UAE Corporate Tax Update

The UAE Ministry of Finance issued three documents on Corporate Tax, last week. The Transfer Pricing aspects arising from these decisions are summarised below:

1. Cabinet Decision 55 of 2023 – Qualifying Free Zone Person (QFZ) and its domestic / foreign PE shall be treated as separate and independent persons that are related parties, and accordingly income to be attributed to such Pes. Hence, we opine arm’s length principle should be adhered for transactions between QFZ and its domestic / foreign PEs.Core activities of QFZ should be undertaken in a FreeZone with adequate substance in form of adequate assets, employees and  adequate operating expenses. QFZ can outsource activities to related party or third party in Free Zone. But, QFZ should adequately supervise the outsourced activities. These substance requirements are similar to Economic Substance Regulations prescribed earlier.
2. Ministerial decision 139 of 2023 –Qualifying activities of QFZ also includes headquarter services and treasury & financing activities to related parties. Thereby extending the benefit for business Groups to have regional HQ companies in UAE and be tax efficient.
3. Ministerial decision 134 of 2023 – Adjustments to be made by transferee while computing taxable income while transfer of asset or liability with related parties.
   • Where consideration (Net Book Value or NBV) (say 150) paid by transferee is more than market value (MV) (i.e., Arm’s Length Price) (say 100):
     • in cases other than upon realization, any depreciation / amortization or change in value of asset or liability relating to difference between the NBV and MV (i.e., 50) to be excluded.
     • on realization of asset/liability, difference between NBV and MV (i.e., 50) to be included.
4. Where consideration (say 50) paid by transferee is less than MV (say 100):
   • in case other than upon realization, any change in value of asset or liability relating to difference between the MV and NBV (i.e., 50) to be excluded.
   • on realization of asset or liability, any gain to the extent of difference between MV and NBV (i.e., 50) to be reduced.

Adjustments in A) i) and ii) shall not apply where:

– NBV becomes equal or less than MV in scenario A, or

– transferee opts to recognise the difference between NBV and MV as income

Adjustments in B) i) and ii) shall not apply.

– Where NBV becomes equal to greater than MV in scenario B above,

Adherence with conditions prescribed for QFZ from time to time is critical, as failure to meet such conditions would result in entity ceasing to be QFZ for the said tax period and following 4 tax periods. Hence transfer pricing compliance between QFZ and related parties is crucial.