The UAE Corporate Tax regime offers a range of deductions, exemptions, and reliefs to help taxpayers and encourage investment and economic growth, where these benefits are meant to be applied in good faith and in line with commercial reality. To prevent the misuse of these tax benefits, the UAE corporate tax law incorporates General Anti-Abuse Rules (GAAR).
The GAAR ensures that any transaction or arrangement undertaken primarily for the purpose of gaining an illegitimate corporate tax advantage rather than for valid commercial or non-tax reasons, can be neglected and adjusted by the Federal Tax Authority (FTA).
The Chapter Fifteen of the federal decree law provides clear conditions for identifying such unauthorized transactions, and outlines the authority’s right to counteract these abusive financial arrangements, and mentions the factors to be considered in determining whether the rules apply.
Article 50 – General Anti-Abuse Rule
The GAAR provisions are applicable only when a transaction or arrangement meets both of the following conditions:
- Lack of Genuine Commercial Purpose – The arrangement, or any part of the transactions, are not carried out for a valid commercial purpose or other non-tax purpose.
- Main Purpose is Tax Benefit – The primary goal of the transaction is to secure a corporate tax advantage that contradicts the purpose of the Corporate Tax Law.
For the purposes of GAAR, a “corporate tax advantage” includes, but is not limited to:
- A refund or increased the amount of a corporate tax refund.
- Lowering the corporate tax payable amount through artificial arrangements.
- Delaying the due date for the payment of corporate tax or advancement of a refund without genuine business reasons.
- Avoiding withholding obligations to deduct or account for corporate tax at source.
The above examples give a clear picture that the concept of “advantage” includes both direct and indirect benefits gained through abusive practices.
When the GAAR provisions are applied to a transaction or arrangement, the FTA may counteract or adjust the corporate tax benefit obtained from such transactions or arrangements. This may involve adjusting, reversing, or disregarding the artificial arrangement so that the intended tax outcome cannot be achieved.
If the tax authority finds out that an arrangement is abusive, it can issue an assessment to give effect to the determination, which may involve:
- Allowing or disallowing exemptions, deductions, or reliefs in calculating taxable income or corporate tax payable or any part thereof.
- Allocating such benefits such as exemptions, deductions or relief to other persons where appropriate.
- Recharacterizing the nature of payments or any other amounts for corporate tax purposes.
- Disregarding the effect of the arrangement that would otherwise apply for other provisions of the corporate tax law, in order to restore the intended tax treatment.
The FTA can also make compensating adjustments to the corporate tax liability of other persons impacted by the arrangement, promoting fairness in the overall tax treatment.
To decide whether GAAR applies, the authority will consider :
- The manner of arrangement that was entered into or carried out.
- Whether the legal form reflects the actual economic reality.
- Whether the timing of the arrangement suggests a tax avoidance motive.
- The tax outcome that arises from applying the corporate tax law to the arrangement.
- Any change in the financial position of the taxable person resulting from the arrangement.
- Any change in the financial position of other persons involved resulting from the arrangements.
- Whether the arrangement or transaction has created rights or obligations that are not typically found in transactions between unrelated parties.
- Any additional facts or information that may indicate an abusive purpose.
The above factors ensure that the evaluation of GAAR is comprehensive and considers both objective and subjective indicators of abuse.
In any dispute or legal proceeding regarding GAAR, the authority will bear the responsibility of verifying and proving that its determination to counteract a corporate tax advantage is just and reasonable. This requirement safeguards taxable persons from arbitrary or unjustified application of the anti-abuse provisions.
