[World Tax News] Brief of 7 Decisions Announced by UAE Ahead of the Enactment of ‘Corporate Tax Law’

Editorial Team – [2023] 151 taxmann.com 30 (Article)

World Tax News provides a weekly snippet of tax news from around the globe. The current column provides information on 7 ministerial decisions recently announced by the UAE Finance Ministry in view of implementing Corporate Tax in the United Arab Emirates from 1st June 2023.

According to Federal Decree-Law No. 47 of 2022, businesses will be subject to UAE Corporate Tax from the beginning of their first financial year, which starts on or after 1st June 2023.

1. Ministerial Decision No. 120: Transitional rules

This decision provides guidelines for adjusting a taxable person’s opening balance sheet under the corporate tax law, which is effective from 1st June 2023.

The decision applies to specific assets and liabilities, including real estate, intangible assets, financial assets, and financial liabilities, that businesses hold before implementing the corporate tax law.

Businesses can adjust their tax treatment of such assets and liabilities based on specific rules and must decide how to do that when they submit their first tax return. Their choice would be permanent except in special circumstances.

The decision also provides relief to real estate sectors where the immovable property is recorded on a historical cost basis. They have the option to select the basis of the relief using either a time apportionment method or a valuation method.

Source: Ministerial Decision No. 120 of 2023

2. Ministerial Decision No. 125: Tax Grouping

Ministerial Decision No. 125 outlines guidelines on tax grouping for the purpose of corporate tax. As per the decision, the UAE Parent Company must own at least 95% of the voting rights and shares in each of such UAE entities. All the members of the tax group will be considered UAE residents for corporate tax purposes.

Further, if a subsidiary leaves a Tax Group or a Tax Group ceases to exist as a result of no longer meeting the prescribed conditions, the Tax Group shall notify the Authority within 20 business days from the date the conditions are no longer met.

The decision includes guidelines on the following:

(a) Ownership and tax residency requirements for subsidiaries and parent companies;

(b) Rules in relation to transactions before forming or joining a Tax Group;

(c) Relief for pre-grouping tax losses;

(d) Transfer pricing documentation requirements and the calculation of the taxable income of tax groups;

(e) Clarifications on income from intra-tax group transfers and business restructuring transactions; and

(f) Financial statement requirements for subsidiaries that leave tax groups.

Source: Ministerial Decision No. 125 of 2023

3. Ministerial Decision No. 126: General Interest Deduction Limitation Rule

Article 30 of the Federal Decree Law imposes a restriction on the deductibility of the Net Interest Expenditure. The article prescribes a limit of 30% of the Taxable Person’s accounting earnings before the deduction of interest, tax, depreciation and amortisation (EBITDA) for the relevant Tax Period.

This Ministerial Decision provides a capping limit to the limitation rule, and it prescribes a safe harbour limit of AED 12 million. Thus, the limitation rule is not applicable where the Net Interest Expenditure does not exceed such limit.

Tax groups with members who are bank and/or insurance providers must exclude these members’ income and expenditure while determining the 30% EBITDA threshold.

Further, long-term infrastructure projects meeting relevant conditions will not face restrictions on interest deductibility. Interest incurred on debt instruments entered into before the law was published to the general public on 9th December 2022 will not be subject to the limitation rule.

Source: Ministerial Decision No. 126 of 2023

4. Ministerial Decision No. 127: Unincorporated Partnerships

The Ministerial decision clarifies that unless an election is made, an unincorporated partnership will not be considered a taxable person in its own right, provided it is not a Juridical Person (Corporate Entity).

Where an Unincorporated Partnership elects to be treated as a Taxable Person in its own right, once it is approved, the decision stands irrevocable. Further, any change in the partnership composition must be notified to the Federal Tax Authority within 20 business days.

The decision also sets out conditions in which a family foundation or a Foreign Partnership is treated as an Unincorporated Partnership.

Source: Ministerial Decision No. 127 of 2023

5. Ministerial Decision No. 132: Transfers within a Qualifying Group

The decision clarifies that an election is required to be made by the entity in the tax return for the application of relief as prescribed under Article 26 of the Decree-Law. The entity must comply with the associated record-keeping requirements.

The election to apply the relief for transfers within a Qualifying group is irrevocable and will apply to all future tax periods. The decision also sheds light on the implications of simultaneous assets or liability exchanges and the tax implications if the relief needs to be revoked as the relevant assets or liabilities or the group companies leave the Qualifying group within two years of the original transfer.

Source: Ministerial Decision No. 132 of 2023

6. Ministerial Decision No. 133: Business Restructuring Relief

The decision demonstrates Business Restructuring Relief for the purposes of Corporate Tax. The decision provides aid to the business restructuring relief given to the taxpayers by virtue of Article 27 of the Decree-Law.

Article 27 provides that no tax will be applicable on the gain or loss arising on the transfer of the entire business or an independent part of the business segment due to the transfer in exchange for shares or other ownership interests.

The decision clarifies that no gain or loss is to be included in the taxable income if the transferor makes an election to apply the relief. Article 3 of the decision clarifies that a transfer will be considered to meet the conditions of Article 27 of the Corporate Tax Law only where the Market Value of any other forms of the consideration received in addition to shares or other ownership interests do not exceed the lower of:

(a) The net book value of the assets and liabilities transferred; or

(b) 10% (ten percent) of the nominal value of the ownership interests issued.

Further, the decision enlists various other aspects, including the treatment of unutilised tax losses, who are considered parties to the transfer, applicability in case of unincorporated partnerships and mechanism for clawing back the relief if the business or the ownership interests are subsequently transferred within 2 years from the date of original restructuring.

Source: Ministerial Decision No. 133 of 2023

7. Ministerial Decision No. 134: Rules for Determining Taxable Income

This Ministerial Decision streamlines the process of determining the taxable income for Corporate Taxation purposes. The decision sets out various adjustments to be made to the accounting income for the computation of Taxable income.

The decision sets out adjustments needed for the taxable income calculation, including the recognition of realised and unrealised gains or losses reported in the Financial Statements. It also provides guidelines for adjusting changes in values on assets and liabilities derived from transfers involving Related Parties, Qualifying Groups or Business Restructuring Relief.

Further, businesses preparing financial statements on an accrual basis of accounting can choose to recognise gains and losses on a realisation basis for certain assets and liabilities.
This election must be made during the first tax period and is irrevocable, except under exceptional circumstances approved by the Federal Tax Authority.

Source: Ministerial Decision No. 134 of 2023