GAAR and UAE Corporate Tax

General Anti-Avoidance Rule (GAAR)

Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses was published in the Official Gazette on 10 October 2022, and its provisions, including the General Anti-Abuse Rule (GAAR) under Article 50, apply to Tax Periods commencing on or after 1 June 2023. Whenever altering structural elements, involving related parties, or making other adjustments, entities should take care to prevent them from being solely designed for tax efficiency.

Tax Administrations (TAs) and taxpayers need to adhere to tax principles such as legality, tax equality, and contributory capacity. Neither artificial structures nor the creation of new taxable events allows taxpayers to avoid paying taxes. Nevertheless, they are permitted to engage in genuine tax planning.

The Objective of the General Anti-Avoidance Rule / Anti-Abuse Rule (GAAR)

In contrast to tax evasion, anti-avoidance rules are designed to prevent the practice of tax avoidance. Under Article 50 of the UAE Corporate Tax Law, GAAR applies to a transaction or arrangement that is not entered into for a valid commercial or non-fiscal reason and where the main purpose or one of the main purposes of the transaction is to obtain a Corporate Tax advantage inconsistent with the intention or purpose of the law.Tax avoidance involves artificially reducing taxes through unconventional means, distinct from genuine tax planning. The purpose of these rules is to prevent acts that are designed solely to reduce taxation without a legitimate economic or legal impact.

Design of the General Anti-Avoidance Rules (GAAR)

Article 50 of the UAE Corporate Tax Law provides the criteria for GAAR application, focusing on whether a transaction lacks a valid commercial reason and obtains a tax advantage inconsistent with the law’s intention., tax events are to be assessed based on the same criteria used to define them in the law. Depending on whether the act or transaction is deemed simulated, taxes will be assessed according to the actual activity.

In addition, Article 11 introduces a general anti-avoidance clause, according to which, if a certain result is achieved artificially or inappropriately, the tax consequences will be determined by ordinary or appropriate acts for achieving that result. Exceptions only apply when the artificial or improper actions have no significant economic or legal effects.

A simplified model is proposed by Waerzeggers and Hillier, which applies when the Tax Authority is convinced that the main purpose of the plan is to obtain a tax benefit. Tax authorities have the power to adjust tax liabilities in such cases as if the plan's execution had been avoided or an alternative plan had been executed. The Tax Authority must make its determination within five years of the end of the relevant tax year and provide reasons for its decision.

General Anti-Avoidance Rules (GAAR) and Corporate Tax

There is a provision about Anti-Abuse Rules (AAR) in Chapter 15, Article 50 of Federal Decree-Law No. 47. Transactions are prioritized based on their substance rather than their formal appearance. By developing AAR, the primary objective is to ignore or set aside transactions created primarily to gain a Corporate Tax (CT) advantage. To put it simply, the AAR allows authorities to disregard or invalidate a deal that is primarily structured to achieve tax benefits without a genuine business purpose.

Implementation of General Anti-Abuse Rules (GAAR)

Assuming all relevant factors are taken into consideration, the following conditions apply to a transaction or arrangement:

• There is a reasonable likelihood that the transaction or arrangement, or part of it, does not reflect economic reality on a commercial or non-tax-related level.
• It is the primary purpose of the transaction or arrangement, to gain an advantage over Corporate Taxes which is contrary to the intent and purpose of the Decree-Law. Essentially, this article applies to deals that lack a genuine business reason and are primarily structured to achieve tax benefits in violation of the law.

Corporate Tax Advantages that can be denied with GAAR

• Refunding or receiving a larger refund of UAE Corporate Tax.
• Avoiding or reducing your Corporate Tax Liability.
• Delaying the payment of Corporate Tax or receiving a refund before schedule.
• For the purposes of Article 50, a Corporate Tax advantage includes a refund or increased refund of Corporate Tax, avoidance or reduction of Corporate Tax payable, deferral or advancement of Corporate Tax payments or refunds, and avoidance of an obligation to deduct or account for Corporate Tax.

GAAR's Effects on UAE Corporate Tax

The Authority can counteract or adjust certain UAE Corporate Tax advantages if it determines that the transaction has resulted in certain benefits. Among the possible steps are:

• Calculating taxable income, deductions, or relief by determining whether certain exemptions, deductions, or relief should be permitted or disallowed.
• Giving another person, group, or organization these exemptions, deductions, or reliefs.
• Reclassifying any payment or amount under this Decree-Law.
• Ignoring other parts of the Decree-Law that would normally have an impact on the situation.
• Adjusting other individuals' or entities' Corporate Tax liabilities per the Authority's decision.

The Authority can take various measures to correct or adjust the tax treatment of a transaction if it determines that it provides unfair tax advantages.

Determining Factors

The following factors should be considered in determining whether a particular article applies to a transaction or arrangement:

• Transaction Method: How the transaction was conducted.
• Transaction Nature:  A transaction's form and substance.
• Transaction Timing : When the transaction occurred.
• Transaction Outcome:  According to the applicable law, the outcome of the transaction.
• Impact on the Taxpayer's Financial Position:  The effect of the transaction on the taxpayer's financial position.
• Impact on the Financial Position of any other Taxpayer:  If the transaction impacts the financial position of other taxpayers.
• Inheritance of Rights and Obligations:  Additional obligations or rights that wouldn't normally occur in arms-length agreements.
• Further Details and Circumstances:  Any other pertinent details or conditions will be considered.

GAAR-Related Activities that require Evaluation

Considering the General Anti-Avoidance Rule (GAAR) is important before making certain decisions or engaging in particular activities. The following activities need to be evaluated:

• Change of Financial Year:  It is important to consider the implications of changing the financial year under GAAR before making a decision.
• Restructuring or Planning:  GAAR should be applied to any planning or restructuring activities.
• Related Party Transactions under Corporate Tax Law:  Changes in related party transactions, under UAE Corporate Tax Law, should be analyzed in the light of GAAR.

GAAR must be applied fairly and reasonably by the authorities responsible for applying these rules.

If you have any queries regarding GAAR and UAE Corporate Tax, feel free to get in touch with Reyson Badger, one of the top Corporate Tax Consultants in Dubai.