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Business publication - October 2023

Gearing up for UAE Corporate Tax Compliance

With the UAE’s introduction of the new corporate tax regime and requirements, a host of new laws have now come into effect since June of this year. As the new laws are centred to corporate taxes, this means individuals’ salaries remain out of scope, thus leading business owners to potentially contemplating whether paying themselves a good or higher salary from their own companies be within the scope of the new laws and therefore in compliance. While the temptation of a higher salary and consequent lower taxes may inherently be there, such practice could carry pitfalls and legal consequences, besides being easier said than done.

Paying yourself a salary – As a business owner
UAE based business owners first need to evaluate if they have an employment contract with their own companies. If so, the next step may require to evaluate and show that the related salary paid is remuneration for the owner’s labour. Distinguishing between remuneration for labour and the return on capital (on the basis of having established a successful business venture) requires a thorough economic analysis instead of making wishful arguments.

The UAE Ministry of Finance has indicated that employment requires all, or most of the income being derived from one customer/employer. Drawing salaries from multiple companies owned by the same owner(s), or their immediate relatives, may violate this essential feature. In addition, Business owners holding a Golden Visa would also need to pay attention to these requirements before claiming employment income.

An arrangement provided by a Taxable Person, that being the business, to its Connected Person, the business owner, shall be deductible only if and to the extent the payment or benefit corresponds with the Market Value of the service, benefit or otherwise provided by the Connected Person and is incurred wholly and exclusively for the purposes of the Taxable Person’s Business. Arm’s length principle is an important applicable aspect in regard to business owners paying themselves a salary, as the applicable rules seek to ensure that transactions between Connected Parties are carried out on an arm’s length basis, as if the transaction was carried out between independent parties. To prevent the manipulation of Taxable Income, various articles in the Corporate Tax Law require that the consideration of transactions with Related Parties and Connected Persons need to be determined by reference to their “Market Value”. A Person will be considered “connected” to a business that is within the scope of UAE Corporate Tax if they are, amongst others:
• The owner of the business;
• A director or officer of the business; or
• A related party of either of the above.

Any payment to owners, or their relatives, will be subject to arm’s length principle and transfer pricing analysis. Benchmarking of salaries paid to owners could take the following approaches to ensure the salaries are not in excess of:
• What would have been paid to a third-party performing similar functions; or
• What the owner would have earned from an independent company for performing similar functions.

Finding a database to undertake the comparative analysis at present is a challenge, and although viewing available job vacancies in the media may shed some light, such references may not be of relevance or be reputable enough to benchmark on. Considering the multitude and varying sizes of different businesses in the UAE, any analysis could become highly subjective when arriving at reasonable benchmarks.

UAE corporate tax has prescribed thresholds for various items such as transfer pricing documentation, Small Business Relief, interest expenses, and so on to ease the tax compliance burden. A similar approach by prescribing a ‘safe harbour’ threshold for
owners’ salaries – whether based on amount or on percentage of revenue – could help owners save on compliance costs and mitigate future risks, although additional MoF guidance addressing the topic and owner’s concerns has not being published, thus emphasising on a cautious approach.

Shareholder Services
Global transfer pricing guidance relating to inter-company services could also be useful in relation to owners’ salaries. An overseas parent company may opt to supervise its global investments by deputing its employee to specific regions or by having a supervisory board at the head office.

The cost of such deputed employee or supervisory board cannot be charged to – and claimed as an expense – by a UAE subsidiary.

Anti-Abuse rules
While planning for corporate tax, business owners may also need to factor in the anti-abuse rules. Anti-abuse rules cover any transaction or arrangement which is not for a valid commercial/non-fiscal reason reflecting economic reality.

If the main purpose of such a transaction/arrangement is to obtain a corporate tax advantage inconsistent with the tax law, the transaction could be disregarded – and result in tax arrears and penalties. Owners’ salaries would require a 360-degree review to ensure that it does not fall under anti-abuse rules.

Business owners may need to ask themselves the right questions to avoid finding themselves under the microscope lenses at the time of future tax assessments and audits.

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