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UAE Corporate Tax: Significant Relief Granted To Commodity Traders Operating in Free Zones
Commodity enterprises in free zones will find considerable satisfaction in the latest corporate tax revisions. The focus has shifted back to the taxation framework in UAE-free zones. A recent cabinet decision, accompanied by a corresponding ministerial decision that revokes previous rulings, has been retroactively implemented from June 1, 2023. These decisions bring forth new concepts and provide clarity on relevant issues. As is typical in taxation matters, some intriguing discussion points have surfaced.
Qualifying Commodities Trading
The trading of Qualifying Commodities has brought significant relief to commodity traders based in free zones not classified as ‘designated zones.’ Income generated from the trading of ‘qualifying commodities’ with individuals or entities outside the free zone, whether domestic or international, is now eligible for a 0 percent tax rate.
Qualifying commodities refer to metals, minerals, energy, and agricultural commodities traded in their raw form on a recognized commodities exchange market, either within the UAE or internationally. This applies to the physical trading of these commodities and associated derivative trading used for hedging against risks inherent in such activities.
Qualifying Intellectual Property
Qualifying intellectual property, which encompasses income from the ownership or exploitation of all intellectual property assets, was initially explicitly excluded from the 0 percent tax rate. However, with the revised decisions, a specific portion of the income derived from the ownership of ‘Qualifying Intellectual Property’ is now eligible for the 0 percent rate.
Qualifying IP includes patents and copyrighted software, along with any other rights that are functionally equivalent to a patent (e.g., utility models, IPR for plants and genetic material, orphan drug designations, and extensions of patent protections). It’s important to note that intellectual property rights related to marketing, such as trademarks, are not eligible for this rate.
Clarity on Sufficient Substance
Ensuring ‘adequate substance’ is a crucial compliance requirement for claiming the 0 percent tax rate. This entails engaging in core income-generating activities (CIGA), maintaining sufficient assets, having a specific number of employees, and incurring operational expenses.
Core income-generating activities primarily involve functions that contribute to the business’s value and are not predominantly support activities. It necessitates having an appropriate number of qualified full-time employees. The required substance should be upheld in the respective free zone or designated zone where the qualifying activity is mandated. Even third parties to whom core income-generating activities may be outsourced must meet this location condition.
Points for Consideration:
Detailed clarification has been provided on income from headquarter services to related parties, which is now eligible for a 0 percent tax rate. ‘Headquarter services’ encompass the administration, oversight, and management of business activities for related parties. This includes providing senior and general management, captive insurance services, administrative services, procurement services, business planning and development, risk management, coordination of group activities, and incurring expenditures on behalf of related parties, along with offering other support services.
Caution is advised in handling ‘headquarter services.’ Beyond anti-abuse rules, a lingering question pertains to whether a mainland company, typically ineligible for the 0 percent rate and/or engaged in operating mainland retail stores, could potentially restructure its management activities, including owners’ salaries, by establishing a separate free zone company.
The detailed clarification of the distribution of goods or materials within or from a designated zone has effectively addressed concerns raised by taxpayers. Numerous intriguing scenarios, such as the distribution of non-resale equipment, verification of overseas customers as resellers, trading in non-qualifying commodities, and sales involving third-port shipments, still require careful evaluation.
With enhanced clarity on free zone tax incentives, it is imperative for business owners to pose the appropriate questions to optimize the tax impact and meet compliance requirements.
The information provided herein is for the general information of the user and is provided in good faith. We make no representation or provide warranty of any kind, express or implied, regarding the adequacy, suitability, validity, or completeness of the information. Our advice in regard to UAE corporate tax and value added tax is based on our understanding of the relevant laws and the regulations issued. We cannot be held responsible for new regulations and/or interpretation of existing regulations by the FTA that is not consistent with our advice. Under no circumstance shall we have any liability to any user of this information or to third parties for any loss or damage of any kind incurred as a result of the use or reliance of this information.
Breaking News: UAE announces New Tax Rules for Non Residents
The UAE’s Federal Tax Authority (FTA) has offered clarification on the standards used to identify non-residents who are subject to corporate tax.
The UAE’s Federal Tax Authority (FTA) has revealed a fresh set of guidelines outlining the parameters for identifying non-residents liable to corporate tax within the nation.
This announcement is a component of the corporate tax legislation that became operational on June 1, 2023.
In an official statement, the FTA encourages all individuals not residing in the country but earning income in the UAE to refer to the recently released guidelines and the applicable legal framework on the FTA’s official website.
For non-resident individuals, the FTA’s guide outlines specific conditions under which they may be subject to corporate tax.
For natural persons, two scenarios are applicable. The first is if an individual has a Permanent Establishment in the UAE with a turnover exceeding AED 1,000,000 in a calendar year. The second is if they earn State-Sourced Income from the Emirates.
Regarding non-resident juridical persons (corporations), they must fulfill certain criteria to fall under the scope of Corporate Tax. This includes having a Permanent Establishment in the UAE, deriving State-Sourced Income, or having a nexus in the UAE, such as earning income from Immovable Property in the country.
The guide emphasizes the necessity for non-resident juridical persons to register for Corporate Tax and obtain a Tax Registration Number (TRN) when meeting the relevant criteria. This is crucial to prevent compliance delays and potential administrative penalties.
Furthermore, the FTA clarified that Corporate Tax registration is not obligatory for non-resident juridical persons solely earning State-Sourced Income without a Permanent Establishment or nexus in the Emirates.
Additionally, the guide specifies that a non-resident natural person must register for Corporate Tax and obtain a TRN if their turnover attributable to their Permanent Establishment in the UAE exceeds AED 1,000,000 within a calendar year.
The information provided herein is for the general information of the user and is provided in good faith. We make no representation or provide warranty of any kind, express or implied, regarding the adequacy, suitability, validity, or completeness of the information. Our advice in regard to UAE corporate tax and value added tax is based on our understanding of the relevant laws and the regulations issued. We cannot be held responsible for new regulations and/or interpretation of existing regulations by the FTA that is not consistent with our advice. Under no circumstance shall we have any liability to any user of this information or to third parties for any loss or damage of any kind incurred as a result of the use or reliance of this information.
Before January 1, 2023, business owners must carefully assess the potential consequences of the forthcoming alterations.
Businesses should reevaluate whether they are required to obtain VAT registration. January 1, 2023, marks a significant milestone for the UAE’s Value-Added Tax (VAT) system, as it signifies five years since its introduction and introduces the first major amendments.
Here are the top changes you should know about:
1. Increase Time for Tax Audits
In general, a tax audit for a monthly or quarterly tax period cannot be conducted after five years from the end of that specific tax period. However, if a taxpayer has received notification of a tax audit within the initial five-year period, the audit can still take place and be completed within the subsequent four years following the notification.
2. Tax Audits Following Voluntary Disclosures
If a Voluntary Disclosure for a monthly or quarterly tax period is submitted in the fifth year from that period, the Federal Tax Authority (FTA) will have an additional year to conduct a tax audit. This additional time allows the FTA to process the voluntary disclosure and carry out any necessary audits based on the information provided in the disclosure.
3. Tax Evasion
In cases of tax evasion, a tax audit can be conducted up to 15 years from the end of the tax period in which the evasion took place. Tax evasion is defined as the unlawful actions, whether by a registered or unregistered individual, that result in reduced tax amounts, non-payment of taxes, or obtaining an illegitimate tax refund.
4. Failure VAT registration
It’s a common misconception that avoiding VAT registration keeps businesses off the tax authorities’ radar. However, if a person fails to obtain VAT registration, the Federal Tax Authority (FTA) may initiate a tax audit within 15 years from the date they should have been registered. Therefore, businesses should reevaluate their obligation to obtain VAT registration.
5. Good News for Exporters
If a business’s entire supply is zero-rated, there is no mandatory requirement for business owners to comply with periodic VAT regulations. Such businesses have the option to request an exemption from VAT registration.
For companies that were unaware of this advantageous provision and were already VAT registered, they were obligated to continue their periodic VAT compliance. Effective from January 1, 2023, VAT-registered businesses can also apply for an exemption from VAT registration.
6. Additional requirements for input credit on service imports
Many businesses pay for services from overseas service providers based on agreements without insisting on the issuance of invoices by the service providers. The recent changes in VAT laws specify that, for the import of services, input credit can only be claimed if the taxpayer receives and retains invoices by the VAT laws.
7. Retention Payments in the Construction Industry
In a previous Tax Conversation on 05/07/2021, we discussed the time of supply for retention payments in the construction sector. If the duration between the progressive milestones of goods or services delivery and retention payment claims extends beyond 12 months, VAT may still be applicable. The one-year mark from the date when the goods or services were provided is now designated as a specific VAT supply date.
8. Supplies to Related Parties Considered
Previously, deemed supplies, such as providing goods or services to related parties free of cost, could trigger a VAT liability under existing laws. With the amended VAT laws, a company may not incur a VAT liability for providing free-of-cost goods or services to related parties if the recipient company is otherwise eligible to recover 100% input credit on its purchases.
Concluding Remarks
Tax law amendments are a global trend, reflecting the adaptability of tax laws to evolving economies and the responsiveness of tax authorities to taxpayer needs. In light of the modifications in VAT laws, it’s anticipated that corresponding adjustments to the executive regulations will follow shortly.
Business owners are encouraged to carefully assess the implications of these recent changes, as they are set to take effect on January 1, 2023.
The information provided herein is for the general information of the user and is provided in good faith. We make no representation or provide warranty of any kind, express or implied, regarding the adequacy, suitability, validity, or completeness of the information. Our advice in regard to UAE corporate tax and value added tax is based on our understanding of the relevant laws and the regulations issued. We cannot be held responsible for new regulations and/or interpretation of existing regulations by the FTA that is not consistent with our advice. Under no circumstance shall we have any liability to any user of this information or to third parties for any loss or damage of any kind incurred as a result of the use or reliance of this information.
UAE Drops VAT for Bulk Electronics and Smartphone Buyers!
In the future, buyers will instead provide a written declaration to the seller, so UAE electronics and smartphone traders will no longer charge VAT on bulk sales.
Traders and wholesalers in the UAE dealing with electronics, mobile phones, computers, and accessories will receive much-needed relief from their VAT obligations. This relief specifically applies to business-to-business (B2B) transactions among VAT-registered dealers, with no changes affecting VAT on consumer purchases of electronic goods.
Under the new regulations, sellers of these products will no longer be required to impose VAT on their supplies to VAT-registered buyers who plan to resell the goods. Instead, going forward, buyers will provide a written declaration to the seller and independently account for VAT on their purchases. This process is known as the ‘Reverse Charge Mechanism’ and is already in place for bulk gold trade between VAT-registered dealers in the UAE.
Extending this decision to encompass electronics and computer products is a significant development for the electronics and computer trade sector in the UAE. It solidifies the UAE’s position as a prominent re-export hub for this market, providing a notable boost to the industry.
Previously, many overseas bulk buyers would purchase electronic goods from various individual suppliers in the UAE, and these goods were later combined for export.
There were instances where customers couldn’t provide export documents to each supplier, potentially making VAT a cost for the local seller.
With the new system in place, electronics goods bought in bulk in the UAE can now be sold to a single VAT-registered consolidator or shipping company using the Reverse Charge Mechanism. The shipping company can then export the goods to the overseas customer in a single shipment, complete with the necessary documents. This change is expected to significantly reduce operating costs for mainland suppliers.
What 'reverse charge' means for small businesses
In simplified terms, these changes will make it easier for electronics businesses in the UAE to comply with tax regulations, according to a prominent industry source.
The tax authority is shifting from collecting VAT at multiple points to a single collection point. This simplifies the tax collection process, rectifies any system gaps, and reduces the potential for lost revenue.
Furthermore, Electronics businesses will now have access to funds tied up in VAT, which they can use to expand their operations. The Reverse Charge Mechanism shifts the responsibility for VAT payments to a different party.
These new regulations reaffirm the authorities’ commitment to transforming Dubai and the UAE into a center for technological innovation and trade. We are excited to witness the industry’s growth under this updated tax framework.
The timing of this change couldn’t be better for the local electronics and tech sector. As we enter the final quarter of 2023, it’s the time when bulk deals become commonplace, with overseas buyers placing orders with UAE suppliers for everything from the Apple iPhone 15 to trending gaming devices.
The new requirements simplify the entire process, particularly in terms of accounting for VAT on such deals. They also reaffirm the UAE’s reputation as the go-to place for purchasing gadgets.
To maintain competitiveness as a trading hub, it’s crucial that the UAE remains affordable and offers easy trading opportunities.
This announcement regarding the Reverse Charge Mechanism is a clear indication that the feedback and insights from the business community and industry groups were heard. As a Board Member of the Dubai Computer Group, which represents the interests of IT traders in Dubai, we’ve been actively providing feedback through official channels to streamline processes and ensure that the UAE retains its competitive edge as a re-exporter.
The information provided herein is for the general information of the user and is provided in good faith. We make no representation or provide warranty of any kind, express or implied, regarding the adequacy, suitability, validity, or completeness of the information. Our advice in regard to UAE corporate tax and value added tax is based on our understanding of the relevant laws and the regulations issued. We cannot be held responsible for new regulations and/or interpretation of existing regulations by the FTA that is not consistent with our advice. Under no circumstance shall we have any liability to any user of this information or to third parties for any loss or damage of any kind incurred as a result of the use or reliance of this information.
What are The VAT Rules in the UAE For multi-year Leasing Contracts?
If you make payments in installments for your lease, you might need to be aware of a specific period when VAT applies.
How will VAT be applied to staggered payments for a lease contract?
When a seemingly innocent question sparks lengthy discussions about taxes, it highlights the intriguing nature of taxation and one’s fascination with the subject.
The initial question appeared simple: What are the VAT consequences of a 4-year equipment lease with eight semi-annual invoices? In the business world, this question encompasses a wide range of transactions.
Whether you’re leasing goods, vehicles, commercial real estate, or intellectual property rights, the VAT implications are crucial for lessors to consider. It’s commonly assumed that VAT will be payable in installments upon the issuance of each of the eight semi-annual invoices.
VAT is calculated based on the ‘date of supply’ for goods or services. The ‘date of supply’ for contracts involving periodic payments or consecutive invoices is clearly defined as the earliest of:
1. The date of issuing a tax invoice.
2. The payment due date as stated on the tax invoice.
3. The date of payment receipt.
4. The date of one year’s expiration from when the goods or services were provided.
If a tax invoice is issued or payment is received, VAT is due only on the amount mentioned in the invoice or the payment. The remaining VAT will be payable later, following VAT laws.
The real challenge arises for long-term contracts when one year has elapsed. Does VAT become immediately payable on the entire remaining value?
Let’s delve into a case study:
Consider a four-year commercial property lease for Dh2 million with advance invoices of Dh250,000 issued every six months. The first two tax invoices, issued before one year from the contract date, should trigger VAT on the first Dh500,000.
For the remaining amount, the one-year threshold will pass before the issuance of subsequent invoices or payments. This raises the question of whether VAT becomes immediately payable on the remaining Dh1.5 million upon completing one year.
The ‘date of supply’ provisions don’t account for apportioning the contract value over the contract period or calculating a proportionate value at the one-year mark. Without such apportionment, the ‘date of supply’ could apply to the entire remaining value once the one-year period expires.
Nature of leasing transactions:
It could be argued that leasing services involve the daily transfer of the right to use the property throughout the contract period, meaning the one-year period never expires.
In leasing transactions, the service essentially revolves around transferring the right to use the property. This transfer happens at a specific point in time, not over a duration. While the right to use the property may span a period, the transfer itself occurs once upon signing the contract.
Concerning extended car leases, it’s clarified that the ‘date of supply’ will be the earliest of the three specified dates, provided it doesn’t exceed one year from the start of the lease.
Hence, leasing services should be considered ‘provided’ at the beginning of the leasing period. At the one-year mark, without apportionment, the ‘date of supply’ for the entire remaining value could be triggered, resulting in a substantial VAT liability.
International Jurisprudence:
Instances of annual tax points in cases of continuous supplies can be found in the VAT/GST laws of the UK and India.
In the UK, the annual tax point applies only to taxable supplies between related parties when the recipient can’t fully recover the input VAT. Since related parties with incomplete input VAT recovery exist, the VAT accounting could be indefinitely delayed without issuing VAT invoices or exchanging lease payments. The creation of an annual tax point prevents this indefinite delay and requires apportioning the contract value over the contract period.
The current UAE VAT provisions don’t address such specific scenarios, which means they could apply to all instances of continuous services.
Corporate Tax:
VAT implications could also impact corporate tax. Recovering input VAT on the entire remaining value might necessitate recognizing deferred tax assets/liabilities in the financial records.
Taxation is about seeking the right answers. It demands asking the right questions, whether consciously or innocently, and being willing to challenge mere hearsay about potential tax consequences.
The information provided herein is for the general information of the user and is provided in good faith. We make no representation or provide warranty of any kind, express or implied, regarding the adequacy, suitability, validity, or completeness of the information. Our advice in regard to UAE corporate tax and value added tax is based on our understanding of the relevant laws and the regulations issued. We cannot be held responsible for new regulations and/or interpretation of existing regulations by the FTA that is not consistent with our advice. Under no circumstance shall we have any liability to any user of this information or to third parties for any loss or damage of any kind incurred as a result of the use or reliance of this information.
The Big VAT Shift: Electronics Wholesalers in UAE Brace for New B2B Rules
Starting October 30, 2023, the UAE electronics sector shifted to the ‘Reverse Charge Mechanism‘ for VAT on B2B supplies of electronics and tech devices meant for resale or further manufacturing. The UAE has also issued specific criteria for classifying electronic device components, which are eligible for the Reverse Charge Mechanism.
Key Points:
- UAE electronics industry adopted the ‘Reverse Charge Mechanism’ for VAT on B2B supplies of electronics.
- Eligible components for the Reverse Charge Mechanism include those used in manufacturing, necessary for device operation, or replacements.
- Components enhancing device functionality but not essential for operation are not covered.
- SIM cards and similar external cards are exempt.
- Failure to declare intent of use can lead to unrecoverable VAT for buyers.
- Correct classification is crucial to avoid VAT-related risks.
- Transitional provisions apply to supplies dated October 30, 2023, or later.
- Compliance with date of supply rules, declarations, and TRN verification is necessary.
- Industry and business owners should ask the right questions to ensure compliance.
The UAE electronics sector transitioned to the ‘Reverse Charge Mechanism’ for VAT on B2B deals involving devices intended for resale or further manufacture on October 30, 2023. A ministerial decision outlined the criteria for eligible electronic device parts, including those used for manufacturing, operation, or replacement. However, components that enhance device functionality but aren’t necessary for operation aren’t covered. SIM cards and similar items are also excluded.
The Reverse Charge Mechanism for B2B supplies is mandatory, and failing to declare intent of use may render input VAT non-recoverable. VAT-registered buyers aiming to resell/manufacture must ensure VAT isn’t charged on electronic device supplies. Proper classification is crucial, as misclassifying items can lead to VAT credit loss or penalties for suppliers.
Certain items like earphones, external storage devices, and protective covers enhance device enjoyment but won’t qualify as parts and pieces. Memory cards, monitors, and motherboards, necessary for device operation, likely will qualify. Other items require careful assessment.
All electronic device supplies after October 30, 2023, must adhere to VAT treatment and compliance requirements, including transitional provisions for advance payments and written declarations. Businesses must evaluate various tax aspects and ensure they ask the right questions regarding this change.
The information provided herein is for the general information of the user and is provided in good faith. We make no representation or provide warranty of any kind, express or implied, regarding the adequacy, suitability, validity, or completeness of the information. Our advice in regard to UAE corporate tax and value added tax is based on our understanding of the relevant laws and the regulations issued. We cannot be held responsible for new regulations and/or interpretation of existing regulations by the FTA that is not consistent with our advice. Under no circumstance shall we have any liability to any user of this information or to third parties for any loss or damage of any kind incurred as a result of the use or reliance of this information.