Suleman Mulla’s Post

UAE FTA Issued New CIT Guide on Free Zone Persons On 20 May 2024, the UAE Federal Tax Authority (FTA) issued a Corporate Tax (CIT) Guide on Free Zone Persons (CTGFZP1) on the FTA Portal. The UAE Corporate Tax Law (UAE CIT Law) provides an advantageous regime for Free Zone Persons (FZP), offering them the opportunity to benefit from a 0% CIT rate under specific conditions. The newly published guide is designed to help businesses navigate these regulations by outlining the criteria for qualifying as an FZP (QZFP) and identifying which activities are eligible for tax exemptions. The UAE CIT rules aim to provide a 0% tax rate on qualifying income derived from transactions between QFZPs and FZP, where the FZP is the beneficial recipient, and certain activities conducted within the geographical boundaries of an FZ or a Designated Zone (DZ) for distribution purposes. For FZ companies and branches to benefit from the 0% tax rate, they must meet specific conditions. These include having audited financial statements, maintaining adequate substance, and earning income from qualifying activities. It is crucial to note that the regime is largely an all-or-nothing approach. If a Free Zone entity earns non-qualifying income exceeding 5 million AED or 5% of its overall income, the entity's income is entirely disqualified from the 0% tax rate. The guide published by the FTA provides extensive examples and clarifications. It often adopts a taxpayer-friendly approach, with broad applications of qualifying activities and interpretations of the 0% CIT for Free Zone entities within the confines of the law. Importantly, the guide clarifies that for the distribution of goods from a DZ to qualify as a qualifying activity, there is no need for the goods to enter the UAE physically. This includes third-country trading (high sea sales) and goods purchased by an FZ company in a DZ being exported from the mainland. Crucially, the processing of goods is defined broadly, encompassing activities beyond traditional manufacturing where an item undergoes a process but remains essentially the same. Moreover, if an FZP does not earn any qualifying income in a certain period because it has not yet started to derive income, this does not immediately disqualify it from QFZP status. The FTA also emphasizes that adequate substance requirements for FZP depend on the nature and size of the business, without a strict rule. The guide also highlights that investing for oneself (e.g., excess cash) as an FZP is considered financing to related parties and, therefore, qualifies as a qualifying activity. A QFZP is not required to prepare separate financial statements for its qualifying income and other income. Thus, understanding and adhering to these guidelines is crucial for FZ entities to benefit from the advantageous 0% CIT rate, thereby enhancing their competitive edge in the UAE market. #FreeZone #FTA #Tax Read more about the new Guide here: https://rb.gy/58mlag

Navigating Tax Treaties: A Landmark Judgement The recent judgement in the Tiger Global International Holdings v. Authority For Advance Rulings case has significant implications for international investors and tax authorities. Here’s a detailed look at the key points: Case Background Parties Involved: Tiger Global International Holdings, a Mauritius-based investment company, and the Authority for Advance Rulings (AAR). Issue: The case centered on whether the capital gains from the sale of shares in Flipkart were taxable in India or exempt under the India-Mauritius Double Tax Avoidance Agreement (DTAA). Initial Ruling by AAR AAR’s Decision: The AAR ruled that the primary purpose of Tiger Global’s arrangement was to avoid taxes. It argued that the management and control of Tiger Global were effectively in the U.S., not Mauritius. Reasoning: The AAR believed that the Mauritius entity was a shell company with no substantial business activities in Mauritius, thus not eligible for the tax benefits under the DTAA. Delhi High Court Decision Overruling AAR: The Delhi High Court overruled the AAR’s decision, allowing Tiger Global to claim the capital gains exemption. Key Findings: Management and Control: The court found that the management and control of Tiger Global were not solely in the U.S. The court noted that the company had substantial business activities and decision-making processes in Mauritius. Compliance with DTAA: The court determined that Tiger Global’s operations were in line with the provisions of the DTAA. The company was not a mere shell entity but had a legitimate business presence in Mauritius. Capital Gains Exemption: As a result, the court allowed Tiger Global to claim the capital gains exemption under the DTAA, exempting the gains from Indian taxation. Implications For Investors: This judgement reinforces the importance of substance over form in tax matters. It highlights that companies must have substantial business activities in the jurisdiction they claim tax benefits from. For Tax Authorities: The ruling serves as a reminder that tax authorities must carefully assess the substance of business operations before denying tax treaty benefits. This landmark judgement underscores the critical role of genuine business operations in international tax planning.

Basics of Transfer pricing in UAE

What’s Transfer Pricing all about? A Price that is being charged for transfer of goods, services, intangibles, Financing or lending and any transactions of both commercial or non-commercial in nature between different entities which may be geographically in the same or different tax jurisdictions, belonging to common related parties. TRANSFER PRICING DECREE IN UAE Pre-Corporate Tax: Before the issue of decree law for Corporate tax in UAE( in 2022), Country-by-country Reporting was made mandatory from 2020 vide cabinet Decision 44 of 2020. Country by Country Reporting Reporting (CbyCR) is part of Action 13 of the Base Erosion and Profit Shifting (BEPS) initiative led by the Organization for Economic Co-operation and Development (OECD) and the Group of Twenty (G20) industrialized nations. BEPS Action 13 requires large Multinational Groups of Entities (MNE Groups) to file a CbyCR report that should provide a breakdown of the Multinational Group’s global revenue, profit before tax, income tax accrued and some other indicators of economic activities for each jurisdiction in which the MNE operates. The purpose of CbyCR is to eliminate any gap in information between the taxpayers and tax administrations with regards to information on where the economic value is generated within the MNE Group and whether it matches where profits are allocated and taxes are paid on a global level. In the UAE, CbyCR requirements are applicable to the UAE-headquartered MNE Groups with reporting fiscal years starting on or after 1 January 2019. This document provides guidance to the UAE Ultimate Parent Entities (UPEs) of applicable MNE Groups on preparation and submission of CbyCR report in compliance with the UAE CbyCR legislation (Cabinet Resolution No. 44 of 2020). Post Corporate Tax Implementation Following 3 Reporting Requirements would become mandatory: 1.        Local File 2.        Master File 3.        Country by Country Reporting A.        Local file and Master File: Vide Ministerial Decision 97 of 2023, a Taxable person who meets either of the following conditions SHALL maintain BOTH Master file and a Local File: a)        Where the Taxable Person, for any time during the relevant Tax Period, is a Constituent Company of a Multinational Enterprises Group as defined in the Cabinet Decision No. 44 of 2020 referred to above that has a total consolidated group Revenue of AED 3,150,000,000 (three billion one hundred and fifty million United Arab Emirates dirhams) or more in the relevant Tax Period. b)        Where the Taxable Person’s Revenue in the relevant Tax Period is AED 200,000,000 (two hundred million United Arab Emirates dirhams) or more. CA Bhargava Srinivas #icaidubai #corporatetaxuae

INTERNAL REVENUE SERVICE ISSUES COMPREHENSIVE PROPOSED REGULATIONS ON CORPORATE ALTERNATIVE MINIMUM TAX On October 15, 2024, the Internal Revenue Service (IRS) issued proposed regulations (REG-112129-2) addressing the application of the corporate alternative minimum tax (CAMT) imposed by Section 55 of the Internal Revenue Code (Code). These regulations, issued under Sections 56A, 59, and 1502 of the Code, provide comprehensive guidance on implementing this new tax regime. Key Features of the CAMT The CAMT applies to applicable corporations for tax years beginning after December 31, 2022. It is based on adjusted financial statement income (AFSI) and imposes a 15% tax rate on AFSI, minus the CAMT foreign tax credit. The CAMT applies when its liability exceeds the sum of regular tax plus the base erosion and anti-abuse tax (BEAT). Financial Statement Net Operating Losses (FSNOLs) FSNOLs reduce AFSI, subject to an 80% limitation. They are based on adjusted AFS losses from tax years ending after December 31, 2019. The regulations provide rules for calculating FSNOLs, carrying forward unused FSNOLs, and applying the limitation. Applicable Corporation Determination An applicable corporation generally meets these criteria: - Not an S corporation, regulated investment company (RIC), or real estate investment trust (REIT) - Meets the average annual AFSI test ($1 billion over 3 years) - Special rules for foreign-parented multinational groups (FPMGs) CAMT Foreign Tax Credit If an applicable corporation claims the regular foreign tax credit, it can claim a CAMT foreign tax credit. This credit includes CFC taxes (subject to limitation) and direct foreign taxes on the corporation's own AFS. The regulations provide details on calculating the credit, limitations, and a 5-year carryforward for excess CFC taxes. Consolidated Group Provisions and Special Industries The regulations include special rules for consolidated groups and targeted rules for insurance companies, banks and financial institutions, partnerships and S corporations, REITs and RICs, and tax-exempt organizations. Corporate Transactions The CAMT implications of various corporate transactions are addressed, including mergers and acquisitions, spin-offs and reorganizations, liquidations, and ownership changes. International Provisions In addition, regulations cover application to foreign corporations with U.S. operations, treatment of foreign branches, and interaction with global intangible low-taxed income (GILTI), Subpart F, and other international provisions. Computational and Procedural Guidance The regulations provide guidance on: - Calculating and reporting CAMT liability - Estimated tax requirements - Carryover of tax attributes - Statute of limitations considerations - Interaction with other Code provisions Effective Dates and Transition Rules The regulations generally apply to tax years beginning after December 31, 2022. #Corporate&TaxLawyers

Happy to announce that the Journal of International Accounting, Auditing and Taxation published our article (Maarten Siglé, Sjoerd Goslinga, Ryan J. Wilson), "Tax control and corporate VAT compliance: An empirical assessment of the moderating role of tax strategy." High-quality Tax Control Frameworks (TCF) are viewed as essential for corporate tax compliance by tax authorities and the OECD. These frameworks can also help organizations optimize their tax strategies within the boundaries of the law. This study examines how TCF quality affects VAT compliance, using survey and tax audit data from large Dutch organizations. Results show that higher-quality TCFs improve VAT compliance, reducing both unintentional and intentional errors. For organizations with conservative tax strategies, TCF quality does not impact intentional non-compliance, while for organizations with aggressive strategies, the level of intentional non-compliance is conditional upon the quality of the TCF, with a lower (higher) quality TCF leading to more (less) intentional non-Compliance. https://lnkd.in/eJiN-iW3 #tax strategy, #VAT compliance, # Tax Control Framework

What, How, and Why of the UAE Corporate Tax's implications on the financials of year ended 2023!! ✅ Background The UAE Corporate Tax regime is effective for financial years starting on or after 1 June 2023. However, provision of UAE Corporate Tax will be applicable from 1 January 2024 if the company has financial year starting on 1 January 2023 and ending on 31 December 2023. ✅Transitional Provisions Article 61(1) of the UAE corporate tax law, which carries transitional provisions, provides that the closing balance sheet prepared for financial reporting purposes under on the last day of the fiscal year will be the opening balance sheet for corporate tax purposes of a taxable person. 🔶 Example ABC Ltd. follows financial year as January to December 2023; and effective date of applicability of Corporate Tax is 1 January 2024. ABC Ltd.’s first tax period will start from January 1 2024; and their immediately preceding financial year 2023. Therefore, ABC Ltd.’s closing balance sheet as of 31 December 2023 will be considered as opening balance sheet as at 1 January 2024 under corporate tax law of UAE. ✅ What make this provision relevant, and why does it matter to the companies? Article 61(2) of the law provides that taxable persons must prepare financial statements in accordance with IFRS and adhere to transfer pricing regulations. That means if the company failed to comply with the provision of transfer pricing in the previous financial years that ended before the start of the first tax period, it will be required to recalculate the numbers using the arm's length principle and pass an adjustment in the books of accounts to arrive at the opening balances in accordance with general anti-abuse rule as given in the article 50 of the law which may attract the corporate tax of 9%. In conclusion, the company must ensure the related party transaction that has been executed on or before 31 December 2023 have been made at arm’s length price. 🔶 Example ABC Ltd. has rendered consulting services to one of its affiliated entities within the group for AED 10,00,000 in F.Y. 2023, for which trade receivable shows as AED 3,00,000 as of 31 December 2023 while a comparable entity in the similar market charges AED 12,00,000 for comparable consulting services from an unrelated party. (Applicable Tax Rate- 9%) The opening trade receivable as of 1 January 2024 may be recalculated as AED 5,00,000 taking into consideration an adjustment of AED 2,00,000 for undervaluing the consulting fees in year 2023. This implies that, ABC might have to pay corporate tax of AED 18,000 (2,00,000 x 9%) ✅ What are our take ways: a. Ensure sufficient rationale and evidence are available to justify that the related party transaction has been executed at arm’s length. b. Revisit the arm’s length price to determine the range currently in effect for a comparable entity of the similar nature and size. #uaecorporatetax #uaetax #transferpricing #transition #CANepal #taxguide

Taking the lead on Pillar II implementation, Bahrain recently introduced the legislation for levy of Domestic Minimum Top-up Tax (DMTT) on multinational enterprises (MNEs) reporting consolidated revenue exceeding €750M in two of the last four fiscal years. The DMTT will be effective for fiscal years starting on or after 01 January 2025. The introduction of the law marks a significant milestone as Bahrain is the first Gulf Cooperation Council country to legislate the implementation of a DMTT. The said law has been introduced with the objective of ensuring that constituent entities of covered MNEs situated in Bahrain pay a global minimum tax of 15% on their profits, in line with the OECD BEPS 2.0. However, Bahrain has refrained from imposing the income inclusion rule or undertaxed payments rule at this stage, restricting levy of tax on Bahrain income. Salient features of the law introduced are as follows: •  The DMTT shall be subject to the revenue test, including the revenue of excluded entities in consolidated revenue computed   •  The constituent entity will be required to get itself registered, file a tax return and pay the applicable tax in specified installments. The DMTT shall be payable if the effective tax rate (ETR) is less than the global minimum tax of 15%. The ETR shall be computed based on the proportion that adjusted covered tax for all constituent entities holds vis-à-vis the net income of the constituent entities   •  The covered tax and the net income shall be aggregated for all the Bahrain located constituent entities of an MNE, based on their financial statements. DTAs/DTLs shall be considered for the ETR. Interestingly, the revenue/ income/ deferred tax details of investment entities shall be excluded from computation of ETR   •  The law also excludes certain entities from the levy of DMTT, such as: - Government bodies, international organisations, etc - Constituent entities having average aggregate revenue of less than €10M and average income/ loss of less than €1M - Constituent entities subject to transitional country-by-country reporting safe harbour - MNEs with presence in upto six jurisdictions and aggregate net book value of tangible assets of upto €50M million in five years, etc.   •  Intentional contravention of the DMTT law (including failure to register, file tax returns, etc.) can be subject to a fine of upto 100%-300% of the tax due. Prosecution provisions may also apply in certain circumstances   •  The application of DMTT provisions shall also be subject to domestic GAAR (to be aligned with the OECD Model Rules). The authorities are empowered to disregard the transaction/ arrangement to recompute the just taxes where it is determined that the said transactions/ arrangements have been carried out without a genuine commercial purpose and/or with primary purpose of obtaining a tax advantage With Bahrain leading the way, interesting times lie ahead for the region. #Bahrain #Pillar2 #DMTT #Bahraintax #OECD

UAE FTA Issued New CIT Guide on Taxations of Partnerships On 4 March 2024, the UAE Federal Tax Authority (“FTA”) issued a Corporate Tax (“CIT”) Guide on Taxation of Partnership (CTGPTN1) on the FTA Portal. The long-awaited document intends to provide comprehensive guidance on the taxation of partnerships, explaining the treatment of partnerships under the CIT Law, detailing its application to both partnerships and their partners along with special provisions relevant to them, and the tax treatment of frequently occurring events. The new guide highlights that partnerships are categorized into two distinct types: incorporated partnerships and unincorporated partnerships. Incorporated partnerships are recognized as separate legal entities, meaning they have a distinct legal personality apart from their partners. This classification renders them juridical persons, fully accountable for their tax responsibilities. Conversely, unincorporated partnerships do not possess a separate legal personality from their partners. The law's default stance treats unincorporated partnerships as fiscally transparent entities. This implies that they are not directly taxed as a person; rather, the tax obligations are passed through to the individual partners (“look-through approach”). Accordingly, each partner is responsible for CIT on their share of the partnership's assets, liabilities, income, and expenses. For natural persons who are partners in such partnerships, tax liability aligns with their share of the partnership's business outcomes, assuming they meet the criteria for CIT liability. Similarly, juridical entities that are partners and residents in the UAE will face CIT in relation to their portion of the partnership's financial activities, in addition to any other business ventures they undertake. Also, the guide recalls that partners in an unincorporated partnership hold the privilege to request the FTA to consider their partnership as a taxable person, or fiscally opaque. Upon approval, the partnership is then recognized as a taxable person, liable to CIT on its profits, thereby shifting the tax responsibility from the individual partners to the partnership itself. Nevertheless, it is important to note that the partners would retain joint and several liabilities for the CIT due to the partnership throughout the periods they are associated with it. This aspect ensures that the tax obligations are fulfilled, maintaining the integrity of the tax system. This nuanced approach to the taxation of partnerships in the UAE underscores the importance of understanding the legal and fiscal framework within which these entities operate. It reflects the UAE's commitment to a robust and transparent tax system, accommodating different business structures while ensuring tax compliance. #UAE #CIT #Tax Read more about the new Guide here: https://lnkd.in/gug9AvJA

UAE Corporate Tax - Taxation of Partnerships Guide The Federal Tax Authority (FTA) has introduced a Corporate Tax (CT) Guide on Taxation of Partnerships. This guide offers valuable insights and clarifications on various aspects related to partnership taxation and compliance obligations. Key Highlights: Overview of the Guidance: The guide covers topics such as the types of partnerships, their tax treatment, compliance requirements, and specific areas of the CT law relevant to partnerships. Different Types of Partnerships: Partnerships in the UAE can be incorporated or unincorporated. The guide lists various entities, such as General Partnerships and Limited Liability Partnerships, considered as incorporated partnerships for CT purposes. Unincorporated partnerships are typically viewed as fiscally transparent, but they can opt to be treated as fiscally opaque for CT. Tax Reliefs: The guide explains that unincorporated partnerships treated as fiscally opaque may not qualify for the 0% CT rate regime. It also outlines participation exemption relief and small business relief eligibility criteria. Deduction Rules: It clarifies the deduction rules for partners and fiscally opaque partnerships, as well as the interest deduction limitation rule. Foreign Tax: The guide discusses the availability of foreign tax credits for unincorporated partnerships and allocation among partners in fiscally transparent partnerships. Foreign Partnerships: It explains the criteria for foreign partnerships to be considered fiscally transparent and subject to CT in the UAE. Transfer Pricing: The guide emphasizes compliance with arm's length standards for transactions between related parties. CT Compliance Obligations: Partners in fiscally transparent partnerships are responsible for determining their CT obligations, while fiscally opaque partnerships must file CT returns and maintain financial statements. General Anti-Abuse Rules (GAAR): GAAR empowers the FTA to adjust transactions aimed at gaining unfair CT advantages.