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United Arab Emirates - Taxation of cross-border mergers and acquisitions

Taxation of cross-border mergers and acquisitions for United Arab Emirates.

Taxation of cross-border mergers and acquisitions for United Arab Emirates.

Introduction

The United Arab Emirates (UAE) is a federation of seven emirates: Abu Dhabi, Dubai, Sharjah, Fujairah, Ras Al Khaimah, Ajman and Umm Al Quwain.

All companies are required to obtain a license in order to undertake business activities in the UAE. The types of licenses that are generally available include a trading license, an industrial license and a service license.

Recent developments

Foreign Direct Investment

On 23 November 2020, the UAE amended Commercial Companies Law (CCL) allowing foreign nationals to have 100 per cent ownership of companies undertaking business in the Emirates, unless a specific restriction is created with respect to entities that engage in business activities that will have a “strategic impact” on the UAE economy.

The amended law does not provide clarity on what these strategic impact activities are. A list of such activities, and the applicable licensing requirements, will be determined by a Committee comprising representatives from each Emirate and is still awaited (as on the date of publishing this guide).

Subject to the powers of the Committee in relation to “strategic impact” activities, each Emirate will determine the percentage of permitted ownership, and the level of capital contribution required for higher levels of foreign ownership. Therefore, it is possible that different Emirates will set different UAE national ownership requirements for similar business activities.BEPS implementation in the UAE

The UAE joined the Organisation for Economic Co-operation and Development (OECD) Inclusive Framework on Base Erosion and Profit Shifting (BEPS IF) on 16 May 2018. As a consequence, the UAE has committed to implementing the four minimum standards:

  • Action 5: Harmful tax practices
  • Action 6: Treaty abuse
  • Action 13: Transfer pricing documentation and country-by-country reporting
  • Action 14: Dispute resolution

Economic substance requirements

In order to honor its commitment to implement BEPS Action 5, the UAE introduced Economic substance regulations with notification and reporting requirements for UAE entities. These regulations require UAE based entities to locally maintain and demonstrate adequate ‘economic substance’ in the UAE with respect to certain types of activities and revenues.

Economic substance can broadly be considered to comprise of core income generating activities, employees, premises, management and costs. The purpose of the Economic Substance Regulations is to ensure that UAE entities report actual profits that are commensurate with the economic activity undertaken within the UAE.

The regulations require UAE onshore and free zone companies and certain other business forms (like partnership firms, UAE branches of foreign entities) that undertake any of the specified ‘relevant activities’ (viz Banking, Insurance, Investment fund management, Lease finance, Headquarters, Shipping, Holding company, Intellectual property, and Distribution and Service Center business) and derive any income therefrom to demonstrate Economic substance i.e. meet Economic substance Tests.

Country-by-country reporting (CbCR)

Similarly, in relation to BEPS Action 13, the UAE has implemented CbCR rules, with notification and reporting requirements. CbCR requirements apply to the ultimate parent entity (UPE) of a Multinational Group of Entities (MNE) which is a ‘tax resident’ in the UAE and has consolidated revenues equal to or exceeding AED3.15 billion (approximately USD858 million) in the preceding financial year.

Legislative framework for mergers and acquisitions

Federal Companies Law

CCL is relevant when considering mergers and acquisitions (M&A) in the UAE. The scope of the CCL covers all commercial operations established in the UAE except:

  • companies excluded by resolution of the UAE Federal Cabinet
  • companies wholly owned by federal or local governments, if a special provision is provided in the company’s memorandum
  • companies operating in certain oil, gas and power sectors in which the federal or local government directly or indirectly holds 25 percent.

The CCL also extends to Free Trade Zones (FTZs), to the extent the matters are not specifically covered in the FTZs regulations.

A merger under the CCL can be effected either by one company absorbing another company or by a combination of two or more companies being absorbed by a new company. The CCL allows companies to merge by a contract specifying the method of conversion of the existing entity’s (or entities’) shares. The CCL also introduces a short-form merger procedure between a holding company and a fully owned subsidiary, as well as between two or more fully owned subsidiaries of the same holding company where no merger contract is required.

Listed companies must also observe corporate governance code and other circulars/regulations issued by the Securities & Commodities Authority.

An acquisition can also take place by buying shares in a company, subject to foreign investment regulations.

Foreign investment

There are two types of investment locations in the UAE, namely, Mainland UAE and the various FTZs. The key distinction between these two investment locations is based on the foreign ownership restrictions.

Mainland UAE

 

Mainland UAE is the wider UAE, where foreign investment restrictions apply, except for those which have obtained specific permission to have 100% foreign shareholding in mainland entities (as discussed in the earlier section). In general, a foreign shareholder cannot own more than 49 percent of the shares in a company. The remaining 51 percent must be owned by a UAE national individual or UAE national company.

The benefit of registering a Mainland UAE entity is that there are no restrictions on undertaking business activities inside or outside the UAE, provided that the licensing requirements are met. A Mainland UAE-registered entity can enter into contracts directly with Mainland customers and public entities, which is not permissible for an entity registered in the FTZ.

Free Trade Zones

There are around 45 FTZs in the UAE, with the majority of them located in the emirate of Dubai. FTZs are designed to promote foreign direct investment in the country. The benefits of setting up in an FTZ include 100 percent foreign ownership, a guaranteed tax holiday and pre-built business space, along with a customs duty exemption for imports into the FTZ.

FTZ entities are only licensed to do business either within the FTZ in which they have been established or outside the UAE altogether (subject to the laws of the countries concerned).

Each type of FTZ entity is allowed to be 100 percent foreign owned, with no requirement to appoint a local agent or sponsor.

Also, a dual licensing system has been introduced by certain FTZs to allow entities (engaged in certain sectors) to also operate in the Mainland UAE, thereby reducing the cost involved in operating a separate office in the Mainland UAE.

A foreign company can set up a representative office or a branch either in Mainland UAE or one of the FTZs.

Corporate tax

There is no corporate tax legislation at the Federal UAE level. Some of the seven emirates (including Dubai) have introduced corporate taxes through their own decrees. Currently, these taxes only apply to foreign oil and gas companies and branches of foreign banks.

Foreign oil companies separately enter into concession agreements with the Ruler of the Emirate in which they extract and/or produce oil. The tax paid by an oil company can range from 55 to 87 percent.

For branches of foreign banks, corporate tax is generally calculated at the rate of 20 percent of taxable income. The tax decrees do not mention the consequences of company M&As or disposals.

The UAE did sometime announce its intention to introduce the federal (unified) corporate tax regime applicable for all emirates and all industries. However, any details on the proposed regime and its implementation date are not known yet.

Withholding tax and capital gains tax

Currently, the UAE does not impose withholding tax or any specific capital gains tax. Where applicable, capital gains are taxable under the same rules as ordinary income.

Value Added Tax (VAT)

The UAE introduced VAT on 1 January 2018 with a standard rate of 5 percent with some transactions ‘taxed’ at zero rate of VAT and others exempt from VAT. To date, the Federal Tax Authority (FTA) has published a number of guides to assist taxpayers in particular sectors with their compliance. The FTA has also released Public Clarifications confirming the VAT treatment of supplies and recovery of input VAT where there is uncertainty in the legislation.

The general principles of UAE VAT are similar to those of other mature VAT jurisdictions: 

  • Businesses are required to register for VAT if they make taxable supplies of more than AED375,000 (about USD100,000). 
  • Businesses may register for VAT on a voluntary basis if they make taxable supplies or incur taxable expenses of more than AED187,500 (about USD50,000). 
  • VAT registered businesses are required to charge VAT on supplies of goods or services within the territory of the UAE.
  • VAT registered businesses must issue tax invoices when they make taxable supplies.
  • VAT registered businesses must file periodic VAT returns to the FTA to account for VAT and pay any VAT liability due. 
  • VAT registered businesses must keep the tax records for a period of 5 years (or 15 years in case of tax records related to real estate).
  • VAT registered businesses can recover VAT incurred on expenses attributed to making taxable supplies. 
  • VAT recovery is only permitted when the VAT registered business receives a tax invoice and intends to make a payment within six months of the due date of payment. 
  • VAT registered businesses can recover the input tax in the tax period when both the tax invoice is received and the intention to make payment is formed or in the subsequent tax period.

Asset purchase or share purchase

Purchase of assets

There are no specific provisions relating to asset purchases or M&As in any of the tax decrees. Where a merger or acquisition involves an entity or entities that are currently subject to corporate tax in the UAE, the tax implications, including purchase price allocation, treatment of goodwill and continuity of tax attributes, should be considered on a case-by-case basis.

Value Added Tax

The default position is that VAT will be chargeable on the sale of assets located in the UAE at the time of supply.

The VAT legislation provides as an exception that the transfer of the whole or independent part of a business to a taxable person for the purposes of continuing the business would not be considered a supply. This is commonly known as a Transfer of a Going Concern (TOGC). Where the conditions for a TOGC are satisfied VAT is not applicable on the transfer of a business.

TOGC only applies to a transfer of a business or part of a business capable of independent operation but not to transfers of single business assets.

Transfer taxes

There is no stamp duty on the acquisition of assets, except on the acquisition of real property or land, where a registration fee may be due, depending on the emirate in which the property is situated.

Purchase of shares

The sale or transfer of ownership of shares are specifically exempted from VAT in the legislation. A purchase of shares would not have VAT charged.

Value Added Tax

As is typical with most VAT regimes, many financial services are treated as exempt. The UAE has taken a very narrow approach to exemption, limiting it to financial transactions where consideration is by way of a margin, with all fee- and commission-based services being taxed at the standard rate. Where a business is transferred through a sale of shares, the financial services exemption needs to be considered. The Executive Regulations set out the treatment and definitions of financial services. The regulations exempt any transfer of ownership in an equity security from VAT.

Where a VAT exemption is applied, the recovery of input VAT for expenses directly related to the exempt supply is restricted.

Transfer taxes

There is no stamp duty on the acquisition of shares.

Choice of acquisition vehicle

As mentioned above there are two investment locations in the UAE — Mainland UAE and the various FTZs. The following entity types are generally available:

Mainland UAE

In Mainland UAE, a limited liability company (LLC) or joint stock company may be incorporated, subject to foreign investment restrictions if applicable.

A representative office or a branch of a foreign company may be established (a national/local service agent is required).

Free Trade Zones

In an FTZ, an entity could be incorporated with 100 percent foreign ownership.

In an FTZ, a free zone establishment company (one shareholder) or free zone company/free zone LLC (more than one shareholder) may be incorporated. It is also possible to set up a branch in an FTZ.

The above entities must obtain appropriate licenses on registration (renewable periodically) from the relevant authorities.

Local holding company

A local holding company can be established either in the Mainland UAE (foreign ownership restrictions should be considered) or in the FTZs (a limited number of FTZs allow purely investment activity).

Choice of acquisition funding

The UAE has no specific thin capitalization rules or no exchange control regulations. Funds can be easily repatriated. Under the CCL, certain companies (joint stock companies, commercial banks and branches of foreign banks) must allocate at least 10 percent of their net profits every year to a legal reserve. These allocations can stop once the reserve reaches 50 percent of the company’s issued share capital.

Other considerations

Accounting and auditor requirements

The CCL requires locally registered companies to appoint auditors to audit their annual financial statements.

Registered companies in some FTZs are also required to have their financial statements audited annually. The audited financial statements need to be submitted to the respective FTZ authority for license renewal.

Group relief/consolidation

The tax decrees contain no provisions for group relief or consolidation of tax returns.

Value Added Tax

Entities that are located in the UAE that satisfy certain conditions may form a tax group. Supplies between the members of the tax group are disregarded for VAT purposes and no VAT is charged. In addition, a single VAT return is required for all members of a tax group. This can present a cash flow advantage.

Members of the tax group are, however, jointly and severally liable for the VAT debts of the tax group as a whole for the period of time for which they are members.

Transfer pricing

Currently, the UAE has no provisions for transfer pricing. However, the UAE has implemented CbCR requirements (as discussed earlier).

Employment of nationals

The UAE has an active ‘emiratization’ program for the employment of UAE nationals and has identified suitable industries in which they may work. Trading, banking and insurance were identified as industries in which emiratization is a key requirement. Companies operating in those sectors are required to meet annual quotas. Emiratization rules do not apply to entities set up in FTZ.

The National Human Resource Development and Employment Authority is an agency of the UAE government established to help implement the emiratization program.

UAE Double Tax Treaties (DTTs) and Tax Residency Certificate (TRC)

The UAE has an extensive network of 117 DTTs, of which 88 are in force. The UAE also has a DTT in force with Kingdom of Saudi Arabia — the first of its kind within the GCC, as GCC countries do not have mutual DTTs. The BEPS Multilateral Instrument (MLI) is in force in the UAE to change its selected 114 DTTs. The extent to which the MLI will modify the UAE’s DTTs will depend on the final MLI positions of the counterparty countries.

The FTA issues Tax Domicile Certificates or Tax Residency Certificates (TRC) on a case-by-case basis to UAE entities (except branches of foreign companies) which have been in operation for at least 1 year. A TRC is issued for a specific DTT and for a specific period. 

Comparison of asset and share purchases

From a corporate tax perspective, there is no difference between asset and share purchases because there is no corporate income tax except for companies in the oil and gas and banking industries.

From a VAT perspective, the default position is that VAT will be chargeable on the sale of assets located in the UAE at the time of supply.

The VAT legislation provides as an exception that the transfer of the whole or independent part of a business to a taxable person for the purposes of continuing the business would not be considered a supply. This is commonly known as a Transfer of a Going Concern (TOGC). Where the conditions for a TOGC are satisfied VAT is not applicable on the transfer of a business.

TOGC only applies to a transfer of a business or part of a business capable of independent operation but not to transfers of single business assets.

Where the transfer of a business is realized through a purchase of shares, no VAT will be charged to the purchaser. The sale or transfer of ownership of shares are specifically exempted from VAT in the legislation. A purchase of shares would not have VAT charged. However, where a VAT exemption is applied, the recovery of input VAT for expenses directly related to the exempt supply is restricted.

KPMG in the United Arab Emirates

Stuart Cioccarelli
Partner, Head of Tax,
KPMG Lower Gulf Limited
Abu Dhabi Corniche,
Nation Tower 2,
19th Floor
Abu Dhabi,
United Arab Emirates

T: +971 2401 4881
E: scioccarelli@kpmg.com

 

Nilesh Ashar
Partner, International Tax
KPMG Lower Gulf Limited
The offices 5 at One Central, Level 4
PO Box 3800 Dubai
United Arab Emirates

T: +971 4 403 0370
E: nashar1@KPMG.com

 

Anuj Kapoor
Partner, International Tax
KPMG Lower Gulf Limited
The offices 5 at One Central, Level 4
PO Box 3800 Dubai
United Arab Emirates

T: +971 4424 8974
E: anujkapoor@kpmg.com

This country document does not include COVID-19 tax measures and government reliefs announced by Government. Please refer below KPMG link for referring Jurisdictional tax measures and government reliefs in response to COVID-19

Click here — COVID-19 tax measures and government reliefs

This country document is updated as on
1 January 2021.

 

The information contained herein is of a general nature and is not intended to address the specific circumstances of any particular individual or entity. Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.