member of a QG.  
• QG Relief does not permit Tax Losses to be transferred to the Transferee. 
• In case the conditions of QG are not met or the Transferor does not elect for the QG relief, the transfer will be taxable as per the normal provisions of the UAE CT Law. This implies that the transfer must adhere to arm length pricing as outlined in the Transfer Pricing Rules.  
• Transfer pricing rules are not applicable if the transferor has made an election for QG Relief in respect of transferred assets or liabilities that are held on the capital account. 

Download Qualifying Group Relief Guide

On 28 February 2024, Federal Tax Authority (FTA) has released decision no.3 of 2024 stating the Timeline for Registration of Taxable Persons for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses and its amendments. The key highlights of the decisions are outlined below:-

Key points to be taken into consideration while determining the timeline for Corporate Tax Registration:

• Effective date of this Decision is March 1, 2024.
• In our view, first issue month (Original Issuance date mentioned in the Trade License) is to be considered for determining the deadline for CT registration.
• The earliest Deadline for submission is 31 May 2024 for the companies that have January or February as the license issue month.
• Penalty of AED 10,000 will be imposed on non-submission of Corporate Tax Registration application rather than on obtaining Corporate Tax Registration Number from Emara Tax Portal.

Below are the timelines specified for submission of Corporate Tax Registration application on Emara tax portal-

1. A Timeline for Tax Registration of Resident Juridical Persons that are incorporated or established or recognised before March 1, 2024 are: –

For resident Juridical person that have more than one license, in such case the license that was issued earliest shall be considered.

2. Timeline for Tax Registration of Resident Juridical Persons that are incorporated or established or recognised on or after March 1, 2024: –

3. Timeline for Tax Registration of Non-Resident Juridical Persons: –

• Became non-resident taxpayer before 1 March 2024:
  • A person that has a Permanent establishment in UAE: must register within 9 months from the date the permanent establishment came into existence.
  • A person that has Nexus in the UAE: must register within 3 months from 1 March 2024 (i.e. before the end of May 2024).
• Became non-resident taxpayer on or after 1 March 2024:
  • A person that has a Permanent establishment in UAE: must register within 6 months from the date the permanent establishment comes into existence.
  • A person that has Nexus in the UAE: must register within 3 months from the date the nexus was established.

4. Timeline for Tax Registration of Natural Persons:

• Resident Natural Persons whose total turnover exceeds AED 1 Mn in a Gregorian calendar year (January-December): before31 March of the subsequent Gregorian year
• Non-residents Natural Person conducting a Business or Business Activity during the 2024 Gregorian calendar year or subsequent years whose total Turnover derived in a Gregorian calendar year exceeds AED 1 Mn: within 3 months from the date the individual became a UAE taxpayer.

5. An administrative penalty of Dh10,000 will be imposed for late registration of UAE Corporate Tax. This penalty is applicable to businesses that fail to submit their Corporate Tax registration applications within the aforementioned timelines set by the FTA.

Download Federal Tax Authority Decision No 3 of 2024

Timeline for CT Registration of Taxable Persons

Spain draft legislation includes the Income Inclusion Rule and a Qualified Domestic Minimum Top-up Tax (QDMTT) applicable for fiscal years starting on or after 31 December 2023, as well as an Undertaxed Profits Rule (UTPR) generally applicable for fiscal years starting on or after 31 December 2024. In addition, the draft legislation contains a Transitional CBCR Safe Harbor, a Safe Harbor for QDMTT and a Transitional UTPR Safe Harbor. The draft bill was subject to public consultation until 19 January 2024.

Current Practice

Receipt of concerned Services;

As a taxable person, the financial institution is regarded as making a taxable supply to itself when it imports such concerned service and is responsible for all applicable VAT obligations and accounting for VAT on the service.

Then, the financial institution is required to issue a valid tax invoice to itself as the recipient of the supply concerning each SWIFT transaction for which it incurs interbank charges.

Issue with Current Practice

Administrative burden to issue tax invoices to itself for a high number of SWIFT-related concerned services; impracticality for financial institutions to issue tax invoices in respect of international bank charges incurred from non-resident banking institutions as a result of using the SWIFT communication system with these non-resident banks.

Welcome Clarification

Financial institutions are not obligated to issue a tax invoice to themselves for interbank services received from non-resident banks if the necessary information is contained within the SWIFT message (Qualifying SWIFT Message) to establish the particulars of the supply.

For purposes of input tax recovery, considering the nature of the Qualifying SWIFT message, it is accepted as sufficient documentary evidence to support the recovery of input tax that relates to this specific imported service. The recovery of input tax is subject to the other standard VAT recovery rules.

What’s SWIFT Charges? How did it become taxable?

Financial institutions incur international bank charges from banking institutions outside the UAE due to using the Society for Worldwide Interbank Financial Telecommunications (“SWIFT”) communication system with these non-resident banks.

The provision of the right to use the SWIFT communication service constitutes a service for VAT purposes.

If this service is received by a financial institution that is a resident of the UAE, according to the general place of supply rule, the place of supply is in the UAE.

Consequently, where such service is received from outside the UAE, it constitutes a concerned service for UAE VAT purposes.

Download VAT036 Public Clarification on SWIFT