UAE tax law: Are businesses ready for anti-abuse rules?

2022 was an exciting year for taxation in the UAE. As we were reaching the end of the eventful year, the decree law on corporate tax was finally announced. Though the tax will trigger on your company’s financial year starting on or after June 1, 2023, one important aspect of the law will immediately become effective once it is published in the official gazette.

The “anti-abuse” rules will come into effect immediately upon the publication of the decree law in the official gazette.

What are Anti-abuse rules (AAR)?

“Anti-abuse” rules (AAR) are aimed to combat the abuse of the tax laws and prevent taxpayers from projecting a tax position/consequence otherwise inconsistent with the intent of the law. AAR are based on the global best practices of General Anti Avoidance Rules, commonly referred to as GAAR.

Transactions covered under AAR could be disregarded by the tax authorities to determine taxable profits and/or the taxability of entities.

As much as taxation is new to the UAE, AAR is fairly recent for many countries and for UAE businesses in particular.

Scope of AAR

AAR essentially follows the ‘substance over form’ principle. AAR applies to a transaction or an arrangement which is carried out (a) without a valid commercial rationale/economic reality, and (b) to primary gain a corporate tax advantage.

The ‘corporate tax advantage’ includes (a) avoidance/reduction of tax; (b) creation/increasing tax refunds; (c) deferral of corporate tax, or (d) avoidance of withholding tax compliances.

AAR applies not only on business transactions but also on business arrangements entered on or after the official gazette publication. Arrangements such as change of financial year, restructuring of business operations/entities, share transfer, mergers/demergers could also be covered under AAR.

Determination of abuse

Determining an unjust use of tax laws is always a subjective test. The tax authorities will have to consider various factors to determine the economic reality and applicability of AAR on transactions and arrangements.

Factors to determine AAR applicability includes the manner of entering into or carrying out the transaction/arrangement, the result thereof, the expected financial result etc.

In the context of preparing for corporate tax, businesses must remember that the timing of the transaction/arrangement will also be a factor to apply AAR. To illustrate, if a company suddenly moves its operations from mainland to a free zone now, or changes its financial year, the timing and intention could be questioned under AAR. Or, if an owner starts drawing salary from his/her company which was hitherto not withdrawn in the past, the new arrangement could also be questioned.

One has to also examine if a transaction or arrangement has created rights/obligations which would not normally be created between independent unrelated parties. In line with the global best practices, AAR requires that the application thereof must be just and reasonable.

The tax authorities may make a determination that one or more specified corporate tax advantages obtained as a result of the transaction/arrangement should counteracted e.g. re-computation of taxable income. The tax authorities will have seven years to undertake audits and apply AAR.

The gap between the tax year and audit determination would automatically lead to interest and penalties.

Practical impact

AAR will immediately trigger upon publication of the decree law in the official gazette. As the businesses prepare for corporate tax implementation, a thorough analysis of proposed restructurings would be necessary to comply with AAR. Any haste by the companies in tax implementation, without a thorough analysis, could lead them into a spiralling tax and penalty trap.

The authors are working with AskPankaj Tax Advisors. For feedback and queries, you may write to info@AskPankaj.com. Views expressed are his own and do not reflect the newspaper’s policy.

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