Decision No. 116 of 2023 was released by the Ministry of Finance on May 10, 2023, specifically addressing the Participation Exemption under Federal Decree-Law No. 47 of 2022, which pertains to the taxation of corporations and businesses (referred to as the ‘CT Law’ hereafter). This decision became effective the day after it was published. One of the key provisions outlined in Article 23 of the CT Law is an exemption on income derived from a Participating Interest, provided certain conditions are met. The Ministerial Decision that has been issued further elaborates on the guidelines and regulations pertaining to the application of the Participation Exemption for taxable individuals. The detailed provisions are highlighted below.

Key Highlights

The Decision provides a clear definition of a ‘Participating Interest’ as an ownership stake in the shares or capital of a legal entity, satisfying the conditions outlined in Article 23 of the Corporate Tax Law. These conditions broadly include the following:

• Ownership interest: The ownership interest must be equal to or greater than 5%.
• Holding period: There should be a continuous ownership period of 12 months or an intention to hold the interest for at least 12 months.
• Taxation in country of residence: The Participating Interest must be subject to taxation in its respective country or territory of residence at a rate that is not lower than 9%.
• Composition of assets: The direct and indirect assets of the Participating Interest should not exceed 50% of ownership interests that would have been exempt from taxation if held directly by the Taxable Person.

These conditions provide clarity on the requirements that need to be fulfilled for interest to qualify as a Participating Interest eligible for exemption under the Participation Exemption provisions

Ownership Interest

The Decision provides a comprehensive definition of ‘ownership interest’ within the context of the CT Law. According to the Decision, an ownership interest encompasses various holding interests, including ordinary, preferred, and redeemable shares, membership and partner interests, and other types of securities, capital contributions, and rights that entitle the owner to receive profits and liquidation proceeds. This definition includes Islamic Finance Instruments or arrangements associated with Islamic Finance Instruments

Importantly, an ownership interest must be classified as an equity interest under the applicable accounting standards to qualify for an exemption. This highlights the significance of considering the relevant accounting standards by Taxable Persons when determining the eligibility for exemption.

Furthermore, the Decision emphasizes that the Taxable Person should exercise control and have the right to the economic benefits generated by the ownership interest. This implies that the Taxable Person should be the beneficial owner of the ownership interest, rather than merely the legal owner. This aspect emphasizes the importance of genuine ownership and economic entitlement for the application of the Participation Exemption.

Aggregation of Ownership Interests

One of the conditions provided under the CT Law for participation exemption is a minimum of 5% ownership in the shares or capital of a juridical person (i.e. ‘Participation’). The Ministerial Decision provides that in order to determine whether the ‘5%’ has been met, a Taxable Person should aggregate the different types of ownership interests (as provided above) in the Participation.

Moreover, with regards to entities that form part of a Qualifying Group, the 5% ownership interest is considered to be met in the event the total amount of ownership interest from all Group members in the same Participation adds up to at least 5%.

Transfer of Ownership Interests

For a Taxable Person who exchanges their ownership interest in one legal entity for an ownership interest in another legal entity, there are specific conditions that must be satisfied in order for the exchanged ownership interests to be considered as continuous ownership interests. These conditions include:

• Exchanging ownership stakes in compliance with Article 27 of the CT Law’s provisions for corporate restructuring relief.
• Confirming that the ownership stake in the legal entity satisfies the requirements for a participating interest under Article 23 of the CT Law.

Debt Instruments Issued by the Participation

Income derived by a Taxable Person from their Participation, specifically related to debt instruments classified as an equity interest according to the Accounting Standards adopted by the Taxable Person, will be considered income from a Participating Interest. This treatment applies even if the debt instruments do not meet the definition of ownership interest.

Subject to Tax’ Test

The Ministerial Decision reinforces the requirement that the Participation must be subject to taxation in its respective jurisdiction at a rate that is not lower than 9%, using a similar basis as the Corporate Tax (CT) in the UAE. To provide further clarity, the Decision outlines the conditions that need to be met for the “subject to tax” test:

• Application of a 9% effective tax rate (ETR) on the income or profits generated by the Participation.
• If the relevant jurisdiction’s tax regime does not have a 9% ETR, the test can still be satisfied by recalculating the ETR based on the provisions of the UAE CT Law.

Holding Companies

The Ministerial Decision includes provisions for waiving the requirement of a 9% effective tax rate in the case of a holding company Participation. To qualify for this waiver, the Participation must fulfill the following conditions:

• Directed and managed in its relevant foreign jurisdiction: The Participation should be controlled and managed in the foreign jurisdiction where it is established.
• Compliance with administrative requirements: The Participation must adhere to all administrative obligations, such as document submissions, imposed by the relevant jurisdiction.
• Adequate substance: The Participation should have sufficient substance to acquire and hold shares or equitable interests. This ensures that it is not merely a shell company.
• Limited activities: The Participation should only engage in ancillary activities, specifically the holding of shares, and should not conduct any other substantial business activities

Minimum Acquisition Cost

The Ministerial Decision introduces certain provisions related to the minimum ownership criteria for the participation exemption:f the ownership percentage.

• Disregarding the 5% ownership threshold: The minimum ownership requirement of 5% can be disregarded if the aggregated acquisition cost of the ownership interest is equal to or exceeds AED 4 million. In such cases, the Taxable Person can qualify for the participation exemption regardless of the ownership percentage.
• Quantifying acquisition cost in UAE Dirhams: When determining the acquisition cost of a foreign ownership interest, the amounts should be converted into UAE Dirhams using the applicable exchange rate at the date of acquisition. This ensures consistency in evaluating the acquisition cost threshold.
• Failure to meet the acquisition cost threshold: If the minimum acquisition cost threshold is not met for an uninterrupted period of 12 months, any income that was not considered for the participation exemption during that period will be included in the Taxable Income for the corresponding Tax Period. This requirement ensures that the participation exemption is only applicable when the acquisition cost threshold is consistently maintained for the specified duration

Assets of the Participation

In order to avoid abuse of the Participation Exemption, the CT Law provides that no more than 50% of the assets directly or indirectly owned by the Participation may consist of an ownership interest or entitlements that would not qualify for the Participation Exemption if these assets were held directly by the Taxable Person.

• The determination of compliance with this requirement can be based on either of the following methods:
• Carrying value: The calculation can be based on the carrying value of the assets as presented in the consolidated balance sheet of the Participation. This involves considering the recorded value of the assets for accounting purposes.
• Market value: Alternatively, the determination can be made based on the market value of both the direct and indirect ownership interests, along with other assets held by the Participation. This method takes into account the fair market value of the assets.

By employing either the carrying value or market value approach, it becomes possible to assess whether the 50% asset composition threshold is met. This provision aims to ensure that the Participation primarily holds assets that would qualify for the Participation Exemption if held directly by the Taxable Person, thereby preventing potential misuse of the exemption.

Expenditure in relation to the Acquisition and Disposal of the Participating Interest

Expenses associated with the acquisition, sale, transfer, or disposal of a Participating Interest will not be deductible since they are related to exempt income. These expenses include professional fees, due diligence fees, litigation costs, commission and brokerage fees, stamp duty or any other irrecoverable taxes, appraisal and valuation costs, and refinancing costs.Instead of being deducted as expenses, these costs will be capitalized and added to the acquisition cost of the Participating Interest. Regarding interest expenditure, it will be subject to the general and specific deduction rules outlined in Chapter 9 of the CT Law. This means that the deductibility of interest expenses will be determined based on the specific provisions and limitations set forth in the law.

Income from Ownership Interests in a Participation

The participation exemption applies only to income received directly as the owner of the Participation. Income derived indirectly or related to the ownership interest is not eligible for the exemption and will be subject to Corporate Tax.

Liquidation Proceeds and Losses

According to the CT Law, the participation exemption does not apply to losses incurred during the liquidation of a Participating Interest. The calculation of such liquidation losses should be done as follows:

Liquidation losses = Acquisition cost of Taxable Person – [partial] disposal made in the Participation – fair value of the liquidation proceeds received by the Taxable Person

However, adjustments need to be made for the following:

• Tax losses transferred by the Participation to the Taxable Person.
• Exempt dividends or profit distributions received.
• Gains recognized by the Taxable Person on any transfer of assets or liabilities to the Participation that was not taken into account under Transfers Within a Qualifying Group or Business Restructuring Relief.

These adjustments ensure that relevant factors are considered when calculating liquidation losses, taking into account tax losses, exempt dividends, and gains from asset or liability transfers.

Foreign Permanent Establishment Tax Losses

When a Taxable Person utilizes a tax loss from its foreign permanent establishment, the loss must first be offset against future profits of the PE before applying a Foreign PE exemption or the participation exemption provisions under the CT Law.

KCG Insights

• The adoption of the participation exemption in the UAE is a crucial tax policy that supports a competitive tax environment in the region. By eliminating double taxation of corporate profits, the CT regime facilitates cross-border investments and incentivizes companies to invest in foreign entities. This reinforces the UAE’s role as a hub for companies looking to expand and establish international operations.
• Moreover, the proposed participation exemption regime simplifies compliance requirements by reducing the complexities associated with foreign income and intricate double tax treaties for CT purposes. This streamlines the tax compliance process for businesses operating internationally.

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The Ministerial Decision No. 26 of 2023 has been issued by the Minister of State for Financial Affairs, outlining the criteria and conditions for electronic commerce aimed at maintaining records of the supplies made. Furthermore, the Federal Tax Authority (FTA) of UAE has released Public Clarification VATP033, which provides clarity on the amendment to Emirates’ VAT reporting. Below-mentioned is the transcript issued by the Ministry of Finance, UAE.

Criteria and Conditions for Electronic Commerce

According to the provisions of Clause 5 of Article 72 of the UAE VAT Executive Regulation, the Ministerial Decision No. 26 of 2023 outlines the criteria and conditions for electronic commerce. These provisions were introduced following the Cabinet Decision No. 99 of 2022, which amended the provisions of Articles 3 and 72 of the UAE VAT Executive Regulations. As per Article 72, taxable persons who engage in taxable supplies through electronic commerce are required to maintain records of the transactions as evidence of the Emirate where the supply is received. For further information, please refer to our earlier notification regarding the amended Article 72.

The Decision specifies that the supply of goods and services will be classified as an electronic commerce supply via an Electronic Commerce Medium only if all of the following criteria and conditions are fulfilled:

Criteria and Conditions for Electronic Commerce

• The goods and services are listed and advertised on an Electronic Commerce Medium;
• The goods and services are ordered through the Electronic Commerce Medium, regardless of whether the payment is made online or not;
• In case of a supply of goods, the goods are delivered to a location specified by the customer whereby this location is not owned by the supplier nor operated by that supplier.
• In the case of a supply of services, the services are provided, or the right to receive the services is granted to the customer with minimal or no human intervention.

Public Clarification VATP033

On 24 February 2023, the FTA released Public Clarification VATP033, which aims to clarify that the Electronic Commerce Medium encompasses a wide range of concepts, including stores in the metaverse, smart kiosks, robotic devices, and so on. The clarification also includes specific examples and explanations related to the criteria and conditions stated in Article 3 of the Decision. Additionally, the document provides guidance on the factors that should be considered while determining the Emirate in which the supply of goods or services must be reported.

Public Clarification VATP033

• The Emirate in which the services are received shall be determined in accordance with the relevant factors (FTA will accept the place of residence of the customer taking precedence over, for example, billing address or IP address).
• For the supply of goods, the Emirate in which the goods are received shall be determined by the location specified by the customer, taking precedence over the place of residence, billing address, or IP address.

Undisclosed Agent

The Public Clarification VATP033 clarified that when the Electronic Commerce Medium operates as an undisclosed agent, the supplier will be considered as supplying the goods or services to the Electronic Commerce Medium, and the Electronic Commerce Medium will be considered as supplying the same goods or services to the end customer. As a result, the Electronic Commerce Medium’s operator will be responsible for determining the value of taxable supplies made by them through e-commerce, taking into account the supply to the end customer, in terms of the VAT liability.

Key Takeaways

• Taxpayers supplying goods and services through Electronic Commerce Medium should assess whether they are subject to the new Emirates’ reporting mechanism for VAT.
• Taxable persons making taxable supplies through Electronic Commerce Medium and meeting the AED 100 million thresholds are now required to assess changes related to record-keeping to prove the Emirate in which the supply is received and to report the same in the VAT return.
• The new Emirates’ reporting mechanism for VAT will necessitate changes to systems and data collection.
• Additional requirements will be introduced to comply with the legislation.

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On May 10, 2023, the Ministry of Finance (MoF) released Decision No. 115 of 2023 concerning Private Pension Funds and Private Social Security Funds in relation to the implementation of the CT Law.

Key Highlights

The Corporate Tax Law in the UAE provides an exemption for public pension or social security funds, as well as private pension or social security funds that meet certain conditions and are subject to regulatory oversight by the competent authority in the State. Decision No. 115 of 2023 now outlines the specific conditions that Private Pension Funds (PPFs) and Private Social Security Funds (PSSFs) must fulfill in order to qualify for this exemption. According to the Decision, Private Pension Funds (PPFs) and Private Social Security Funds (PSSFs) can seek Corporate Tax exemption by fulfilling the following conditions:

• The fund consists of assets that are designated by law or contract as Pension Plan assets or fund assets, or the acquisition of these assets is financed by contributions solely for the purpose of funding Pension Plan benefits or End of Service Benefits.
• The income generated by the fund is limited to the prescribed income as specified in the Decision.
• The fund must have an appointed Auditor

In the case of PPFs specifically, the fund must grant Pension Plan Members or Beneficiaries a right or other contractual claim or entitlement against its assets or earnings. By meeting these conditions, PPFs and PSSFs can apply for Corporate Tax exemption through the Federal Tax Authority (FTA).

The income of these funds should be derived from the following sources:

• Investments or deposits held with the purpose of fulfilling the fund’s obligations, with investments not constituting a business operated by the fund.
• Underwriting commissions are charged for the fund’s operations
• Rebates of charges that are due or paid by the fund to the fund manager.
• Any other income generated for the benefit of Pension Plan Members or beneficiaries of the End of Service Benefit, as applicable.

It’s important for the income of the funds to originate from these specified sources in order to be eligible for the Corporate Tax exemption.

The Decision provides details regarding the responsibilities of Auditors for Private Pension Funds (PPFs) and Private Social Security Funds (PSSFs), as well as circumstances under which the Federal Tax Authority (FTA) can withdraw the exemption granted to these funds. Additionally, the Decision states that a Taxable Person can deduct the entire value of contributions made to a PPF for its employees.

However, this deduction is limited to 15% of the employee’s remuneration which is eligible for Corporate Tax deduction in the relevant Tax Period. This allows Taxable Persons to claim deductions for contributions made to PPFs, subject to the specified limit.

KCG Insights

The exemption of private and public funds from Corporate Tax is an important factor in fostering investment and driving economic growth and development. The issuance of clear guidelines regarding the eligibility criteria for this exemption is a significant development that enables funds to assess their Corporate Tax status and comprehend the implications of the UAE Corporate Tax regime. This clarity brings much-needed certainty to the fund’s industry and facilitates informed decision-making.

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On May 9, 2023, the Ministry of Finance (MoF) released Decision No. 114 of 2023 concerning Accounting Standards and Methods for the implementation of Federal DecreeLaw No. 47 of 2022 on the Taxation of Corporations and Businesses (referred to as the ‘CT Law’).

Key Highlights

The recently issued Decision provides important clarifications regarding accounting standards and methods for the implementation of the CT Law:

• Cash basis option: Taxpayers whose revenue does not exceed AED 3 million have the option to prepare financial statements on a cash basis instead of accrual. In exceptional circumstances, taxpayers can seek approval from the tax authorities to use the cash basis.
• Consolidated financial statements: Tax Groups should prepare consolidated financial statements by aggregating the standalone financial statements of each member while eliminating intragroup transactions
• Applicable accounting standard: The only accounting standard allowed for determining taxable income is the International Financial Reporting Standards (IFRS). Corporate taxpayers must use IFRS to determine their accounting profit/loss, which serves as the starting point for calculating taxable income. Taxable persons with revenue below AED 50 million have the option to apply IFRS for small and medium-sized entities (IFRS for SMEs), a simplified version of full IFRS designed for smaller entities

KCG Insights

The application of accounting standards, particularly the International Financial Reporting Standards (IFRS), plays a crucial role in standardizing corporate tax reporting in the UAE. By adhering to IFRS, the CT regime establishes a framework that promotes accurate financial reporting and enables a consistent and comparable approach for Taxable Persons. This consistency enhances transparency and facilitates effective tax assessment and compliance procedures.

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The Ministry of Finance released Decision No. 127 of 2023 regarding the Unincorporated Partnership, Foreign Partnership, and Family Foundation. on May 22nd. This decision falls under the Federal Decree-Law No. 47 of 2022, which governs the taxation of corporations and businesses (referred to as the ‘CT Law’ hereafter). The decision took effect on the day following its publication.

Key Highlights

Unincorporated Partnership

The Decision addresses specific aspects related to the treatment of Unincorporated Partnerships (UPs) according to the Corporate Tax (CT) Law in the UAE. According to the CT Law, UPs are not considered Taxable Persons in the country. However, each partner within a UP is treated as an individual Taxable Person for CT purposes.

The Decision provides clarity that a UP, if not a legal entity, is not considered a Taxable Person on its own. Nevertheless, a UP has the option to choose to be treated as a Taxable Person by submitting an irrevocable application to the Federal Tax Authority, unless there are exceptional circumstances. If the application is approved, the UP must inform the FTA within 20 business days when a partner joins or leaves the UP.

The CT Law outlines specific criteria for a Foreign Partnership (FP) and Family Foundations (FF) to be recognized as a UP for CT purposes. The Decision further specifies additional requirements and conditions for these entities to qualify as UPs.

With regards to FPs:

• Foreign Partnerships (FPs) are required to submit an annual declaration to the Federal Tax Authority (FTA) confirming that they meet the conditions outlined in the Corporate Tax (CT) Law. The specific format, method, and deadline for submitting this declaration will be determined by the FTA.
• It is necessary for the UAE and the relevant foreign jurisdiction to have established agreements concerning the exchange of tax-related information regarding the partners involved in the Foreign Partnership (FP). This ensures that there are arrangements in place to facilitate the sharing of tax information between the two jurisdictions.

With regards to FFs:

If a Family Foundation (FF) has at least one beneficiary who is a public benefit entity, it can be regarded as an Unincorporated Partnership (UP) under certain conditions. This is applicable when the income received by the beneficiaries would not be subject to corporate tax (CT) if they had received it individually. However, if this condition is not met, an FF can still be treated as a UP if the income is distributed to the respective beneficiaries within six months from the end of the applicable tax period.

KCG Insights

• The Decision clarifies the treatment of Unincorporated Partnerships (UPs) under the Corporate Tax (CT) Law in the UAE.
• UPs are not considered Taxable Persons in the UAE, but each partner within a UP is treated as an individual Taxable Person for CT purposes.
• UPs can choose to be treated as Taxable Persons by submitting an irrevocable application to the Federal Tax Authority (FTA), with exceptions in exceptional circumstances.
• Foreign Partnerships (FPs) must submit an annual declaration to the FTA, confirming that they meet the conditions outlined in the CT Law.
• The UAE and relevant foreign jurisdictions must have established agreements to exchange tax-related information regarding partners in FPs.
• Family Foundations (FFs) can be considered UPs if they have at least one beneficiary who is a public benefit entity
• An FF can also be treated as a UP if the income is distributed to beneficiaries within six months from the end of the applicable tax period.

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The UAE has released Ministerial Decision No. 83 of 2023, which outlines the criteria determining when a non-resident’s presence in the country does not establish a permanent establishment for tax purposes, as per Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses. KCG has shared below the transcript issued by the Ministry of Finance, UAE. The Decision was published on 10 April 2023 and is effective from 25 April 2023.

Conditions of a Temporary and Exceptional Presence in the State

The Decision specifies that a non-resident person’s presence in the UAE will only be considered temporary and exceptional if the following conditions are all met:

• The presence of the natural person in the UAE is a consequence of exceptional circumstances of a public or private nature;
• The exceptional circumstances cannot reasonably be predicted by the natural person or the Non-Resident Person;
• The natural person did not express any intention to remain in the State when the exceptional circumstances end;
• The Non-Resident Person does not have a Permanent Establishment (PE) in the UAE before the occurrence of the exceptional circumstances; and
• The Non-Resident Person did not consider that the natural person is creating a PE or deriving income in the UAE as per the tax legislation applicable in other jurisdictions.

Exceptional Circumstance

Furthermore, the Decision states that an “exceptional circumstance” is defined as a situation or event that meets one or more of the following conditions:

• Beyond a natural person’s control;
• Which occurred while he was already in the UAE;
• Which he could not reasonably predict or prevent; and
• Which prevented him from leaving the UAE as originally planned.

Examples of exceptional circumstances of a public nature, which are not limited to the following, include:

Adoption of public health measures by competent authorities in the UAE or in the jurisdiction of the original workplace, or by the World Health Organisation (WHO);

• Imposition of travel restrictions by the competent authorities in the UAE or in the jurisdiction of the original workplace;
• Imposition of legal sanctions on the natural person preventing him from leaving the UAE’s territory;
• Acts of war or occurrence of terrorist attacks;
• Occurrence of natural disasters or force majeure beyond reasonable control; and
• Any other circumstances similar to those provided for above, as prescribed by the Federal Tax
  Authority (FTA).

Examples of exceptional circumstances of a private nature, which are not limited to the following, include:

• Occurrence of an emergency health condition affecting the natural person or their relatives up to the fourth degree, including by way of adoption or guardianship; and
• Any other circumstances similar to the above as prescribed by the FTA.

Key Takeaways

• The recent Ministerial Decision in the UAE has provided clarity for taxable persons regarding the preparation and maintenance of audited financial statements to comply with the CT Law.
• Businesses need to ensure their records align with Generally Accepted Accounting Principles to be able to present audited financial statements.
• The Decision has clarified how Non-Residents should interpret “exceptional circumstance” for the creation of a UAE Permanent Establishment for a natural person.
• However, further guidance is required for natural persons who are tax residents in the UAE.

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The Ministry of Finance released Decision No. 126 of 2023 regarding the General Interest Deduction Limitation Rule on May 22nd. This decision falls under the Federal Decree-Law No. 47 of 2022, which governs the taxation of corporations and businesses (referred to as the ‘CT Law’ hereafter). The decision took effect on the day following its publication.

Key Highlights

The Decision elaborates on the Rule regarding the Limitation on General Interest Deduction (“GIDLR”) and outlines the provisions concerning its application. The primary features of the Decision are outlined as follows.

Interest

The Decision elaborates on the Rule regarding the Limitation on General Interest Deduction (“GIDLR”) and outlines the provisions concerning its application. The primary features of the Decision are outlined as follows.

The Decision clarifies that for the purpose of the GIDLR, any financial gains or payments related to a financial asset or liability that represent an interest or are economically equivalent to interest will be considered, regardless of their classification and treatment under the International Financial Reporting Standards (IFRS)

Furthermore, the Decision emphasizes that the following types of payments will be deemed as interest for the GIDLR:

• Costs incurred in the process of obtaining financing, including fees for guarantees, arrangement fees, commitment fees, and any other fees of a similar nature.
• Interest in Islamic financial instruments that comply with Sharia principles and any equivalent mechanisms or a combination thereof.
• The interest component of forward contracts, futures contracts, options, interest rates, foreign exchange swap agreements, or any other financial derivative instruments.
• The financing portion of payments is related to finance and non-finance leases.
• Foreign exchange gains and losses arising from interest.
• Interest that has been capitalized

In summary, the Decision provides clarity on the inclusion of various types of payments and gains as interest for the purpose of the GIDLR, regardless of their treatment under IFRS. The Decision introduces a safe harbor provision, which sets a threshold of AED 12 million for the Net Interest Expenditure (NIE). If the NIE falls below this threshold, the General Interest Deduction Limitation Rule (GIDLR) will not apply. However, if the NIE exceeds the threshold, the Taxable Person is eligible to deduct the higher of the threshold amount or 30% of the Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA). This provision allows for a more favorable deduction for eligible businesses, ensuring a balanced approach to the application of the GIDLR.

EBITDA

The Decision outlines the methodology for calculating EBITDA, which involves adjusting the Taxable Income for various items. These adjustments include the Net Interest Expenditure (NIE) for the relevant Tax Period, excluding any NIE related to Qualifying Infrastructure Projects. It also takes into account the depreciation and amortization expenditure considered in determining the Taxable Income for the relevant Tax Period, as well as any interest income or expenditure associated with historical financial assets or liabilities held before 9 December 2022.

If, after applying the above calculation, the EBITDA is negative, the amount of EBITDA considered for determining the 30% limit will be AED 0, ensuring that no deduction is allowed in such cases.

Furthermore, the Decision specifies that the NIE attributed to debt instruments, whose terms were agreed upon before 9 December 2022, is exempt from the application of the GIDLR. It is important to note that the NIE incurred by a Qualifying Infrastructure Project Person, who meets the prescribed conditions outlined in the Decision, will not be subject to the GIDLR.

These provisions provide clarity and guidelines for the calculation of EBITDA and the treatment of certain interest-related expenditures, ensuring a fair and consistent application of the GIDLR.

KCG Insights

The Decision introduces a safe harbor amount of AED 12 Million for Net Interest Expenditure (NIE), below which the General Interest Deduction Limitation Rule (GIDLR) will not apply.

• If the NIE threshold is exceeded, businesses can deduct the higher of the threshold or 30% of Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA).
• The methodology for computing EBITDA involves adjusting the Taxable Income by considering NIE, depreciation and amortization expenditure, and interest income or expenditure related to historical financial assets or liabilities held before 9 December 2022.
• In cases where the calculated EBITDA is negative, the amount considered for the 30% limit will be AED 0, resulting in no deduction.
• NIE attributed to debt instruments with terms agreed upon before 9 December 2022 is exempt from the application of the GIDLR.
• NIE incurred by Qualifying Infrastructure Project Persons meeting prescribed conditions is not subject to the GIDLR.
• These key takeaways provide a summary of the important aspects of the Decision and its implications for businesses operating in Dubai.

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The Ministry of Finance released Decision No. 125 of 2023 regarding Tax Group on May 22nd. This decision falls under the Federal Decree-Law No. 47 of 2022, which governs the taxation of corporations and businesses (referred to as the ‘CT Law’ hereafter). The decision took effect on the day following its publication.

Key Highlights

Ownership & Residence

The Decision provides clarification on the definition of share capital in relation to meeting the requirement that the group parent must possess at least 95% of the subsidiary’s share capital. Share capital refers to the nominal value of the shares issued and fully paid, or the membership or partnership capital of each subsidiary, as applicable.

Furthermore, the Decision clarifies that a foreign legal entity can establish or become part of a Tax Group if it is considered a Resident Person due to effective management and control from the UAE. However, this is subject to confirmation by the relevant authority that the entity is not considered a resident of its home country.

Administration & Computation

The Decision also introduces specific administrative and computational procedures for a Tax Group, which are as follows:

• Applications to establish a Tax Group or join an existing group must be submitted prior to the conclusion of the relevant Tax Period.
• It outlines regulations concerning transactions conducted between members of a Tax Group before forming or joining the group. This includes guidelines on when to eliminate such transactions and when to recognize subsequent income arising from them.
• It provides clarity on the components to be considered when consolidating financial results, assets, and liabilities in order to calculate the Taxable Income of a Tax Group. This encompasses transactions between members within the same Tax Group, as well as adjustments and provisions related to those transactions.
• If a member of a Tax Group has accumulated Tax Losses prior to joining the group, those losses can be offset against the Taxable Income of the Tax Group. However, certain limitations on the utilization of Tax Losses apply. Specifically, the amount that can be utilized is the lower of:
• • the portion of the Taxable Income of the Tax Group that can be attributed to the specific member.
  • the maximum amount of Tax Loss that is permitted to offset against the Taxable Income of the Tax Group in the relevant tax period.

• The Tax Group is required to calculate the Taxable Income of its members, following the transfer pricing rules, in the following circumstances:
  • A member of the Tax Group possesses unused pre-Grouping Tax Losses.
  • A member of the Tax Group has generated income that qualifies for a Foreign Tax Credit claim by the Tax Group.
  • A member of the Tax Group is eligible for any Corporate Tax incentives.
  • A member of the Tax Group carries forward unutilized pre-Grouping Net Interest
    Expenditure.

• The Tax Group is required to inform the tax authority within twenty business days if a member of the Tax Group intends to leave the group or if the Tax Group ceases to exist due to the conditions no longer being met.

KCG Insights

The Decision also introduces specific administrative and computational procedures for a Tax Group, which are as follows:

• Clarifies the definition of share capital for the 95% ownership requirement.
• Share capital refers to the nominal value of shares or membership/partnership capital.
• Foreign legal entities can join the Tax Group if considered Resident Persons managed and controlled by UAE.
• Administrative and computational procedures introduced for Tax Group.
• Applications to form or join the Tax Group must be submitted before the relevant Tax Period ends.
• Regulations on transactions between Tax Group members are outlined.
• Guidelines for consolidating financial results, assets, and liabilities for Taxable Income calculation.
• Utilization of Tax Losses limited, lower of Taxable Income portion or maximum allowable offset applied.
• Transfer pricing rules apply for calculating the Taxable Income of Tax Group members in certain circumstances.
• Tax Group must inform tax authority within twenty business days if a member leaves or Group ceases to exist.

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Brief

The recent release of the Corporate Tax Rules for Free Zones brings much-anticipated clarity to the taxation
framework. Cabinet Decision No 55 of 2023, along with Ministerial Decision No. 139 of 2023, sets out the
criteria for determining qualifying income and activities. These decisions are now in effect, providing a
comprehensive understanding of the rules under the CT Law.

Key Highlights

According to the UAE CT Law, Qualifying Free Zone Persons (QFZPs) are subject to specific tax rates: 0% on
Qualifying Income and 9% on Taxable Income that does not fall under the category of Qualifying Income. The
definition of “Qualifying Income” has been eagerly anticipated and has now been clarified to include the
following:

• Income derived from transactions with other Free Zone Persons, except for income generated from
  “Excluded Activities.”
• Income obtained from transactions with Non-Free Zone Persons, but only for “Qualifying Activities” that
  are not considered Excluded Activities.
• Any additional income is considered Qualifying Income, provided that the QFZP satisfies the specified de
  minimis requirements.

Excluded Activities encompass certain categories, including:

• Transactions involving natural persons (with specific exceptions for Qualifying Activities related to
  shipping, aircraft, fund, wealth, and investment management).
• Regulated activities in banking, finance, leasing, and insurance.
• Ownership or utilization of intellectual property assets.
• Ownership or utilization of immovable property, except for transactions with Free Zone Persons involving
  commercial property within a Free Zone.

Qualifying Activities encompass a range of operations, including:

• Manufacturing and processing of goods or materials.
• Holding of shares and other securities.
• Ownership and operation of ships.
• Regulated reinsurance and fund/wealth management.
• Provision of headquarters and financing services to related parties.
• Financing and leasing of aircraft.
• Logistics and distribution of goods in or from a designated zone, subject to specific
  conditions.

It should be noted that the definitions of excluded and qualifying activities generally align
with the meanings assigned to them under the applicable laws governing these activities
unless stated otherwise.

De Minimis Requirements:

To meet the de minimis requirements, non-qualifying revenue should not exceed either 5% of
total revenue or AED 5,000,000, whichever is lower. Non-qualifying revenue comprises
income derived from excluded activities or activities that do not qualify, involving non-Free
Zone persons.

Certain types of revenue are excluded from the calculation of non-qualifying revenue and
total revenue. This includes revenue related to specific immovable property within a Free
Zone, revenue from a Domestic or Foreign Permanent Establishment, and commercial
property transactions with non-Free Zone persons.

It is crucial to note that if a Free Zone Person fails to meet any of the qualifying conditions
specified in the UAE CT Law and these Decisions, they will be treated as a Taxable Person
subject to a 9% corporate tax rate for a minimum duration of five years.

Domestic Permanent Establishment (“PE”):

The concept of a Domestic Permanent Establishment (PE) is introduced in the Decisions,
applicable to Qualifying Free Zone Persons who have a presence or place of business outside
the Free Zone within the UAE.

Income attributed to a Domestic PE will be calculated separately as if it were a distinct and
independent entity, subject to a 9% corporate tax rate. However, the existence of a Domestic
PE will not affect the eligibility of the Free Zone Person to benefit from a 0% corporate tax
rate on Qualifying Income, nor will it be considered in the de minimis test mentioned earlier.
To determine whether a Qualifying Free Zone Person has a Domestic PE, the regular PE rules
outlined in Article 14 of the CT Law will be applied. Generally, a mainland branch of a
Qualifying Free Zone Person will be deemed a Domestic PE and subject to a 9% corporate
tax rate.

Adequate Substance in Free Zone:

In order to ensure adequate substance, a Qualifying Free Zone Person is required to:

• Conduct its core income-generating activities within a Free Zone.
• Maintain sufficient assets, employ a satisfactory number of qualified personnel, and incur
  an appropriate level of operating expenses relative to the activities carried out within the
  Free Zone.
• It is permissible for the Qualifying Free Zone Person to outsource its activities to a
  Related Party or a third party, as long as they are supervised by the Qualifying Free Zone
  Person.

KCG Insights

The recent Decisions regarding Corporate Tax in Free Zones mark a significant change in the
UAE’s tax framework. The introduction of a de minimis threshold has the potential to subject
Free Zone entities to full taxation under the new rules. It is crucial for companies to promptly
evaluate their readiness to register and adhere to the revised regime to ensure compliance.

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