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United Arab Emirates - Taxation of cross-border mergers and acquisitions

United Arab Emirates - Taxation of cross-border M&A

The United Arab Emirates (UAE) is a federation of seven emirates: Abu Dhabi, Dubai, Sharjah, Fujairah, Ras Al Khaimah, Ajman and Umm Al Quwain.

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Introduction

The United Arab Emirates (UAE) is a federation of seven emirates: Abu Dhabi, Dubai, Sharjah, Fujairah, Ras Al Khaimah, Ajman and Umm Al Quwain.

All companies are required to obtain a license in order to undertake business activities in the UAE.The type of licenses that are generally available include a trading license, an industrial license and a service license.

Legislative framework for M&As

Federal Companies Law

UAE Federal Law No.2 of 2015 Concerning Commercial Companies (CCL) is relevant when considering mergers and acquisitions (M&A) in the UAE.

The scope of the CCL covers all commercial operations established in the UAE except:

  • companies excluded by resolution of the UAE Federal Cabinet
  • companies wholly owned by federal or local governments, if a special provision is provided in the company’s memorandum
  • companies operating in certain oil, gas and power sectors in which the federal or local government directly or indirectly holds 25 percent.

The CCL also extends to Free Trade Zones (FTZs) operating in the Mainland UAE.

A merger under the CCL can be effected either by one company absorbing another company or by a combination of two or more companies being absorbed by a new company. The CCL allows companies to merge by a contract specifying the method of conversion of the existing entity’s (or entities’) shares. The CCL also introduces a short-form merger procedure between a holding company and a fully owned subsidiary, as well as between two or more fully owned subsidiaries of the same holding company where no merger contract is required.

An acquisition can also take place by buying shares in a company, subject to foreign investment regulations.

Foreign investment

There are two types of investment locations in the UAE, namely, Mainland UAE and the various FTZs. The key distinction between these two investment locations is based on the foreign ownership restrictions.

Mainland UAE

Mainland UAE is the wider UAE, where foreign investment restrictions apply. In particular, a foreign shareholder cannot own more than 49 per cent of the shares in a company. The remaining 51 per cent must be owned by a UAE national individual or UAE national company.

The benefit of registering a Mainland UAE entity is that there are no restrictions on undertaking business activities inside or outside the UAE, provided that the licensing requirements are met. A Mainland UAE-registered entity can enter into contracts directly with Mainland customers and public entities, which is not permissible for an entity registered in the FTZ.

The CCL allows the UAE Council of Ministers to identify sectors and companies that may be either majority owned or wholly owned by foreign shareholders. The amendment was issued by Decree pursuant to Law No. 18 of 2017 and came into force on 28 October 2017. At the time of writing, it is unknown which economic sectors or entities will have the relaxed ownership requirement.
A foreign company can set up a representative office or a branch in the UAE, but a national/local service agent is required.

Free Trade Zones

There are around 45 FTZs in the UAE. FTZs are designed to promote foreign direct investment in the country. The benefits of setting up in a FTZ include 100 per cent foreign ownership, a guaranteed tax holiday and pre-built business space, along with a customs duty exemption for imports into the FTZ.

FTZ entities are only licensed to do business either within the FTZ in which they have been established or outside the UAE altogether (subject to the laws of the countries concerned).

Each type of FTZ entity is allowed to be 100 per cent foreign owned, with no requirement to appoint a local agent or sponsor.

Tax decrees

There is no corporate tax legislation at the Federal UAE level. Some of the seven emirates (including Dubai) have introduced corporate taxes through their own decrees. Currently, these taxes only apply to foreign oil companies and branches of foreign banks.

Foreign oil companies separately enter into concession agreements with the Ruler of the Emirate in which they extract and/or produce oil. The tax paid by an oil company can range from 55 to 87 percent.

For branches of foreign banks, corporate tax is generally calculated at the rate of 20 per cent of taxable income. The tax decrees do not mention the consequences of company M&As or disposals.
The UAE did sometime announce its intention to introduce the federal (unified) corporate tax regime applicable for all Emirates and all industries. However, any details on the proposed regime and its implementation date are not known yet.

UAE is also actively considering implementation of the minimum standards under the Organisation for Economic Co-operation and Development’s (OECD) Action Plan on Base Erosion and Profit Shifting. The implications of any BEPS measures adopted by the UAE would need to be analyzed once the Ministry of Finance has made a formal announcement.

Withholding tax and capital gains tax

Currently, the UAE does not impose withholding tax or capital gains tax.

Value added tax

As of January 2018, the UAE has introduced a VAT with a standard rate of 5 percent. The national legislation is based on a framework agreement established by six Gulf Cooperation Council (GCC) countries. The VAT Decree Law was published in August 2017 and supplemented by Executive Regulations published at the end of November 2017. Given that VAT is the first federal tax within the UAE, Federal Tax Authority established in the second quarter of 2017 to administer the VAT and any future taxes.

Given the short implementation timelines and the newly established authority, a lot of legislative questions are still outstanding and no practice of rulings or litigation has been established.

The general principles of UAE VAT are similar to those of European countries:

  • Businesses are required to register for VAT if they are involved in taxable activities with turnover of more than 375,000 UAE dirhams (AED; about 100,000 US dollars — US$).
  • Businesses are required to charge VAT on supplies of goods or services within the territory of the UAE.
  • Businesses can recover VAT incurred with respect to making taxable supplies.

The important document for businesses for VAT compliance is a tax invoice. Businesses are required to issue tax invoices for all of their taxable supplies ,and VAT can only be recovered when the business possesses a correct, compliant tax invoice.

Asset purchase or share purchase

Purchase of assets

There are no specific provisions relating to asset purchases or M&As in any of the tax decrees. Where a merger or acquisition involves an entity or entities that are currently subject to corporate tax in the UAE, the tax implications, including purchase price allocation, treatment of goodwill and continuity of tax attributes, should be considered case-by-case.

Value added tax

In the context of M&A transactions, the VAT Degree Law provides for an exception whereby the transfer of whole or independent part of business to a taxable person for purposes of continuing the business would not be considered a supply.

It is anticipated that this concept would apply to a transfer of a particular part of the business but not to transfers of single business assets.

Transfer taxes

There is no stamp duty on the acquisition of assets, except on the acquisition of real property, where a registration fee may be due, depending on the Emirate in which the property is situated.

Purchase of shares

As mentioned previously, an acquisition can be achieved by buying shares in a company, subject to foreign investment restrictions.

Value added tax

As is typical with most VAT regimes, many financial services are treated as exempt. The UAE has taken a very narrow approach to exemption, limiting it to financial transactions where consideration is by way of a margin, with all fee-and commission-based services being taxed at the standard rate. Where a business is transferred through a sale of shares, the financial services exemption needs to be considered. The Executive Regulations set out the treatment and definitions of financial services. The regulations exempt any transfer of ownership in an equity security from VAT.

Transfer taxes

There is no stamp duty on the acquisition of shares.

Choice of acquisition vehicle

As mentioned above there are two investment locations in the UAE — Mainland UAE and the various FTZs. The following entity types are generally available:

Mainland UAE

In Mainland UAE, a limited liability company (LLC) or joint stock company may be incorporated, subject to foreign investment restrictions that restrict foreign ownership to only 49 per cent of the share capital of the entity.
Under the recent changes to the CCL, the UAE Council of Ministers may identify sectors and companies that
may be either majority owned or wholly owned by foreign shareholders.

A representative office or a branch of a foreign company may be established (a national/local service agent is required).

Free Trade Zones

In an FTZ, an entity could be incorporated with 100 percent foreign ownership. No local sponsorship for branches is required.

In FTZ, a free zone establishment company (one shareholder) or free zone company/free zone LLC (more than one shareholder) may be incorporated.

The above entities must obtain appropriate licenses on registration (renewable periodically) from the relevant authorities.

Local holding company

A local holding company can be established either in the Mainland UAE (foreign ownership restrictions should be considered) or in the FTZs (a limited number of FTZs allow purely investment activity).

Choice of acquisition funding

The UAE has no specific thin capitalization rules or no exchange control regulations. Funds can be easily repatriated. Under the CCL, certain companies (joint stock companies, commercial banks and branches of foreign banks) must allocate at least 10 per cent of their net profits every year to a legal reserve. These allocations can stop once the reserve reaches 50 percent of the company’s issued share capital.

Other considerations

Accounting and auditor requirements

The CCL requires locally registered companies to appoint auditors to audit their annual financial statements.
Registered companies in some FTZs are also required to have their financial statements audited annually. The audited financial statements need to be submitted to the respective FTZ authority for license renewal.

Group relief/consolidation

The tax decrees contain no provisions for group relief or consolidation of tax returns.

Value added tax

Group consolidation for VAT purposes is possible where certain requirements are met.

Transfer pricing

Currently, the UAE has no provisions for transfer pricing.

Thin capitalization

Currently, the UAE has no thin capitalization requirements.

Dual residency

There are no provisions in the tax decrees relating to dual residency in the UAE.

Employment of nationals

The UAE has an active ‘emiratization’ program for the employment of UAE nationals and has identified suitable industries in which they may work. Banking and insurance were identified as two industries in which emiratization is a key requirement. Companies operating in those sectors are required to meet annual quotas. Emiratization rules do not apply to FTZ entities.

The National Human Resource Development and Employment Authority is an agency of the UAE government established to help implement the emiratization program.

Tax treaties

The UAE has tax treaties with the following countries and jurisdictions: Albania, Algeria, Andorra, Armenia, Austria, Azerbaijan, Bangladesh, Barbados, Belarus, Belgium, Bulgaria, Bosnia and Herzegovina, Brunei, Bulgaria, Canada, China, Czech Republic, Cyprus, Egypt, Estonia, Fiji, Finland, France, Germany, Georgia, Greece, Guinea, Hungary, Hong Kong (SAR), India, Indonesia, Ireland, Italy, Japan, Jersey, Jordan,
Kazakhstan, Kenya, Korea (Rep.), Kyrgyzstan, Latvia, Lebanon, Liechtenstein, Lithuania, Luxembourg, Macedonia, Malaysia, Malta, Mauritius, Mexico, Mongolia, Montenegro, Morocco, Mozambique, Nation of Brunei, New Zealand, Netherlands, Panama, Pakistan, Philippines, Poland, Portugal, Romania, Russia, Singapore, Serbia, Seychelles, Slovenia, Slovakia, Spain, Sri Lanka, Sudan, South Africa, Switzerland, Syria, Thailand, Tajikistan, Tunisia, Turkey, Turkmenistan, United Kingdom, Ukraine, Uruguay, Uzbekistan, Venezuela, Vietnam and Yemen.

Treaties with many other countries and jurisdictions are currently under ratification. These countries include: Angola, Bermuda, Burundi, Cameroon, Colombia, Costa Rica, Croatia, Ecuador, Ethiopia, Iraq, Maldives, Mali, Moldova, Nigeria, Palestine, Paraguay, Rwanda, St. Kitts and Nevis, Senegal and Uganda.

Comparison of asset and share purchases

From a corporate tax perspective, there is no difference between asset and shares purchases because there is no corporate income tax except for companies in the oil and gas and banking industries.

For VAT purposes, the transfer of a whole or independent part of business to a taxable person for purposes of continuing the business is not considered as a taxable supply.

This concept is expected to apply to a transfer of particular part of the business but not to a transfer of single business assets.

Where the transfer of business is realized through a sale of shares, the financial services exemption should be
considered. The Executive Regulations exempt transfers of ownership in equity securities from VAT.

KPMG in the United Arab Emirates

Jerome van Staden
KPMG
Abu Dhabi Corniche, Nation Tower 2,
19th Floor Abu Dhabi,
United Arab Emirates

T: +971 2 401 4775
E: jeromevanstaden@kpmg.com

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