Dubai: “The Gulf”
Yesterday, Sunday, the Ministry of Finance launched the Public Digital Consultation Initiative, to consult with the business community and relevant stakeholders, to get their opinions and observations regarding corporate tax, until 19 May 2022, via the ministry ‘s website.
According to the advisory document, companies residing in the UAE will be subject to corporate taxes on their global income, including capital gains.
In addition, to avoid instances of double taxation, and to recognize the UAE’s position as an international business hub for holding companies, the UAE corporate tax system will provide corporate tax exemptions for certain types of income.
The main exemptions from the corporate tax system are related to the income generated by companies in the UAE from investments in other companies, and from operations outside the country by foreign subsidiaries or branches.
Dividends and “Capitalism”
In many other countries and leading international financial centers, shareholders of companies located in the country are generally exempt from corporate tax on dividends received and capital gains earned from the sale of shares of a subsidiary. According to the Ministry of Finance, the purpose of this exemption is to avoid double taxation on corporate profits, firstly when it is earned by the subsidiary and secondly when it is distributed as dividends or the subsidiary’s shares by the state-owned joint-stock company.
The proposed corporate tax system will exempt all dividends from companies located in the country, including dividends paid by a qualifying person based in the free zone and benefiting from the 0% corporate tax system.
Dividends paid by foreign companies, and capital gains from the sale of shares in both companies located in the UAE and foreign companies will also be exempt from corporate tax, provided certain conditions are met.
The main condition for benefiting from the participation exemption is that the shareholder located in the country owns an ownership interest of at least 5% of the shares of the subsidiary company. To prevent the transfer of income to a subsidiary in a country that is not taxed or subject to a low tax rate, the participation exemption will only be available if the foreign subsidiary is subject to corporate tax (or similar tax) at a rate of at least 9%.
Notwithstanding the benefit of the 0% corporate tax, capital gains arising from the sale of shares by a qualified person based in the free zone will be exempt from corporate tax in cases where the person established in the free zone has a is a holding company, and all its income is derived from the contribution In shares of subsidiaries that meet the conditions for the participation exemption.
Profits from foreign branches
Companies located in the country may restructure their foreign operations; Whether through a foreign subsidiary or through a foreign branch. Generally, a foreign branch forms a permanent business in the foreign country, and is subject to the corporate tax regime (or equivalent tax) on its profits in that foreign country.
The main difference between the completion of operations abroad by a foreign subsidiary or foreign branch is that the subsidiary is a separate legal entity, with its own books and records, and that the transactions between the parent company located in the country and its foreign branch is clearly documented. and recorded.
On the other hand, a branch is not a separate legal entity, but an extension of the parent company. Although it may not be necessary to prepare separate financial statements, many of the branch’s transactions will usually be the parent company’s transactions with itself, which makes it difficult to determine the ‘independent’ financial results of the foreign branch.
Recognizing the potential complications associated with the allocation of income and expenditure to foreign branches, companies in the State may either: (1) claim a deduction from the foreign tax credit paid in the foreign branch’s country, or (2) ) choose an exemption for all profits from foreign branches.
The option to claim exemption from branch profits will apply to all foreign branches of the company located in the UAE, and the choice will be irrevocable. Note that there will be no exemption for the profits of foreign branches; Where the foreign branch is not subject to a tax of a similar nature to the corporate tax in the country in which the branch is situated, at a rate of not less than 9%.
Other income released
As a major logistics hub and international air traffic hub, the UAE corporate tax system will exempt non-resident income from operating or leasing aircraft or ships (and related equipment) used in international transportation, provided the same tax treatment awarded to the UAE For business in the foreign country concerned under the principle of reciprocity.
Expenditure deduction restrictions
Calculation of taxable income will largely follow general accounting rules, and the UAE corporate tax system will not allow deductions for certain specific expenses; This is to ensure that the exemption can only be obtained for the purposes of expenses incurred to obtain taxable income, and to address potential situations of abuse or deduction of excessive expenses.
interest rate rules
While a minimum amount of capital or capital reserves may be required under UAE legislation, business owners generally have flexibility in how they finance their businesses.
Interest and other similar financing costs are a cost of doing business and will therefore be deducted for corporate tax purposes in the UAE. However, the possibility of interest deduction and other similar financing costs could lead to opportunities for a shrinking UAE corporate tax base, and arbitrage in the corporate tax system, unless appropriate measures are taken. An obvious example of tax arbitrage is the reduction of taxable profits through the use of deductible interest payments; Where the recipient of the interest income is not taxed (for example, an individual shareholder or a qualifying person based in a free zone).
To avoid the different tax treatment of equity and debt that is exploited through the use of excessive debt levels, the UAE corporate tax system limits the amount of net interest expense that can be deducted to 30% of the company’s EBITDA, for which it has been amended. corporate tax purposes. This is in line with the Benefit Determination Rules proposed by Action 4 of the OECD project on base erosion and profit shift applied by countries around the world.
To reduce the administrative burden, a business may be allowed to deduct a certain amount of net interest expense (the safe haven or minimum amount), regardless of the deduction limit; It is calculated on the basis of earnings, interest, tax, depreciation and amortization.
Recognizing that different sectors have different capital requirements and different risk profiles, the interest rate rules will not apply to banks, insurance companies and some other regulated financial services entities. In addition, the interest rate cap rules will also not apply to business conducted by natural persons; A taxpayer who is part of a consolidated group will be considered for another application of the interest rate limit.
Consideration is given to allowing companies that are part of a consolidated group to apply a different interest rate ceiling by referring to the general position of the group.
In addition to the requirement that the interest paid on the loans of the related parties should be on the principle of a neutral rate; Where these loans are used in certain transactions within the group (eg to pay dividends or to capitalize the group company), the interest of the related parties will only be deductible if there is a valid business reason for obtaining the loan; A commercial reason will be considered valid if the lender of the related party is subject to corporate tax (or similar tax) of at least 9% of the interest income earned.