Developments for UAE Family Businesses

With the introduction of corporate tax in the UAE, family businesses across the region have been assessing the impact that the new tax legislation will have on their current structures.

One of the key issues for family businesses will be to ensure that their holding and management structures are established appropriately from a tax perspective and do not inadvertently increase the group’s effective tax rate. 

This will be particularly important for groups that have international investments held in tax-free jurisdictions (such as Jersey or the BVI) as these groups could find that their international companies are considered tax resident in the UAE and liable to UAE corporate tax. 

This would have a significant impact on family groups that do not take appropriate steps to implement changes to their management and corporate governance structures.

Certain family groups may also find that they become liable to an increased tax rate of 15% as a result of changes which will be introduced to align the UAE’s tax system with the global minimum tax initiative under “Pillar Two” of the OECD Base Erosion and Profit Shifting (BEPS) project (the Pillar Two Rules). Family businesses should assess the potential impact the Pillar Two Rules may have on the group’s effective tax rate and whether any steps may be taken to minimise the impact of the rules.

Scope of UAE Corporate Tax

Corporate tax was introduced in the UAE by Federal Decree-Law No.47 of 2022 (the Corporate Tax Law) and is effective for financial years beginning on or after 1 June 2023. 

For companies with a 31 December financial year-end, their first corporate tax period began on 1 January 2024.
The general corporate tax rate is 9% for taxable income exceeding the threshold of AED 375,000, and 0% for income below that threshold.

Certain entities (such as government entities and qualifying investment funds) will be exempt from corporate tax. Free zone entities which meet certain conditions may be subject to tax at 0% on their qualifying income. There is also a relief for small businesses which are tax resident in the UAE whereby they may elect to be treated as not having derived any taxable income where their revenue in the current and previous tax periods is less than AED 3 million.

UAE tax resident entities (that cannot benefit from an exemption) will be subject to corporate tax on their worldwide income (subject to certain exemptions and reliefs). 

In general, an entity will be considered tax resident in the UAE when it is incorporated in the UAE (including a free zone entity), or where a foreign entity is effectively managed and controlled in the UAE.

Where an entity is effectively managed and controlled is a question of fact. A key factor is where key management and commercial decisions that are necessary for the conduct of the entity’s business are in substance made. Typically, this will be where a company’s board of directors makes decisions that play a leading part in the management of the company. 

Given the typical management and corporate governance structures in place in many family businesses, it is likely that their international companies could be considered tax resident in the UAE, giving rise to UAE tax on their income. 

This will particularly be a risk where all directors and senior management of the international companies are based in the UAE and there is minimal substance in the relevant country.

Family businesses should review their current structures to ensure that they align with the best practices from an international tax and corporate governance perspective. In addition, consideration needs to be given to the ownership structure of real estate assets located in the UAE and the corporate tax exposure that such assets may be subject to. 

Pillar Two Rules - Global Minimum Tax

It is expected that the UAE will introduce legislation in line with the Pillar Two Rules which would subject the profits of large multinational enterprises which have revenue in excess of €750 million (approx. AED 3.25 billion), to a minimum tax of 15% on their income in each jurisdiction. 

Entities which fall within the scope of the Pillar Two Rules will potentially be required to pay an effective tax rate of at least 15% on their profits on a country-by-country basis. Where a group has low-taxed profits in one or more countries, the Pillar Two Rules allow other countries to charge top-up taxes to ensure the 15% minimum rate is met.

Federal Decree-Law No. 60 of 2023 introduced an amendment to the Corporate Tax Law to lay the foundation for the implementation of the Pillar Two Rules in the UAE. While further detail is to be released, the amendment gave some insight into how the 15% minimum tax rate under the Pillar Two Rules may be implemented in the UAE.

The rules are expected to be implemented in the UAE in 2025 and a public consultation will be conducted in early 2024.

Family offices with turnover of more than €750 million should consider the impact of the Pillar Two Rules on their group, including potential restructuring opportunities, compliance obligations and top-up taxes outside the UAE. 

Overall, given recent developments, family offices should review their current shareholding, corporate governance and management structures from a legal and tax perspective to ensure that they have implemented the optimal structure that upholds the shareholders’ interests and operates in a tax efficient manner in line with international best practice.