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Overview Focus: Tax on Corporate Transactions in the United Arab Emirates

Published on : February 2017
Author(s):George SK

Tax Global Guide 2016-17 Volume 1: Tax on Corporate Transactions: Country Q&A

"Tax on corporate transactions in the United Arab Emirates: an overview"

The United Arab Emirates

STA Law firm

Lawyers in DubaiTax authorities

  • What are the main authorities responsible for enforcing taxes on corporate transactions in your jurisdiction?

The Federal Government of the United Arab Emirates (UAE) does not levy any corporate income tax or other personal taxes on its residents. However, most of the Emirates have imposed a corporate tax on companies vide their respective local income tax decrees. The Department of Finance of each Emirate is the authority responsible for enforcing corporate taxes in their respective jurisdictions.

Pre-completion clearances and guidance

  • Is it possible or necessary to apply for tax clearances or obtain guidance from the tax authorities before completing a corporate transaction?

Within the United Arab Emirates, a company is not under any obligation to apply for tax clearances or obtain guidance from tax authorities prior to finalizing corporate transactions.

Disclosure of corporate transactions

  • Is it necessary to disclose the existence of any corporate transactions to the tax authorities?

Circumstances where disclosure is required

Presently, companies in UAE are not required to divulge any corporate transactions to tax authorities. However, UAE Cabinet in accordance with the rules set out by G20 and Foreign Account Tax Act (FATCA) will enforce standards for disclosure of certain corporate transactions such as joint disclosures and exchange information to tax authorities next financial year.

Manner and timing of disclosure

The manner and timing of disclosure of corporate transactions will be in accordance with the guidelines laid down by the UAE Cabinet. Further, an automated system for the exchange of information by establishing the technological infrastructure has been initiated in the country.

Main taxes on corporate transactions

Transfer taxes and notaries' fees

  • What are the main transfer taxes and/or notaries' fees potentially payable on corporate transactions?

Transfer Tax

Key characteristics.

Generally, companies are not liable to pay transfer taxes on the purchase of an asset (physical asset or share). However, transfer taxes are levied in the form of registration fees on transferring the title of a real estate property. These taxes are payable to the respective local land department of an emirate depending upon the jurisdiction in which the property is located. Further, the transfer tax is also imposed on the transfer of shares of a company that is established in Jebel Ali Free Zone (JAFZA) and holds real estate property in the emirate of Dubai even though they benefit from the all the other benefits that free zones in the country enjoy.

Triggering event.

Transfer of property taxes is ordinarily payable at the time of sale or purchase of real estate, leasing of property and mortgage. Although, a company established in JAFZA and holds real estate property in Dubai would also be liable to pay a transfer tax on the event of a transfer of shares of that particular company.

Liable party/parties.

Transfer fees are typically divided equally between the parties or can solely be paid by the purchaser, subject to any agreement between the parties.

Applicable rate(s).

The real estate property tax rate in Abu Dhabi and Dubai is 2% and 4%, respectively. Further, companies that are established in JAFZA and hold real estate property in Dubai are liable to pay 4% transfer tax in the event of a transfer of shares.

Taxation Lawyers in DubaiNotary fees

Key characteristics.

Notary fee is payable to the Notary Public for getting corporate documents attested for legal purposes in all the emirates.

Triggering event.

Notary fees are paid by corporates and individuals to the Notary Public of the respective emirate for notarization of corporate documents such as articles of association, sale contracts, power of attorney, wills, declarations or the like.

Liable party/parties.

In accordance with the various local income tax decrees of each emirate, notaries are paid by the person possessing the document(s).

Applicable rate(s).

Notary fees in Abu Dhabi and Dubai may range from AED 100 to AED 500.

Corporate and capital gains taxes

  • What are the main corporate and/or capital gains taxes potentially payable on corporate transactions?

Corporate Income Tax

Key characteristics.

The Federal Government of UAE has not implemented any federal corporate income taxes or other taxes on corporate transactions. However, most of the emirates have imposed taxes on corporate income through local decrees. In Abu Dhabi, the Income Tax Decree Number 4 of 1972 has imposed a ‘chargeable person’ holding trade or business with a corporate income tax on their annual earnings. Similarly, in Dubai, in accordance with Dubai Income Tax Decree 1970 and Dubai Income Tax Ordinance 1969, every organization conducting trade or business activities in Dubai is liable to pay corporate income tax. Further, Sharjah Income Tax Decree 1968 (and subsequent amendments) has imposed corporate entities with an income tax on their annual earnings. Although, in practice, corporate taxes are generally only imposed on the annual income of branches of foreign banks and companies engaged in upstream petroleum activities.

Further, companies are not liable to pay taxes on capital gains in the UAE.

Triggering event

According to the respective decrees regarding corporate income tax of each emirate, a corporate person is liable to pay tax on its annual earnings as soon as it falls under the purview of the term ‘chargeable person’. Further, a chargeable person is a body corporate that conducts trade or business activities in the specific Emirate through a permanent establishment in the same.

Liable party/parties.

Any party that falls under the ambit of the term ‘chargeable party’ for purposes of the local tax decrees of each emirate is liable to pay corporate income tax.

Applicable rate(s)

Companies are liable to pay taxes depending upon their income as elucidated below:

Taxable Income Slabs

Rate (in %)

Slab Lower Limit (AED)

Slab Upper Limit (AED)

  0

  1,000,000

  0

  1,000,000

  2,000,000

  10

  2,000,000

  3,000,000

  20

  3,000,000

  4,000,000

  30

  4,000,000

  5,000,000

  40

  5,000,000

  onwards

  55


However, branches of foreign banks are liable to pay the tax of 20% on their yearly income irrespective of the particular income tax slab they fall in. Whereas, foreign companies that are engaged in the production of oil and natural gas are also liable to pay corporate income tax and royalties based on the relevant concession agreement in place.

Value-added and sales taxes

  • What is the main value added and/or sales taxes potentially payable on corporate transactions?

Value Added Tax

Law firms in DubaiKey characteristics.

Currently, no value-added tax (VAT) is levied in the UAE. However, the UAE Ministry of State for Financial Affairs has confirmed that VAT will be introduced by 2018.

Triggering event.

The UAE Minister of State for Financial Affairs agreed on introducing VAT. Whereas they have stated that 100 food items, education, health, social services, bicycles will be exempted from the purview of the VAT. Further, no specific events have been disclosed by the ministry that will trigger VAT.

Liable party/parties.

Parties liable to pay VAT will generally be the consumers. However, VAT liability may be affected by the businesses by passing the tax either up or down the supply chain.  

Applicable rate(s).

Although no VAT is payable at present, the UAE Ministry of State for Financial Affairs has disclosed the rate varying from 3% to 5%.

Other taxes on corporate transactions

 

  • Are any other taxes potentially payable on corporate transactions?

Tax on rental income

Key characteristics.

In each emirate, tax on rental income is deducted by the municipality for all the companies receiving income by subletting property in their jurisdiction.

Triggering event

Duty on rental income is accrued during the renewal of trade license of the company receiving the rental income.

Liable party/parties.

All the companies subletting their offices and warehouses or other real estate property in UAE are liable to pay rental income to their local municipality.

Applicable rate(s).

10% of the annual rent received by the company is payable as a tax on rental income. Further, all the companies that have provided accommodation for their employees are also obligated to pay 5% of their rent as a tax.

Taxes applicable to foreign companies

  • In what circumstances will the taxes identified in Questions 4 to 7 be applicable to foreign companies (in other words, what "presence" is required to give rise to tax liability)?

Corporate Income Tax

Branches and representative offices of foreign companies would be liable to pay taxes since they would fall under the ambit of ‘chargeable person’ in accordance with the local tax legislation. However, this tax is generally only levied from branches of foreign banks and companies indulged in upstream petroleum activities (such as production). As mentioned earlier, branches of foreign banks are liable to pay a tax of 20% of their annual income and foreign companies engaged in the production of oil, gas and natural resources should pay corporate income tax in accordance with the relevant concession agreement that is in effect.

Further, a branch of a foreign company would be said to have a presence in the respective emirate is it falls under the ambit of the term ‘chargeable person’ for purposes of the relevant local tax legislation (see Question 5).

Dividends

  • Is there a requirement to withhold tax on dividends or other distributions?

Companies are not required to withhold tax on dividends and other distributions due to the lack of a federal or local legislation requiring the payment of tax on dividends. Dividends and other distributions paid to stakeholders of the company would be considered as personal income of that natural or legal person and such income is not taxable in the UAE.

Share acquisitions and disposals

Taxes potentially payable

  • What taxes are potentially payable on a share acquisition/share disposal?

In UAE, taxes are not payable on share acquisition or share disposal and hence, acquisition of companies are subject to Federal Law Number 2 of 2015 regarding Commercial Companies (the Companies Law) and corporate tax laws of the Emirates. However, companies in JAFZA that hold real estate property in Dubai is liable to pay 4% transfer tax in the event of a sale of shares of the company (see Question 4).

Exemptions and reliefs

  • Are any exemptions or reliefs available to the liable party?

No exemptions or reliefs are available since there are no explicit legislation or decrees mandating tax levy during share acquisition or disposal.

Tax advantages/disadvantages for the buyer

  • Please set out the tax advantages and disadvantages of a share acquisition for the buyer.

Advantages

Buyers have the advantage of exploiting the lack of tax liability during the purchase of shares since no federal or local decree mandates the payment of taxes during the same.

Disadvantages

However, the buyer would subsequently be liable to pay corporate income tax depending on the activity and annual income of his business.

Tax advantages/disadvantages for the seller

  • Please set out the tax advantages and disadvantages of a share disposal for the seller.

Advantages

There is no explicit provision governing share disposal and therefore, the seller does not obtain any tax advantage on the sale of equity.

Disadvantages

Similarly, the seller does not face any disadvantage regarding tax liability in the event of a sale of shares since there are no explicit legislation relating to the same.

Transaction structures to minimize the tax burden

  • What are transaction structures (if any) commonly used to minimize the tax burden?

The UAE is known for its tax-friendly legislations and dynamic corporate environment. The local tax laws imposed by each emirate are nominal in comparison to other jurisdictions. Therefore, the federal and local governments have not provided for any transaction structures to minimize the tax burden of a chargeable person. However, as mentioned in Question 6, VAT is set to be imposed in the UAE in 2018 and the ambit and technicalities of its liability are yet to be seen.

Financial Lawyers in DubaiAsset acquisitions and disposals

Taxes potentially payable

  • What taxes are potentially payable on an asset acquisition/asset disposal?

There is no explicit provision governing asset purchases, neither in federal law nor in a local income tax decree. Therefore, a company would not be required to pay a transfer tax on the acquisition of assets. However, companies are liable to pay a transfer tax in the event of a transfer of title of a real estate property (see Question 4).

Exemptions and reliefs

  • Are any exemptions or reliefs available to the liable party?

No exemptions or reliefs are available to companies that transfer real estate property in the UAE.

Tax advantages/disadvantages for the buyer

  • Please set out the tax advantages and disadvantages of an asset acquisition for the buyer.

Advantages

Buyers are liable to undertake half of the transfer tax that accrues in the event of the purchase of a real estate property, subject to any agreements between the buyer and seller.

Disadvantages

The buyer does not face any undue disadvantage since both, the buyer and the seller is liable to pay the exact amount of transfer tax,

Tax advantages/disadvantages for the seller

  • Please set out the tax advantages and disadvantages of an asset disposal for the seller.

Advantages

The seller does not enjoy any specific benefit in tax liability since the buyer is also liable to pay an equal amount as a transfer tax.

Disadvantages

The seller is not at any kind of disadvantage regarding tax liability during the sale of an asset.

Transaction structures to minimize the tax burden

  • What are transaction structures (if any) commonly used to minimize the tax burden?

There are no specific transaction structures to minimize the tax burden of the parties since the tax liability that has been imposed by the local decrees are already considered minimal in relation to other jurisdictions.

Legal mergers

Taxes potentially payable

  • What taxes are potentially payable on a legal merger?

UAE has not enforced any explicit taxes on mergers and acquisitions. However, in theory, mergers that involve an establishment in JAFZA which holds real estate property in UAE would be liable to pay 4% transfer tax (see Question 4).

Exemptions and reliefs

  • Are any exemptions or reliefs available to the liable party?

Not applicable (see Question 20).

Transaction structures to minimize the tax burden

  • What are transaction structures (if any) commonly used to minimize the tax burden?

Not applicable (see Question 20)

Joint ventures

Taxes potentially payable

  • What taxes are potentially payable on establishing a joint venture company (JVC)?

No federal or local taxes have been imposed on the establishment of a joint venture. Although, Companies Law does not explicitly provide for a legal entity by the term ‘joint venture company’, companies generally form or set up a third-party entity (such as limited liability company) to achieve the goals of a joint venture agreement. Therefore, no explicit taxes are liable to pay by the parties entering into a joint venture. However, the parties are liable to bear all the registration and licensing costs and fees of the Department of Economic Development in the respective emirate during the incorporation of the resulting joint vehicle (such as a limited liability company). Further, the resulting joint venture vehicle would be liable to pay corporate income tax in that emirate (see Question 5).

Exemptions and reliefs

  • Are any exemptions or reliefs available to the liable party?

Not applicable (see Question 23)

Transaction structures to minimize the tax burden

  • What are transaction structures (if any) commonly used to minimize the tax burden?

Not applicable (see Question 23)

Company reorganizations

Taxes potentially payable

  • What taxes are potentially payable on a company reorganization?

Companies in UAE are not liable to pay taxes during its reorganization since there are no explicit federal or local laws that give rise to tax liability when companies initiate their reorganization process.

Exemptions and reliefs

  • Are any exemptions or reliefs available to the liable party?

Not applicable (see Question 26)

Transaction structures to minimize the tax burden

  • What are transaction structures (if any) commonly used to minimize the tax burden?

Not applicable (see Question 26)

Restructuring and insolvency

  • What are the key tax implications of the business insolvency and restructuring procedures in your jurisdiction?

Companies are liable to pay off all corporate income taxes and rent due before the company’s assets are employed to pay off the creditors. After the local corporate income tax have been paid out of the liquidated assets, the creditors would take precedence in clearing their debts prior to distributing the assets between the shareholders of the company.

 Exemptions and reliefs

Private equity financed transactions: MBOs

Taxes potentially payable

  • What taxes are potentially payable on a management buyout (MBO)?

Management buyout (MBO) involves the process of acquiring assets and operations of the business by its existing management with the aid of private equity financing. There are no explicit statutes governing the taxes payable on MBOs, although UAE companies are provided with this resource. Therefore, parties are not affected by tax liability in the event of an MBO.

Exemptions and reliefs

  • Are any exemptions or reliefs available to the liable party?

There are no exemptions and reliefs accessible due to the lack of tax liability in an MBO.

Transaction structures to minimize the tax burden

  • What are transaction structures (if any) commonly used to minimize the tax burden?

Not applicable (see Question 33).

Reform

  •  Please summarize any proposals for reform that will impact on the taxation of corporate transactions.

The UAE was long known to be a comparative safe tax haven in the Middle East due to the lack of direct taxes (such as personal income tax) and indirect taxes (such as VAT). However, the country’s recent step towards the implementation is expected to raise the cost of living and impact the dynamic corporate environment in UAE. The void in tax laws has been one of the foremost incentives for foreign investors to establish themselves in the country. Therefore, the government should yearn to reduce the burden placed on the residents and corporate entities in the UAE by carefully implementing VAT in limited sectors and goods and/or services. Further, establishing a dedicated federal and local tax departments to ensure compliance may aid in the effective implementation of VAT in the country.