In the ever-changing landscape of UAE corporate tax, businesses expanding beyond the UAE encounter a network of complex tax regulations. Article 11 of the UAE corporate tax federal decree law no. 47 of 2022, applicable to both UAE-incorporated entities and foreign entities effectively managed and controlled within the UAE, establishes them as taxable entities.
Effectively overseeing a business for corporate tax purposes necessitates a meticulous analysis of decision-making locations, board meetings, the influence of stakeholders, operational decision hubs, and economic perspectives. This thorough assessment seeks to pinpoint where crucial management decisions occur, offering a nuanced understanding of effective management and control beyond the formalities of place of incorporation.
In the context of the UAE’s corporate tax framework, the treatment of foreign entities registered outside the UAE as tax residents carries significant implications. If recognised as tax residents under UAE corporate tax regulations, as per Article 40 of federal decree law No. 47 of 2022 and guidelines on the taxation of foreign source income, a resident juridical person is subject to corporate tax on worldwide income, encompassing earnings within and outside the UAE. These entities become subject to taxation at a rate of nine per cent. This taxation mandate extends even to entities registered in renowned offshore jurisdictions such as the Cayman Islands, BVI, and Cyprus.
The taxability of income earned by foreign companies from business or investments in countries beyond the UAE, managed and controlled by UAE residents, is governed by both Corporate tax law and Double Taxation Agreements (DTAs) between the UAE and the foreign jurisdiction. The applicability of DTAs may influence the taxation of foreign source income. If a DTA assigns residence to another jurisdiction, that country holds the taxing right over the income unless it originates from the UAE.
Transactions between group entities will attract transfer pricing, businesses operating in multiple jurisdictions must carefully consider the implications. Ensuring that transactions between related entities occur at arm’s length, preventing any potential manipulation, becomes critical. This practice, aligned with international standards, mitigates the risk of tax authorities scrutinizing and adjusting profits deemed inconsistent with market conditions.
Under the UAE’s corporate tax law, a foreign company holding 95 per cent or more shareholding/voting rights in UAE companies can be grouped for corporate tax registration. This is contingent on the foreign company meeting the criteria of a ‘resident person’ under Article 11, being effectively managed and controlled in the UAE. If the foreign company’s directors and decision-makers are UAE residents and all conditions are met, it can form a tax group with its UAE subsidiaries.
In conclusion, UAE corporate tax demands a strategic approach for entities expanding beyond borders. The thorough analysis of effective management, adherence to international standards in transfer pricing, and comprehension of tax residency implications provide a foundation for optimized tax positions. Entities must proactively address the place of effective management (POEM) to mitigate implications on transfer pricing and arm’s length principle (ALP) provisions. As businesses strategically position themselves within the regulatory framework, compliance with provisions of corporate tax Law becomes paramount. Ultimately, a comprehensive understanding of these complexities empowers entities to thrive in the evolving global business environment.
The writer is Partner, MI Capital Services