Tax System in the UAE in 2022. Part 2

The UAE is an attractive jurisdiction in terms of taxation. Please read Part 1 of the article Tax System in the UAE in 2022. Here we are going to continue our detailed description of the taxation system in UAE today.

Transfer Pricing – What Companies in the UAE Need to Comply with It?

There is currently no legislation for transfer pricing in the UAE. However, transactions with related parties should be conducted on an arm’s length basis in order to mitigate any risk of transfer pricing issues arising in a counterparty jurisdiction. 

The recently released the UAE VAT Law contains the definition of related parties, which are defined as two or more entities not separated on the economic, financial or regulatory level, where one entity can control the other entities either by law or through the acquisition of shares or voting rights. Taking all this into consideration, it is desirable to make sure that transactions between companies are based on an arm’s length principle. 

We have made an observation that the UAE Federal Tax Authority may request transfer pricing documentation during VAT audits to ensure that the VAT rate is calculated on the grounds that comply with the arm’s length principle in an intra-group context. 

It is also important to note that the Gulf Cooperation Council’s Common Customs Law contains a definition of related parties similar to that mentioned above. 

Consequently, intra-group transactions and related transfer pricing may be challenged by the customs authorities to ensure consistency between the declared customs value for the proposed duty and the transfer pricing value disclosed in the transfer pricing documentation. 

There are several indicators that may be pointing to the future introduction of new taxes in the UAE, such as income tax. We can expect that the introduction of such a tax would be accompanied by the implementation of some definite transfer pricing rules. 

As best practice, it is recommended for businesses to keep records in accordance with the guidelines of Organization for Economic Co-operation and Development (OECD) and best practices of the industry in general.

Country-by-Country Reporting 

UAE recently introduced country-by-country reporting (“CbC”). The CbC reporting rules are effective for all the fiscal years beginning on or after January 1, 2019.  

These rules generally apply if the group’s consolidated revenue is at least AED 3.15 billion (858 million US dollars) in the financial year immediately preceding the reporting period. 

The CbC report must be submitted within 12 months after the end of the reporting period. Failure to submit this report may result in fines of up to AED 2,250,000 (613,000 US dollars). 

Multinational enterprise groups with headquarters outside the UAE are no longer required to submit CbC notices to the Ministry of Finance for their portion of UAE enterprises. 

Foreign Income and Treaties on Avoiding Dual Taxation in the UAE 

The UAE has concluded about 128 Treaties on Avoiding Dual Taxation, of which about 90 have already come into effect.

Currently effective are the treaties on avoiding dual taxation concluded with the following countries: Comoros, Algeria, Guinea, Egypt, Mauritius, Kenya, Mozambique, Morocco, Senegal, Saudi Arabia, South Africa, Seychelles, Tunisia, Sudan, Syria, Lebanon, Azerbaijan, Yemen , Kyrgyzstan, Kazakhstan, Tajikistan, Turkmenistan, Armenia, Uzbekistan, Brunei, Bangladesh, China, Hong Kong, Georgia, Indonesia, India, Korea, Japan, Maldives, Malaysia, Philippines, Pakistan, Sri Lanka, Singapore, Vietnam, Thailand, Andorra , Albania, Belgium, Belarus, Bulgaria, Bosnia and Herzegovina, Cyprus, Croatia, Estonia, Czech Republic, France, Finland, Hungary, Germany, Ireland, Greece, Italy, Spain, Jersey, Latvia, Kosovo, Liechtenstein, Lithuania, Macedonia, Luxembourg, Moldova, Malta, Netherlands, Montenegro, Portugal, Poland, Russia, Romania, Slovakia, Serbia, United Kingdom, Slovenia, Canada, Barbados, Panama, Mexico, New Zealand, Uruguay, Switzerland, and Fiji. 

In addition, the UAE joined the OECD Inclusive Framework on Base Erosion and Profit Shifting (“BEPS”) in May 2018 and signed the OECD Multilateral Convention on Implementing Tax Treaty Measures to Prevent “BEPS” (Multilateral Instruments, or “MLI”) on June 27, 2018.

Stamp Duty in the UAE

At the moment, stamp duty is not charged in the UAE. When a company is registered, the administration may charge some registration / notary or attestation fees. 

Some free zones may charge an administration fee for the transfer of shares to other UAE companies. 

Real Estate Transfer Fees in the UAE

There are currently no property taxes in the UAE. However, a registration/transfer fee is charged on direct and, under certain circumstances, indirect transfers of real estate (for example, for a transfer of shares of a company owning real estate). This fee also applies to partial transfers of rights under certain circumstances. 

Rates vary depending on the emirate, in which the property is located. For the emirate of Dubai, the rate is 4%; it is supposed to be paid in equal proportions by the buyer and the seller (although in practice, as a rule, the buyer pays all the transfer fees). 

It is worth noting that purchasing real estate throughout the UAE is allowed only to citizens of the UAE and GCC countries. Foreigners are allowed to buy property only if it is located within certain areas of the UAE. There are already quite a few of such zones in the UAE, and they offer a huge selection of real estate objects. 

Municipal Fees in the UAE

In case of property rentals, some emirates charge a municipal fee on the annual rental value of the property, which varies depending on the emirate, in which the property is located. 

In the Emirate of Dubai, a municipality fee of 10% is levied on commercial properties and a fee of 5% — on residential properties. The corresponding fee is included in the monthly utility bills for the property. 

Municipal fees are also charged from certain hotel and entertainment facilities. 

Economic Substance Rules in the UAE 

On August 10, 2020, the UAE Cabinet of Ministers issued Cabinet Resolution No. 57 from 2020 “On Economic Substance Rules in the UAE”. 

UAE companies outside free economic zones and the companies inside the free zones carrying out certain activities mentioned in the rules will be required to comply with economic substance requirements. Failure to comply with this requirement may result in penalties. 

The economic substance rules provide specific substance requirements for companies that fall within their scope of application. 

Generally speaking, there is a two-stage test to determine the applicability of the UAE economic substance requirements to a company. In other words, it is a test of whether an entity is “relevant”, and whether the activity this entity is conducting is “relevant” to these rules in the UAE. 

A “relevant” enterprise is any entity, including a branch, that is licensed by a competent authority to carry out the “relevant” activities either outside the free zones or inside the UAE free zone. 

Any of the following nine types of activity must be regarded a “relevant” under the economic substance rules: 

• banking business; 
• insurance business; 
• fund management business; 
• finances and leasing; 
• cargo transportation business; 
• headquarters activities; 
• holding company business; 
• holding business in the field of intellectual property; 
• business in the form of a distribution or service center.

According to the economic substance rules, licensed entities engaged in the “relevant” activities and receiving income from any of the “relevant” activities listed above must meet the following three economic substance tests. 

Management Test:

The entity must be managed in the UAE with respect to the “relevant” activities (for example, there must be periodic board meetings, a quorum of physically present directors, minutes of all board meetings kept in the UAE, etc.) 

Core Income-Generating Activities («CIGA») Test:

An entity that performs any of the “relevant” activities will be required to demonstrate that the “relevant” CIGA activities were conducted in the UAE for the purposes of meeting the economic substance requirements of the rules. Criteria for the “CIGA” test vary, depending on the “relevant” activity in question. 

Adequacy Test:

The organization needs to have a sufficient number of qualified employees in the UAE, incur adequate expenses in the named jurisdiction, and have an adequate physical presence in the country. The applicability of the adequacy test will depend on the particular facts, and may vary on a case-by-case basis. 

In order to pass the economic content tests, each of the above tests must produce satisfactory results within the entire “relevant” period. Companies subject to economic substance rules must conform with the following two compliance/reporting requirements:

• Filing a notice; and 
• Submitting a report. 

Failure to comply with these demands may lead to financial penalties, as well as to sharing information with the jurisdiction of the shareholder (this potentially depends on the beneficial owner) and to suspension / non-renewal of the trading license. 

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