Escape Taxes on M&A Deals in Dubai? Not Anymore! The landscape of merger and acquisition in Dubai deals has undergone a significant transformation with the introduction of the UAE Corporate Tax (CT) law. This new legislation, effective from January 2024, marked a shift, especially for businesses eyeing M&A activities. Here is what you need to know!
UAE Corporate Tax Law
The UAE CT law, introduced through Federal Decree No.47 of 2022, has broad implications for businesses operating in Dubai, particularly those involved in M&A and restructuring activities. Historically, the absence of federal corporate tax made Dubai an attractive destination for investments and M&A transactions. However, with the advent of ‘VAT’ in 2018 and ‘Economic Substance Regulations’ in 2019, the tax landscape began to evolve, culminating in the recent introduction of corporate taxation.
Implications for Non-UAE Entities
Non-UAE entities effectively controlled and managed from the UAE are deemed UAE tax residents under Article 11(3)(b) of the UAE CT law. If a company based outside the UAE is managed from Dubai, it’s considered a UAE tax resident under UAE CT law. This could increase its tax obligations and require careful evaluation.
After the UAE CT law takes effect, businesses need to review their financial plans and calculations of internal rate of return (IRR). The tax rate can affect:
Cash flow projections,
How profits are distributed, and
Overall profitability.
Impact on M&A Transactions
Tax Due Diligence
Under the UAE CT law, businesses are now required to undertake comprehensive tax due diligence before engaging in M&A transactions. This includes assessing potential tax risks, applicability of UAE CT provisions, and compliance with tax obligations.
Structuring Considerations
The CT law introduces key considerations for structuring acquisitions, such as participation exemption criteria for dividends and capital gains, debt push-down rules limiting interest deductions, and implications for leveraged buyouts.
Restructuring and Group Transfers
Businesses undertaking restructuring or group transfers must go through specific conditions under the CT law to ensure tax neutrality & avoid claw-back provisions. This includes exemptions for business transfers & asset transfers within qualifying groups.
VAT Implications
VAT considerations play a crucial role in M&A transactions in Dubai. Depending on the nature of the transaction (share purchase, asset purchase, or business transfer). VAT may apply at varying rates necessitating careful review and compliance to avoid penalties.
Documentation and Insurance
The role of comprehensive documentation & insurance coverage in M&A transactions has become more critical. Tax indemnities, representations, and warranties related to tax. Exposures require meticulous attention to detail to mitigate risks and ensure transactional security.
Can You Really Escape Taxes?
While the UAE has historically been tax-efficient, the introduction of the CT law signifies a paradigm shift. Businesses and investors must now prioritize tax planning and compliance to mitigate risks and optimize tax efficiencies in M&A transactions. Strategies such as proforma tax due diligence, strategic structuring, and leveraging exemptions provided under the CT law can potentially minimize tax exposures.
Key Takeaways
Early Tax Planning: Start considering tax implications early in the deal process to align financial models and optimize tax structures.
Compliance and Documentation: Ensure robust documentation and compliance with UAE CT law requirements to mitigate risks and ensure smooth transactions.
Strategic Tax Advice: Seek strategic tax advice to adapt to the complexities of the new tax regime and optimize tax efficiencies.
Conclusion
While Dubai has long been favored for its tax advantages, the implementation of the UAE CT law necessitates a proactive approach to tax planning and compliance in M&A transactions. For further guidance on navigating the complexities of merger and acquisition in Dubai transactions. Under the UAE Corporate Tax (CT) law, or for expert advice on optimizing tax efficiencies and compliance strategies. Feel free to reach out to experienced Dubai legal consultants and lawyers in Dubai.
