Taxation is all about reading between the lines and focusing on the fine prints.
The UAE Corporate Tax law requires an additional approach. One needs to first understand the intent of the law. The Explanatory Guide clarifies that the law is intended to be kept simple and permissive. That the law does not have to consider every possible way that taxpayers could seek to exploit the scope and reliefs within it.
This will be achieved through the general anti-abuse rule brought into the corporate taz law. Just because the law is silent on a scenario, it does not mean that it is permissible or vice-versa.
The guide discusses certain noteworthy tax concepts thereby opening up new avenues for discussion.
Free zone branches
The corporate tax law states that a branch in the UAE of inter-alia a UAE company shall be treated as one and the same ‘taxable person’. However, the guide states that the expression ‘free zone person’ includes a branch of a UAE mainland juridical person that is a registered in a free zone.
The reference has created an anticipation that a free zone branch could enjoy a separate tax treatment/exemption, or be treated as its mainland head office for tax purposes. The tax policy will have a significant impact on the structuring of business operations.
Could owners’ salary be treated as dividend?
Many company owners have started, or are contemplating, to draw out salaries to themselves and to family members. The guide states that ‘dividends’ – which is not a deductible expense from taxable profits – include any transaction or arrangement with a related party or connected person that does not comply with the arm’s length principle.
As the owners and their family members are connected person for a company, the compliance requirements for owners’ salaries cannot be understated. Apart from the financial adequacy, the arm’s length principle also entails various tests, including the shareholders’ service test which should be duly complied with.
Only a 50 per cent deduction will be allowed on any entertainment, amusement, or recreation expenditure for the purposes of receiving customers, shareholders, suppliers or other business partners. It includes meals, accommodation, transportation, etc.
The guide clarifies that the expenditure incurred for staff entertainment will be fully deductible – something that we had stated in the past. The relief will open up more questions for the taxpayers. Companies will have to evaluate expenses where employees and customers/vendors are jointly present. Or, expenses incurred by an owner while wearing the hat of an employee under the company’s employment visa.
Will individuals conducing business be considered as owners or as employee? Will exhibition and marketing events be treated as entertainment or as business promotion?
Scope of withholding taxes
The emphasis on withholding taxes (WHT) throughout the guide should be carefully noted. The applicable withholding tax rate could be changed from the current 0 per cent through a cabinet decision in the future. The processes, procedures and timelines to deduct the tax and to remit it will be prescribed separately. The compliance obligations will remain on the UAE companies/payer.
Even for tax groups, as and when the withholding tax rate is increased, each group member will be responsible for deducting and remitting withholding tax amounts. The parent company cannot discharge obligations on behalf of other group members.
A qualifying free zone person is proposed to be taxed at 0 per cent on the qualifying income and at 9 per cent on the non-qualifying income. The guide has clarified that they will be taxed at 9 per cent on its entire non-qualifying income.
Unlike a mainland company, a qualifying free zone person will not be eligible for any slab system for the first Dh375,000 of its taxable income.
Business vs business activity
The guide explains the subtle difference between ‘business’ and ‘business activity’. ‘Business’ means any activity, whether continuous or for a set period of time, conducted by any natural or juridical person in any location.
Reference to ‘conduct’, as compared to ‘carrying on’ of business, indicates that even a short-term commercial activity could be considered as a business for corporate tax purposes.
The definition of ‘business activity’ is wider than that of a ‘business’, and includes any transaction, step, or other element/action undertaken by or as part of a business, which may be carried out entirely or partially within the UAE.
For businesses conducted outside UAE, especially by individuals, one needs to remain careful if a business activity is being carried out in the UAE.
Every statement of the guide could impact the tax burden, structuring options and/or compliance obligations on UAE businesses. Ignorance is not a bliss when it comes to taxation. The gravity of each statement in the guide and the corporate tax impact should not be undermined out of ignorance.