− An overview with focus on Germany, Austria and Switzerland −
UAE’s Corporate Tax Law has been in discussion long before its official announcement in January 2022. As a member of the OECD, the UAE is dedicated to implementing a more uniform tax legislation, conforming with OECD’s “Two Pillar Plan” to combat tax avoidance and to close gaps between the mismatched international tax systems.
B. Taxability in the UAE – an overview
IA taxable person in the means of UAE’s Federal Decree-Law No. 47 of 2022 can be divided into two categories: resident and non-resident persons. A resident juridical person that is effectively managed and controlled in the UAE or a resident natural person conducting business activities in the UAE are therefore considered taxable under this law. This is true as well for a non-resident person with either a permanent establishment, or nexus in the UAE or if the non-resident person is deriving UAE sourced income.
The mentioned permanent establishment (PE) is given if there is a fixed/permanent location in the UAE through which a business is carried out, as well as if there is a person habitually exercising an authority to conduct business in the UAE of the foreign person. However, the criteria of a PE are not met, if the location is exclusively used for storage, display and delivery or any behavior that is merely auxiliary.
Furthermore, income is considered to be an UAE sourced income if it is derived from either a resident person, from a non-resident person in PE or from activities performed, assets located, capital invested and rights used in the UAE.
Apart from taxable persons not deriving an income above the 375.000 AED threshold, there are also a few persons exempt from Corporate Tax, such as government entities, public benefit entities or extractive business further specified in this Decree-Law.
Free Zone entities can also be exempt from Corporate Tax if they maintain adequate substance in the UAE and derive “qualifying income”, which is yet to be further specified. Otherwise, a tax rate of 9% is planned for Free Zone entities not meeting the standards.
Tax losses can be carried forward or set-off from the taxable income of the respective taxable period. Carrying forward of tax losses is possible for unlimited time if at least 50% of the capital are held by the same Shareholders. A set-off of taxes can be achieved for up to 75% of losses and also carried forward to subsequent tax periods. However, tax loss relief is not possible for losses incurred before the effective date of Corporate Tax or before a person becomes a taxpayer or by assets/activities that generate exempt income.
C. Double Taxation – Germany
Since the failed renewal of the double taxation Agreement between UAE and Germany in January 2022, there is currently no antidote against double taxation.
Natural persons with a residence or habitual abode in Germany and juridical persons maintaining a management or a registered office in Germany have unlimited tax liability in Germany according to German Tax Law. If none of the above is applicable, a limited tax liability according to German Tax Law is still possible for a German citizen (e.g., renting out property).
A residence is always given in the case of maintaining a dwelling combined with the probability of actually maintaining and using such dwelling. This is looked at from an objective perspective, meaning that subjective or personal circumstances are irrelevant to determining if a residence is given. In conclusion, a residence by definition of German Tax Law is given if this residence is possessed and used or likely to be used by the taxable person, which is often the case if the German Tax Authority deems a habitual abode likely.
A habitual abode is given if the person is present at a place and there are circumstances indicating such presence is not merely temporary. A continuous stay in Germany for more than 6 Months is always considered a habitual abode.
Avoidance of double taxation can currently be tried in two ways: The imputation system allows for foreign tax to be credited against German tax on one hand. On the other hand, foreign tax can be deducted from the domestic tax base. Nevertheless, up until June, there is no actual tax relief as there is no tax collection in the UAE until the first tax period. Still, a waiver or flat rate is possible in rare cases decided by the German Tax Authority.
Looking into the future after the Decree-Law comes into effect, taxable persons in UAE and Germany (both limited and unlimited tax liability) will most likely continue being taxable in both countries.
D. Double Taxation – Austria
Contrary to the situation in Germany, Austria has made a Double Taxation Agreement with the UAE that has been in place since 23rd September 2003 and was last amended 1st July 2021.
In the last amendment the tax payment method was changed from the “Release Method” to the “Credit Method”. This means the tax paid on taxable income in the UAE will be accredited to the taxable person for Austrian tax due to the Double Taxation Agreement.
Taxes paid by a taxable person in Austria will vary depending on the amount of taxable income from 0% on income up to 11.000 Euro to even 55% on income above 1 million Euro.
E. Double Taxation – Switzerland
Switzerland also has a Double Taxation Agreement with the UAE that has been in place since 21st October 2012 and was last amended on 05th November 2022.
In the agreement the “Exclusivity Method” is applied. That means that tax paid on taxable income in the UAE is exempt from tax payment on certain income in Switzerland due to the Double Taxation Agreement.
The tax paid by a taxable person on taxable income will vary depending on the Canton the person is living in.
UAE’s Corporate Tax Law is a necessary step into a more uniform, global system of Tax Legislation. The effects on Double Taxation Agreements and other international conventions are soon to be experienced. It is to be expected that connecting the UAE to this kind of global tax-network may be beneficial for future international agreements.
In order to minimize the negative consequences for the taxpayer, we have already made the following considerations in this respect:
1. Change of Location: taxability in a country starts with the residency of the taxable person. However, if the taxable person moves to a different country with either a better tax situation in relation to the UAE or in general a Double Taxation Agreement with the UAE, this might deduct the burden of taxation.
2. Foundations: The set-up of foundations at RAKICC, DIFC and ADGM could also be an option to reduce the impact of taxation in some cases, although this must be reviewed individually for each case and therefore cannot be seen as a universal solution.
As the topic bears a vast number of details that can hardly be covered in detail in an article of this length, we would happily assist you with finding the tailored solution to your specific query. Furthermore, we are always available to you with professional advice and support for your individual questions.