What are the UAE Corporate Tax laws for group companies and multinational groups?

Corporate Tax for A Group: 

UAE group entities can choose to create a tax group if they meet these conditions: 

1. The parent company, which must be a UAE tax resident, holds at least 95% of the (I) share capital, (ii) voting rights, and (iii) rights to profits and net assets, either directly or indirectly. 
2. They share the same financial year and prepare financial statements using the same accounting standards. 
3. Neither the parent company nor the subsidiary is an exempt person or a QFZP. 

Once a tax group is established, the parent entity takes charge of handling administrative tasks, such as submitting a single tax return and paying the tax owed for the entire tax group. 

Transfer Pricing for Groups: 

The CT Law brings in rules and regulations regarding transfer pricing. These regulations come into effect at the same time as the corporate tax provisions. 

Most groups have services within the group. This happens because it’s easier and cheaper to do some tasks centrally, like IT, legal, finance, and marketing. Usually, the parent company, a group service centre, or a head office takes care of these tasks. So, considering these factors, it’s essential to adhere to transfer pricing rules. 

Understanding Transfer Pricing: 

Transfer pricing means deciding the price the group companies should pay each other when they trade goods, services, or ideas. This ensures they pay a fair price that matches what they’d pay if they were separate companies. This helps prevent questionable actions like avoiding taxes or shifting profits to places with lower taxes. Essentially, it ensures everyone plays fair and shares the profits fairly, no matter where they’re located. 

Transfer Pricing Methods: 

1. Comparable Uncontrolled Price (CUP): This method compares the price of the transaction between related parties with the price of similar transactions between unrelated parties. 
2. Cost-Plus Method: Under this approach, the transfer price is determined by adding a markup to the cost incurred by the selling entity. 
3. Resale Price Method: This method involves setting the transfer price based on the resale price of the product or service, minus an appropriate gross margin. 
4. Profit Split Method: In cases where transactions involve the joint contribution of valuable assets or services by multiple entities within the same group, profits are allocated among the entities based on their respective contributions. 

Arm Length’s Principle: 

Transactions between related parties, whether they’re international or local, including those involving Free Zone entities, must be fair. This means they should be priced as if they were between independent businesses in similar situations. 

Also, any payments or benefits given to connected individuals should be at a fair price, just like it would be in a regular business deal. 

Arm length principle is important for few reasons: 

1. Fairness: It’s about making sure that when companies are related, they treat each other fairly, just like they would with any other business. This means no special treatment or questionable advantages in their deals. 
2. Transparency: Following this principle helps keep things clear and honest in business. It shows that deals between related companies are happening at prices that make sense, so there’s less chance of arguments or problems. 
3. Tax Rules: Tax authorities use this principle to make sure companies are paying the right amount of tax. If companies try to cheat by playing with prices, they could get in trouble and have to pay penalties. 
4. Global Rules: Big organizations like the OECD support this principle, and many countries use it as a guide to keep business fair and consistent around the world. 

Connected Persons: 

A connected person is defined as; 

1. A natural person who has ownership or control over the taxable entity, either directly or indirectly. 
2. A director or officer of the taxable entity. 
3. Partners in the same unincorporated partnership. 
4. Related parties of any of the individuals mentioned above. 

Any payment or benefit given by a taxable person to a connected individual must: (i) match the fair price of the service or benefit, and (ii) be solely for business purposes to qualify for a deduction. The fair price should be determined using the arm’s-length standard. However, there are exceptions to this rule: 

1. If the taxable person’s shares are traded on a recognized stock exchange. 
2. If the taxable person is under the regulatory oversight of a competent state authority. 
3. For any other person specified in a separate decision, which hasn’t been issued yet 

Corporate Tax for Multinational Enterprises: 

Large multinational enterprises operating in the UAE could be facing a Corporate Tax rate of 15%. This significant change reflects the UAE’s commitment to aligning its tax policies with global standards and best practices. While the standard Corporate Tax rate remains at 9%, there is a provision for larger enterprises with a consolidated annual turnover exceeding €750 million to potentially be subject to the higher 15% rate under the Global Minimum Tax framework proposed by the OECD, commonly referred to as Pillar Two. 

Pillar Two aims to ensure that large multinational enterprises pay a minimum level of tax regardless of where they operate. The concept behind this framework is to address tax base erosion and profit shifting strategies employed by multinational corporations to minimize their tax liabilities. 

Currently, the UAE is deliberating whether to adopt the OECD’s Pillar Two rules or develop its own approach to taxing large enterprises at a 15% rate. This decision-making process involves careful consideration of various factors, including the potential impact on the UAE’s economy, competitiveness, and international standing. 

Regardless of the specific approach taken, this adjustment will lead to varying tax rates for different levels of taxable income among multinational enterprises operating in the UAE. It underscores the evolving landscape of international taxation and the UAE’s proactive stance in addressing these changes while striving to maintain its attractiveness as a business hub. 

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