Anti-Abuse Rules under UAE Corporate Tax

Introduction – Anti-Abuse Rules under UAE Corporate Tax

In a business environment marked by an increase in cross-border transactions, Anti-Abuse provisions are the standard mechanism used by various countries to prevent “abuse of tax regulations” by Taxable Persons. Anti-Abuse Rules also called “AAR”, measure a transaction entered into by a Taxable Person on the pedestal as to whether such a transaction can reasonably be considered as abusive or not. If so found, Anti-Abuse Rules shall kick in and ensure the transaction will be subject to the provisions of the UAE Corporate Tax Law. The Law may also impose penalties on taxpayers to deter such behavior.

Article 50- General Anti-Abuse Rules under the UAE Corporate Tax Law

Applicability of the Anti-Abuse Rules-

The provisions of the AAR are applicable where it can be reasonably ascertained that:

1. Kind of Transaction or Arrangement: A transaction or arrangement that is conducted by the Taxable Person (s) without:

• Any valid commercial, or
• Other non-fiscal reasons, and

The transaction or arrangement fails to reflect economic substance in the UAE, and

2. Corporate Tax Advantage: The primary purpose of the transaction or arrangement is to obtain a Corporate Tax advantage that is inconsistent with the intent or purpose of the UAE Corporate Tax Law.

Note: It is important to note that these persons may not be the same:  

• The person who has the requisite purpose and  
• The Person who obtained the tax benefit.  

This is because the provisions apply when a person enters into a transaction or arrangement and the main purpose (or one of the main purposes) of it is to allow another person to obtain a tax advantage or benefit. 

What are Corporate Tax –Advantages as per the UAE CT Law? 

“Corporate Tax Advantage”, for the purposes of Article 50 of the UAE Corporate Tax Law, shall include the following: 

1. Claiming a Corporate Tax Refund or an increased Corporate Tax refund; 
2. Avoiding or lowering the amount of Corporate Taxes due under the Law; 
3. Advancement of a Corporate Tax refund or the postponement of a Corporate Tax payment; 
4. Avoiding the obligation to deduct Corporate Tax or failing to account for Corporate Tax due under the Law. 

Determination of Corporate Tax Advantages 

The Federal Tax Authority shall determine that one or more of the Corporate Tax Advantages pertaining to a transaction or arrangement needs to be adjusted or counteracted if the provisions of this Anti-Abuse Rules are applicable to a specific transaction or arrangement. This means that the FTA will treat the transaction or arrangement based on its economic reality

Issuance of an Assessment by the Authority 

Under Clause 3 of this Article, the Federal Tax Authority shall issue an assessment to give effect to any finding that may include:  

1. Granting or disallowing any exemption, deduction, or relief in determining the Taxable Income or the Corporate Tax Payable, or any portion thereof; 
2. All or any part of the deductions, exemptions or relief is to be allocated to another person; 
3. To redefine the nature of the payment or amount   for the purpose of the UAE Corporate Tax Law; 
4. To disregard the effect resulting from the application of the provisions of the UAE Corporate Tax Law 

Just and Reasonable: Such assessment, issued by the FTA should be just and reasonable. “Just and reasonable” means fair and appropriate as per the facts and circumstances of the case. 

Compensating Adjustments to Corporate Tax Liability: Furthermore, if such assessment impacts the Corporate Tax liability of any other Person, then such effect shall be remedied by making compensatory adjustments to the Corporate Tax Liability of such Person.  

For instance, if the assessment of the Taxable Person results in the allowance of an expense in a transaction with another Party, thus reducing its overall Tax Payable, counter-adjustment shall be made by disallowing the income that has been recorded in the books of the other Party.  

Person not necessarily party to the transaction or arrangement: For a compensating adjustment to be made, it is not required that the person is a party to the transaction or arrangement. The only thing required is that they are affected by the transaction or arrangement. 

Factors to be considered for determining the applicability of the Anti-Abuse Rules on a transaction or arrangement under UAE Corporate Tax Law – 

The following factors need to be e considered while determining the applicability of the Anti-Abuse Rule to a given transaction or arrangement: 

1. Manner of transaction: That is how the agreement or transaction was made, signed, and carried out;  
2. Nature of the transaction: The form and substance and other relevant details of the arrangement or transaction;  
3. Timing of the transaction: The timing when such transaction or arrangement was entered into or carried out;  
4. Result of the transaction: The outcome of the transaction or arrangement in terms of how the UAE Corporate Tax Law has been applied;  
5. Change in Financial Position of Taxable Person: Any modification to the Taxable Person’s financial situation that has been, will be, or may reasonably be anticipated to be caused by the transaction or arrangement;  
6. Change in Financial Position of another Taxable Person: Any modification to another Person’s financial situation that has been, will be, or may reasonably be anticipated to be caused by the transaction or arrangement;  
7. Creation of rights or obligations of transacting parties: Whether the relevant transaction or arrangement has resulted in the creation of rights or responsibilities that would not typically exist between parties engaging in arm’s-length business 
8. Any other mitigating facts or circumstances.