UAE Tax Updates

Several pivotal changes have been introduced in UAE tax regulations, significantly impacting business operations and financial planning. Below, we provide detailed summaries of the most important tax updates, offering insights into compliance and potential business impacts.

These tax updates introduce key regulatory changes affecting corporate tax groups, foreign tax exemptions, excise tax on electronic products, and VAT treatment of cryptocurrency mining. Businesses must ensure compliance with these rules to avoid penalties and optimize tax benefits.

Guidelines for Formation and Operation of UAE Corporate Tax Groups

1. Ministerial Decision No. 301 of 2024 – Tax Group Regulations under Corporate Tax.

• Effective Date: January 1, 2025
• Details:
  This decision outlines the formation, eligibility, and operational guidelines for Tax Groups under the UAE Corporate Tax Law. Key provisions include:
  • Eligibility for Tax Group Formation:
    • A Parent Company must hold at least 95% ownership of the Subsidiary's share capital, voting rights, or entitlement to profits.
    • Both the Parent Company and Subsidiaries must be UAE tax residents and not subject to tax residency in another country.
  • Arm's Length Principle & Transfer Pricing Rules:
    • Intra-group transactions must be conducted at arm's length (i.e., as if between independent entities).
    • Transfer pricing documentation requirements apply, ensuring that intra-group dealings reflect market value.
    • Tax Groups must calculate taxable income per member, considering pre-grouping tax losses, incentives, and interest expense limitations.
  • Treatment of Tax Losses:
    • Pre-grouping tax losses can only be utilized against taxable income attributed to the entity generating those losses.
    • Any losses exceeding this amount cannot be used to offset the Tax Group's taxable income.
  • Exit Rules & Notification:
    • If a Subsidiary leaves the Tax Group, it must prepare standalone financial statements and adopt the same accounting methods previously applied.
    • The Tax Group must notify the Tax Authority within 20 business days if a Subsidiary leaves or the group dissolves.
• Impact:
  • Multinational groups and holding companies can streamline tax filings by consolidating reporting under a Tax Group.
  • Businesses must ensure proper documentation to comply with arm's length principles and transfer pricing regulations.
  • Failure to comply may lead to additional tax liabilities or loss of Tax Group benefits.
• Compliance Tips:
  • Review intra-group transactions to ensure they meet arm's length requirements.
  • Maintain documentation for all transfer pricing adjustments.
  • File Tax Group applications within the required timeframe and monitor compliance annually.
• Applicability:
  • Corporate groups operating multiple entities under common ownership in the UAE.

Exemptions for Participation Interests and Foreign Permanent Establishments

2. Ministerial Decision No. 302 of 2024 – Participation Exemption & Foreign Permanent Establishment Exemption

• Effective Date: January 1, 2025
• Details:
  This decision clarifies exemptions related to participating interests (ownership in other entities) and foreign permanent establishments ("FPEs") under the UAE Corporate Tax Law.
  • Participation Exemption (Dividends & Capital Gains)
    • Companies holding a Participating Interest (ownership stake) in another entity may qualify for an exemption on dividend income and capital gains if:
      • The ownership is at least 5% for an uninterrupted period of at least 12 months.
      • The foreign entity is subject to a tax of at least 9% in its jurisdiction.
      • The minimum acquisition cost of shares is AED 4 million.
  • Foreign Permanent Establishment Exemption
    • A Qualifying Foreign Permanent Establishment is exempt from UAE Corporate Tax if:
      • The FPE's income is taxed at a minimum of 9% in its foreign jurisdiction.
      • The UAE taxpayer elects to apply for the exemption, provided they have not claimed tax losses from the FPE in previous periods.
• Impact:
  • Holding companies and businesses investing in foreign subsidiaries can eliminate double taxation on dividends and capital gains.
  • Companies with foreign branches may opt for FPE exemptions to reduce tax exposure in the UAE.
• Compliance Tips:
  • Monitor holding periods and ownership thresholds to qualify for participation exemptions.
  • Ensure foreign subsidiaries and branches are subject to taxation at at-least 9% in their respective jurisdictions.
• Applicability:
  • Multinational corporations, holding companies, and UAE businesses with foreign subsidiaries or branches.

Implementation of Excise Tax on Electronic Smoking Products and Beverages

3. Ministerial Decision Implementing Cabinet Decision No. 52 of 2019 – Excise Tax on Electronic Smoking Products & Beverages

• Effective Date: January 3, 2025
• Details:
  This decision updates excise tax rules for electronic smoking products and sugar-sweetened beverages.
  • Expansion of Excise Tax Scope:
    • Excise tax now applies to electronic smoking devices and liquids, whether containing nicotine or not.
    • Concentrates, powders, gels, and extracts used to create carbonated, or energy drinks are subject to excise tax.
  • New Excise Tax Price Calculation Method:
    • The excise tax price is determined based on:
      1. The price set by the Federal Tax Authority's price list (if available), OR
      2. The declared designated selling price (retail price before discounts).
  • New Harmonized System ("HS") Codes for Electronic Smoking Products:
    • Specific HS codes have been assigned for electronic cigarettes, e-shisha, and heated tobacco devices to standardize classification across the GCC.
• Impact:
  • Retailers and importers of electronic smoking products and beverage ingredients must reassess their pricing models to incorporate excise tax changes.
  • Incorrect classification or under-reporting may result in penalties and additional tax liabilities.
• Compliance Tips:
  • Ensure product classifications match the updated HS codes.
  • Maintain accurate tax records to justify excise tax calculations.
  • Verify the "designated selling price" aligns with the tax authority's guidelines.
• Applicability:
  • Retailers, importers, and manufacturers of electronic smoking devices and beverage concentrates.

VAT Treatment for Cryptocurrency Mining Activities

4. VAT Public Clarification VATP039 – VAT Treatment of Cryptocurrency Mining

• Sector-Specific Changes:
  • Cryptocurrency mining for personal use is outside the scope of VAT.
  • Mining on behalf of others is a taxable supply of services subject to 5% VAT.
• Applicability:
  • Self-Mining:
    • Mining for personal use is not considered a taxable supply, and VAT on expenses is non-recoverable.
  • Mining for Others:
    • Providing computational power for mining is a taxable service, subject to 5% VAT unless zero-rated.
• Impact:
  • Businesses offering mining services must register for VAT and charge VAT on fees received.
  • VAT recovery eligibility depends on whether mining is conducted for personal use or third parties.
• Compliance Tips:
  • Assess VAT liability: Determine if mining activities qualify as taxable services.
  • Maintain clear records: Keep documentation of mining transactions.
  • Understand VAT recovery: Only claim input VAT where mining is a taxable service.
• Applicability:
  • Businesses and individuals engaged in cryptocurrency mining in the UAE.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.