Anti-abuse and transitional rules

Anti-abuse and rules

The UAE’s Corporate Income Tax law include general anti-abuse rules that aims to identify any arrangement or transactions entered into for tax advantages only and which do not reflect economic reality or based on commercial reasons.

These anti-avoidance rules are already effective from the date of publication of the Corporate Income Tax law, therefore, any ongoing or planned restructuring should be in compliance with this provision.

Anti-abuse rules apply where:

  • The transaction or arrangement is not for a valid commercial or economic reason.
  • One of the main purposes of the transaction or arrangement is to obtain tax advantage such as tax avoidance or reduction, tax refund, deferral of tax payment or advancement of a refund.

Where anti-abuse rules apply to a transaction or arrangement, the FTA may determine that any obtained tax advantages to be prevented or adjusted, and in enforcing such decision the FTA may:

  • Allow or disallow any exemption, deduction, or relief in calculating tax or Taxable Income.
  • Allocate any exemption, deduction, or relief, to any other person or entity.
  • Recharacterizing the nature of any payment or other amount.

Important considerations

To determine whether the Anti-abuse rules apply to a transaction or arrangement any relevant information and circumstances must be considered including the following:

  • The manner, the timing, and the result of the transaction or arrangement.
  • The form and substance of the transaction or arrangement.
  • Any change in the financial position that has resulted or will result from the transaction or arrangement.
  • The rights or obligations that has been created which would not normally be created between independent businesses in respect of the relevant transaction or arrangement.
  • Transitional rules

For Corporate Tax purposes, the opening balance sheet shall be the closing balance sheet for the financial year immediately before the first tax year.

The opening balance sheet must be prepared with consideration to the arm’s length principle which refer mainly to transactions with related parties (and transfer pricing rules) to be the same as those with non-related parties. Related party has a broad definition in the law and includes company’s shareholders.

Further transitional measures might be announced by Cabinet decisions.

Conclusion

While preparing for corporate income tax, UAE businesses considering any changes in existing business model, structure, salaries, transactions, and other arrangement must do that on commercial basis only, and not primarily for tax advantages.

Any person or entities conducting business activity in the UAE must keep proper accounts specially for the opening balances which is the year preceding the implementation of the corporate income tax.

How Can Audiix Help?

Audiix will make every effort to help you with resources and updates that would assist you to be prepared for the new tax in terms of compliance and tax planning.

 

Disclaimer
This information summary is provided for general awareness purposes only and is not intended to replace an accounting, tax, or professional advice. Please seek professional advice before making any decision. We assume no liability or responsibility for any errors, omissions, or inaccuracy in this content.

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