The UAE enacted its Corporate Tax Law in December 2022 (Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses). The Corporate Tax Law applies with effect from 1 June 2023. A 9% tax rate will apply on income exceeding AED 375,000 (approx. US$102k).
Despite its name, the Corporate Tax Law treats a natural person conducting business in the UAE as a “Resident Person”. Such a person’s business income would be subject to corporate tax in the UAE. Should the legislation not have extended the scope of the Corporate Tax Law to natural persons in this way, it would have provided an incentive for entrepreneurs to conduct business in their own names rather than through separate legal entities.
The Corporate Tax Law provides a framework whereby small businesses who qualify as Resident Persons may elect to be treated as not having any taxable income for a tax period and therefore would pay zero corporation tax for that period (the “Small Business Relief”). The Ministry of Finance recently published the conditions which must be satisfied for small businesses to claim Small Business Relief through Ministerial Decision No. 73 of 2023 (the “Criteria”). See our previous Law-Now on details of the Small Business Relief.
General Anti-Abuse Rule
The Criteria makes specific reference to the general anti-abuse rules (the “GAAR”) contained within the Corporate Tax Law.
In particular, the Criteria provides that where the Federal Tax Authority (the “FTA”) determines that a Taxable Person has “artificially separated” its business or business activity in order to fall under the revenue threshold of AED 3 million (approx. US$816k), and that Taxable Person has elected to apply the Small Business Relief, this would be considered an arrangement to obtain a corporate tax advantage under the GAAR.
For the purposes of determining whether the business or business activity has been “artificially separated”, the FTA will consider whether the arrangement was undertaken for a valid commercial purpose and whether the Taxable Persons concerned carry on “substantially the same” business or business activity. The FTA will take into account all the relevant facts and circumstances, including but not limited to the financial, economic and organisational links of the Taxable Persons concerned.
In order to successfully invoke the GAAR, the FTA must show that having regard to all of the relevant circumstances:
- the arrangements do not reflect economic reality; and
- the “main purpose or one of the main purposes” of the arrangements is to obtain a corporate tax advantage that is not consistent with the intention or purpose of the Corporate Tax Law.
In these circumstances, the FTA has the power to make a determination to counteract the advantage through issuing an assessment.
The legislation places the burden of proof on the FTA (rather than the Taxable Person) to demonstrate that a determination made under the GAAR is “just and reasonable”.
In respect of entrepreneurs trading in their own names, the Small Business Relief revenue threshold would apply to the totality of the Taxable Persons’ business activity. For example, if Mr X runs two restaurants in his own name, the Small Business Relief revenue threshold would apply to the combined revenue of both restaurants.
However, it is unclear how the FTA would regard a situation where Mr X runs one restaurant in his own name and another restaurant under a company in respect of which he holds 100% of the shares. The FTA considers these facts in the VAT registration context in its Basic Tax Information Bulletin (Artists And Social Media Influencers) dated 14 November 2021. The FTA states that “(e)ven where an individual holds 100% shares in a company, the individual is considered distinct from the company and is responsible to account for VAT only on the supplies made in his personal capacity.”
In this context, it is currently unclear how the FTA is likely to consider that a Taxable Person has “artificially separated” its business or business activity in order to fall under the Small Business Relief revenue threshold. In jurisdictions such as the UK and Hong Kong, tax authorities have issued detailed guidance on the application of their respective GAAR regimes. It would be unsurprising if the FTA were to do the same over time. It will also be interesting to see if the application of the GAAR in the Corporate Tax Law context causes a shift in thinking on how the existing VAT rules are applied.