The 2023 UAE Tax Regime – More Dynamics and a Broader Scope
Introduction to the issue
In September 2022, the UAE enacted two major tax legislations. The Cabinet issued its Decision No. 85 of 2022 on the Determination of Tax Domicile on 2 September 2022 (“Tax Domicile Decision” or “TDD”) and the President of the UAE issued Decree-Law No. 28 of 2022 on Tax Procedures on 30 September 2022 (“New Tax Procedures Law” or “New Law”), both of the new legislations are bound to take effect on 1 March 2023 (“Effective Date”), shaping the new tax landscape for the country.
The New Law will repeal the currently effective Law No. 7 of 2017 (“Old Tax Procedures Law” or “Old Law”)) as of the effective date. However, its effective regulations will remain in effect until the New Law’s executive regulations have been enacted. Moreover, the TDD, being inactive until the Effective Date, requires no action of any natural or legal persons except for the determination of whether a person would be subject to the same on the Effective Date.
- The TDD has a rather wide scope of legal persons that may be deemed as tax residents of the UAE, including any legal entity that is recognised as a tax resident under any relevant UAE tax legislation.
- The TDD’s scope of natural persons that may be deemed as tax residents of the UAE, including foreigners who do not necessarily reside for more than 90 days in the UAE provided that they have either a permanent address or a job or business in the UAE.
- The New Law will raise the liability of the taxpayers for any translated documents and discrepancies found in the language of the documents of the tax record.
- The New Law expands on the liability of the taxpayer’s legal representatives for submission of the tax return.
- The FTA now considers a settlement stage for tax evasion offences, before the initiation of the criminal proceedings against the offender.
Determination of Tax Domicile and Its Implications
The TDD has broadened the scope of who becomes a tax resident of the UAE by incorporating a very low ceiling for application.
For legal persons, Article 3 stated two criteria for a legal person to be deemed a tax resident in UAE:
- The standard criterion: if a legal person was established, formed, or recognized per the legislation in force in the UAE, excluding the branch that is registered by a foreign legal person in the UAE.
- The Broad Criterion: if a legal person is considered a tax resident under any applicable tax instrument (“Tax Law”) in the UAE.
The second criterion may extend the jurisdiction of the TDD, and subsequently the New Law, to taxable activities that would make a legal person a tax resident.
For natural persons, Article 4 of the TDD sets three criteria for the determination of the tax resident status of a natural person in UAE if any of which is met.
The first criterion is whether the natural person’s “usual” or “principal” place of residence and the centre of their financial and personal interests are in the UAE or whether they meet any other criteria specified by the ministerial decree of the Minister of Finance (“Minister”). The latter test is very broad and subject to further legislative instruments to be issued by the Minister to accommodate for any special tax residency criteria.
The second criterion is whether a natural person has been physically present in the UAE for a period of 183 days or more during the tax-relevant period of consecutive 12-month period. This criterion would subject most non-UAE residents to the UAE Tax Law, and the New Law, as tax residents.
Finally, a third criterion whether a natural person is physically present in the UAE for 90 days or more during the tax-relevant, conductive 12-months period provided that:
- They hold any of (i) the UAE nationality, (ii) a valid UAE residence permit; or (iii) is a national of a member state of the Cooperation Council (“GCC”).
- They fulfil any of the following: (i) having a permanent place of residence in the UAE; or (ii) doing a job or business in the UAE.
Virtually, most of the non-UAE national natural persons can be deemed tax residents under the above criteria.
Finally, Article 5 of TDD allows a tax resident to issue a tax certificate domicile attesting to their status as tax residents of the UAE, upon fulfilling the conditions of such as explained above. The TDD also incorporates and prioritizes international (multilateral and bilateral) tax domicile determination agreements that would exclude or include any person as a tax resident in the UAE.
Though Article 53 of the New Law does not explicitly refer to the provisions of the TDD for tax persons and tax domicile, it entrusts the Minister with regulating such a matter through their relevant decisions and decrees. We can safely presume that the TDD is incorporated in the New Law.
The UAE Tax Regime Under The New Law
The New Law gives the Old Law a complete makeover by both amending some of its articles and incorporating new articles. In sum, the New Law amends the definitions, language (shifting towards the responsibility of tax filers for their voluntary or involuntary misconduct and liability for the language of the tax records and documents), scope, the status of legal representatives and tax auditors, process and particulars of the voluntary disclosure, tax assessment, the Federal Tax Authority’s (“FTA”) tax auditing process, assessment and amounts of tax penalties, and tax crimes (tax evasion).
Moreover, some new articles were incorporated into the general procedures under New Law, along with a regime for the reconciliation of tax crimes, the possibility for tax assessment review, and extension of time frames.
We note that the executive regulations of the Old Law would remain in effect, to the extent that does not contradict the New Law, until the new executive regulations come out when the New Law is effective.
Analysis of the relevant amendments
- The definiens Business Day, Tax Residency Certificate, Tax Resident, and Executive Regulations were reintroduced to the New Law. The purpose of such seems to be the inclusion of all relevant terms that (even if not effective), would still give a full language understanding of the New Law.
- The scope of the New Law attempts to cover all possible taxation procedures applicable in the UAE. This includes the procedures for the collection of applicable taxes and penalty amounts in the UAE and the enforcement of all Tax Laws.
- In terms of liability and responsibility, Article 5 incorporates the new Clause 3 which establishes the liability of a person for the language of the translated copies of any data or documents related to any tax record, should the FTA decide to rely upon the translation provided. Additionally, Article 10 elaborates that voluntary disclosure is now required in cases where the taxpayer discovers that there is an error or omission in the tax return submitted to the authority, even if it does not result in a change of the due amount of tax.
- A key provision under the responsibility aspects, Article 7 also raises the liability of the legal representative for the submission of tax returns under the New Law and the Tax Law.
- With regards to the FTA’s tax auditing, the timeline for informing the relevant person of the tax audit is now set at no less than 10 business days before conducting the tax audit as opposed to the previous 5 business days under the Old Law. The same new notification period of 10 business days applies to the notification of the tax assessment and the determination of the value of the payable or refundable tax and any other matters specified under the Tax Law.
- Article 39 was amended to accommodate the FTA’s right to offset the tax refund’s amounts with any other tax or undisputed penalties before refunding any amount related to any tax under the Tax Law. Additionally, the amended article has new clauses that state that the FTA may refrain from any tax refunds if it finds that there are other disputed tax amounts related to that person, under a decision of the competent court, or if the person is subject to a tax audit, subject to the conditions specified in an FTA decision or the FTA’s Board of Directors (“BoD”) in the latter case.
- On the penalties side, the amended Article 24 revoked the AED 500 minimum amount for tax penalties and currently caps it at double the amount of the tax for which the administrative penalty is due. Notably, the administrative penalties extend failure to facilitate or assistance of the FTA’s tax auditor during the tax auditing phase by a person, their legal representative, or tax agent. However, Article 25 has a triple amount cap for tax evasion penalties as opposed to the five-times cap under the Old Law. Wilful failure to pay such administrative penalties will result in imprisonment and another penalty that is no less than the amount of the penalty in question and should not exceed the triple of such penalty. An exemption of such penalties may be made by the relevant authorities.
- A new text was introduced under Article 25, Clause 4 which states that imprisonment and a penalty of no more than AED 1M (or both) would be imposed on anyone who: (i) wilfully provides false information, (ii) conceals or destroys tax-relevant documents or other material, (iii) steals or misuses or causes the destruction of tax-relevant documents, or (iv) prevents or hinders the FTA employees from performing their duties. Participation or instigation of the acts stated herein would result in the participant or instigator’s punishment by the penalties stated in the New Law and as per the criminal participation rules set in Decree-Law No. 31 of 2021.
- There are several new Clauses added to the penalties system under Article 25’s Clauses 7 through 11 which establish joint liability for any persons jointly sentenced to a fine, the aggravation of fines and penalties in case of relapse within 5 years of the original crime, and that the sentencing of a person under the New Law does not exempt the sentenced person from paying the underlying tax or penalties.
- The New Law also introduces a one-of-a-kind reconciliation mechanism for tax evasion where the principal strategy of which is setting a settlement stage before the initiation of the criminal proceedings against the offender in return for full payment of the due tax and penalties. A similar mechanism exists for settlements before the issuance of a criminal judgment but with an additional percentage of the evaded tax.
General New Provisions
- A new Article 26 states require a written request from the FTA’s Director General (“Director General“) for the initiation of criminal action against a person under the New Law. Also, in the cases a judgment of ‘confiscation of seized goods and funds’ is required, the FTA may have absolute control over and ability to dispose of such seized items or funds. Nevertheless, the person owning the seized goods may pay the full tax amount and the relevant penalties before being entitled to request the return of such seized goods.
- Similarly, Article 40, in Clauses 1 through 4, includes new provisions where the FTA finds that the tax amounts payable could be lost, the Director General may request the court to issue an order for the seizure of sufficient funds to collect these amounts. The Article states that payable tax and penalties shall supersede any other rights or debts owed by a person. The article concludes with an obligation on the person who receives any amount as a tax to pay it directly to the FTA.
- New Law introduces a dispute resolution mechanism that allows any person to request the review of the tax assessment issued by the FTA, any part thereof, or the related penalties. The process stipulated in Article 28 requires the person to request, within 40 business days from the date of being notified, the review of the tax assessment and related penalties. The FTA shall review the request within 40 business days from the date of the receipt and will notify the person within 5 business days from the date of issuance of its decision on the review.
- Article 29, considering Article 28, allows for reconsideration of any decision issued by the FTA against any person. The process has the same parameters as that of Article 28, with an exception for reconsideration of tax assessments if a similar request is already submitted and pending decision, provided that the time frame for issuance of the decision by the FTA is not reached.
- Article 46 introduces a standard 5-years period statute of limitation for the prescription of tax audits and tax assessments by the FTA for the relevant expired tax period. However, there are notable cases where the statute of limitation would be interrupted. Notably in cases where: (i) If the commencement of the tax audit or tax assessment is notified to the person before the conclusion of the 5 years and is completed within 4 years of the date of such notice, or (ii) if the tax audit or assessment commences regarding a voluntary disclosure made by the relevant person, provided that it is concluded within one (1) year of its commencement. (keep in mind that once 5 years have passed since the end of the applicable tax period, no voluntary disclosures may be made).
- Subject to Article 46, when tax evasion or failure to register for taxes occurs, the FTA may conduct a tax audit or a tax assessment within 15 years from the end of the relevant tax period.
We note that there are amendments introduced by the New Law that will only be significant upon assessment with the new executive regulations upon their issuance around early 2023.
What the new legislations mean to the UAE businesses
While the new legislations seem more comprehensive, they entail that the UAE tax regime, as of the Effective Date, would have more mechanics for the collection and inspection of the relevant taxes. While it may constitute a change in tone from the common tax landscape of the UAE, we note that this is merely a firm grasp of the execution mechanics and does not constitute a change in the tax brackets or obligations of taxpayers in general.
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Author: Khaled Al Khashab, Associate