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UAE Corporate Tax: Impact on contracts, permanent establishments and more_

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With the introduction of Corporate Tax in the UAE on 1 June 2023,  there will be significant compliance obligations on companies in the form of tax returns, pricing documents and document retention. 

In this article, we unpack some of the areas to be considered from an accounting perspective. 

Impact on Contracts 

Given the potentially adverse impact on bottom lines, companies should begin reviewing their ongoing contracts (purchases and sales) and engage with supplies and customers to agree on pricing changes. 

Contract’s (ongoing and new)  will have to ensure that the terms provide for tax stability in such a way that the prices can be adjusted in the event of an adverse impact due to changes in tax law. 

CRESCO Accounting, with our vast experience and sister company CRESCO Legal can support you in reviewing your purchase and sales contracts. There is also an opportunity for businesses to consider if any commercial or strategic advantages can be gained through the implementation of the Corporate Tax. 

Impact on Permanent Establishments

The UAE Corporate Tax applies to companies in the UAE such as: 

  • Legal persons incorporated in the UAE 
  • Natural persons engaged in commercial activity in the UAE
  • Foreign Legal Entities with a Permanent Establishment in the UAE. 

If you are a foreign company or a UAE Free Zone company carrying out activities in mainland UAE without having a corporate entity, you may want to assess whether you should create a Permanent Establishment and the tax consequences associated with it. 

What defines a Permanent Establishment of a foreign company in the UAE? 

Fixed place of business Permanent Establishment 

  • A foreign company will be considered as a Permanent Establishment if the entity has a fixed place through which the business is wholly or partially carried out in the UAE
  • Fixed places includes place of management, branch, office (including temporary field office or any employees home office), factory, workshop, real property, building site where activities are carried for over 6 months, installations and structures used in the exploration of natural resources. Including mines oil or gas wells, queries and other places of extraction of natural resources. 
  • This does not include any preparatory or auxiliary activities in nature (activities linked to marketing and promotions, market research, attending seminars or conventions, storing, displaying or delivering goods.) 

Dependent agent Permanent Establishment 

  • If business travellers or UAE based persons act on behalf of a foreign company in the UAE and has the authority to conclude contracts in the name of the company, these persons should constitute a permanent establishment in the UAE for a foreign company. 

Tax Consequences:

Each foreign entity forming a Permanent Establishment will be subject to Corporate Tax on their taxable income and will need to meet the necessary accounting & compliance obligations. 

Our dedicated Corporate Tax team can assist with reviewing your business model and help identity any Permanent Establishment risks – click here

Unrealised gains or losses

Unrealised gains or losses related to capital items will not be taxable whereas those related to revenue items (any non-capital items) would be subject to tax. 

Under the International Financial Reporting Standards (IFRS) businesses can revalue certain assets and liabilities under certain circumstances to accurately reflect the change in the value of the items. 

Companies can elect to apply an accounting policy to: 

  • Measure investment property under IAS 40 Investment Property at fair value  
  • Measure property plants & equipment under IAS 16 Property, Plant & Equipment using a revaluation model. 

One of the challenges for business will be to distinguish between unrealised gains and losses from capital items and those from revenue items. 

If you have not applied accounting for unrealised gains and losses in accordance with the respective IFRS, please contact us at [email protected]

Tax Grouping Considerations 

Tax compliance for group companies will result in higher administrative costs and complexity in managing the UAE’s tax position – which is why the UAE Corporate Tax law provides an option to apply for a tax consolidation regime (tax grouping).  

CRESCO Accounting can assist you with the following: 

  • Identifying profit-making and loss-making entities: tax consolidation of the financial accounts of the subsidiaries that are part of the tax group. (The positive result of the consolidated entities will be offset by the negative results of the other consolidated entities and can potentially result in a lower effective tax rate where possible) 
  • Excluding entities that are exempt or free zone persons that benefit from 0% Corporate Tax
  • Determining the tax group perimeter: legal structure of the group should be reviewed to identify whether the entities meet the ownership requirement.
  • Running tax group simulations: Determines the cash tax impact of creating a tax group with simulations based on the latest financial statement available or on projections available. 
  • Aligning the financial year of the tax groups entities: all entities need to have the same financial year and those that don’t will need to be changed. 

Closing thoughts…

Performing these analysis upfront, enables taxpayers to react promptly to the UAE Corporate Tax that is coming to effect in June 2023. 

If you have any questions please send us an email on [email protected] and our dedicated experts will reach out. 

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