Ministry of Finance issues 3 new decisions on tax group, interest deduction restrictions and joint venture

The Ministry of Finance in the United Arab Emirates has issued three new ministerial decisions for corporate tax purposes, including Ministerial Resolution No. 125 of 2023 regarding the tax group, Ministerial Resolution No. 126 of 2023 regarding the general rule of interest deduction restrictions, and Ministerial Resolution No. 127 of 2023 regarding the joint coalition.

Younis Haji Al Khoori, Undersecretary of the Ministry of Finance, said: "The new decisions reflect the flexibility of the corporate tax system in the UAE, in terms of providing clear tax procedures that help comply and strengthen the UAE's position as a leading center for business and investment, and the tax group's decision stipulates that the group is treated as if it were one entity to reduce the burden of management and compliance, while the decision on the rules of interest discount restrictions, provides clarity to companies when calculating loan costs and is based on OECD global best practices. that the joint venture is not subject to corporate tax unless it is treated as a company, meaning that the partners in the joint venture will be subject to corporate tax on their share of income generated through the partnership."

Tax Group

The Ministerial Resolution on the formation of the Tax Group clarifies the conditions under which entities residing in the UAE and jointly owned by 95% or more, can form or join a tax group and be treated as a single entity for corporate tax purposes, whereby the parent company residing in the UAE must own at least 95% of the voting rights and capital in each company, and all members of the tax group must be considered residents of the country for corporate tax purposes.

The formation of the tax group helps to facilitate the process of calculating and declaring taxable income by allowing the parent company to file a single tax return based on the group's total taxable profits or losses, thus ignoring transactions between members of the tax group in general, and the decision also clarifies the notification procedures in the event that the subsidiary of the tax group leaves or the tax group ceases to meet the eligibility requirements.

General rule of interest deduction restrictions

The resolution on the general rule of interest deduction restrictions sets the maximum interest that can be deducted by businesses other than banks, insurance service providers or natural persons (individuals) doing business or business activities in the UAE, and in line with international standards, net interest expense deducted is set at up to 30% of the company's accounting profit before interest, tax, depreciation and amortization (EBITDA); or the safe haven amount is set at 12 million. Tax groups comprising members of banks and/or insurance service providers must exclude the income and expenses of such members when determining 30% of EBITDA.

Given the importance of infrastructure projects to the UAE, long-term infrastructure projects that meet the relevant requirements will not face any restrictions on the deductibility of interest expenses under the general interest discount rule. Furthermore, in line with the country's commitment to establish itself as a leading global hub for trade and finance, interest incurred on debt instruments introduced prior to the publication of the Corporate and Business Tax Law to the public on December 9, 2022, will not be subject to the general rule of interest discount restrictions.

Joint Coalition

Under the Ministerial Decision on the Joint Venture (unless chosen), the Joint Venture will not be considered a taxable person per se provided that it is not a legal person (company), but if the Joint Venture chooses to be treated as a taxable person per se, its decision is irreversible once it is approved, and any change in the composition of the partnership must be notified to the Federal Tax Authority within 20 working days, and foreign partnerships that are treated as a consortium must Subscriber submit an annual declaration confirming that it is not taxable under the laws of another foreign country, and each partner is taxed separately based on his share of income.

With regard to family enterprises, the resolution stipulates that one or more beneficiaries in family enterprises must be public benefit entities to be treated as a joint coalition, and it must be ensured that public benefit entities do not receive income that is treated as taxable income; if so, this income is distributed to the beneficiaries concerned within six months of the end of the relevant tax period.

Note that all Cabinet decisions, ministerial decisions and explanatory guides related to the Corporate Tax Law are available on the website of the Ministry of Finance: www.mof.gov.ae.