The new tax reform has raised the corporate tax rate to 9%. This raises new challenges for businesses relocating to the UAE. In this article, we will explain what nuances we believe need to be considered to maintain tax-free status.
Real office and interaction with counterparties
At the moment, UAE banks are receiving a lot of applications to open accounts (which is a mandatory basis for doing business in the Emirates). As a consequence, banks are considering legal entities more carefully. To increase the chances of approval of an application for opening an account, we recommend: first, to open a real office, not a virtual one (which is possible to do in the UAE). Bank employees will come to the office and take photos, then attach files for compliance.
The real activity of the company will also increase the chances. So, if you prepare letters of intent or preliminary agreements with counterparties (and specify in them the contact details of partners — website, e-mail, any contact information that the bank can check), the chances of successfully opening an account will increase. We also recommend that the account manager or beneficiary obtain an Emirates ID.
Banks also often want to see a lack of direct transactions with the Russian Federation, they can take a letter of confirmation of refusal to settle with Russia. This will also increase the chance of successfully opening an account.
It used to be advantageous to do business in the UAE — creating a legal entity in a free economic zone, the tax rate was zero, now any legal entity created under UAE law becomes a resident for tax purposes with a rate of 9% (the first 375 thousand dirhams of taxes are excluded from taxation) with calculation from 01.06.2023.
How to keep the preferential rate?
The first is to obtain the status of qualified investor. The company must simultaneously: audit financial statements; maintain an adequate level of economic presence; enter into transactions with affiliates subject to transfer pricing rules and maintain documentation on it; not to switch to the ordinary tax regime. (Art. 18 of the UAE Federal Corporate Tax Law)
Also, the company must fall under the qualified category. Cabinet Decision No. 139/2023 lists the activities that are subject to the preferential tax rate. These are, for example, production and processing of goods and materials, logistics, holding activities, distribution. It should be taken into account that for companies engaged in trade, it is possible to qualify only if they are located in a free economic zone and import goods through its economic zone.
To assess whether your income falls under the qualified category (this must also be done to meet the requirements). Assess the economic situation in your EEZ if your counterparties are located within your EEZ and have activities that fall under the qualified categories, or income from transactions with companies with other persons whose activities are qualified. Income from transactions with such counterparties will be qualifying income, if you exceed non-qualifying income by more than AED 50 million, you will lose the zero tax rate.
Also, the company must maintain an «adequate level of economic presence». We recommend adhering to the criteria established in practice:
- management and key decision-making within the UAE;
- sufficient number of qualified employees;
- physical office or premises; operating expenses in the UAE are comparable to the company’s
- the main revenue-generating activities take place in the UAE.
The company may outsource some activities, but must control the activities that have been outsourced. The assessment of «adequacy» is subjective; there is no clear guidance on assessing admissibility. However, it is recommended to prepare a lease agreement, resolutions and documented expenses this will help prove your adequate presence.