Explore the intricacies of mergers and acquisitions M&A accounting in the UAE, including crucial legal and tax considerations. Our experts provide valuable insights to help you make informed decisions in the ever-evolving landscape of UAE business transactions.
On 9 December 2022, the UAE rolled out the Corporate Tax (CT) law through Federal law No.47 of 2022 regarding Corporate Tax in the UAE. We have provided an overview into the key areas of the corporate tax in the UAE relevant to businesses. This blog seeks to discuss in detail the impact of corporate tax in the UAE on M&A transactions and restructuring.
Historically, M&A deals involving UAE Targets did not require a great amount of due diligence or purchasing structuring. This was due to the absence of UAE corporate tax. Following the rolling out of VAT in 2018 and Economic Substance Regulations in 2019. Now less scope due diligence started to be undertaken. However, with the coming up of VAT audits and its related controversies coupled with the rolling out of the corporate tax in the UAE law. Now it is critical to look at tax planning for M&A in which UAE Targets. Including those with downstream outside of the UAE investments.
This alert aims to discuss the following major aspects of the UAE corporate tax law. Those that are likely to be probable deals going forward along with the steps that companies need to undertake through the different life cycles of a deal.
Summary of Issues Covered in This Blog
Tax due diligence
Undertake proforma tax due diligence work to assess risks on tax positions and M&A Accounting UAE tax law provisions going forward
Owners Exemption and M&A Accounting Firms in the UAE
Review holding structures and conditions under corporate tax in the UAE to determine tax implications on making of dividends and exit tax on sale of shares from direct and indirect subsidiaries
Debt push-down from M&A Accounting firms in the UAE
Optimization of certain methods of purchase through the introduction of leveraged buyouts but obeying the interest limitation provisions under Emirati law
Restructuring and company transfers
Impact of any potential changes and group transfers in terms of meeting conditions provided under corporate tax in the M&A Accounting UAE for tax neutrality – critical to review claw back provisions
Other key areas under the corporate tax in the UAE
Deemed residency rules for non-UAE companies; tax model and effective tax rate review on transactions. Also, coverage within deal documentation along with representation and warranty insurance
Modes of effecting a deal and their VAT results including documentation and obedience to be undertaken
List of key takeaways for various sets of stakeholders in a deal – buyers, sellers, and group restructuring
A. Corporate Tax in the UAE and Due Diligence
For acquirers looking at putting money in UAE Targets, There is expected to be low historical risks as the corporate tax in the UAE is likely to apply (for most sectors). This is from 1 January 2024, with the initial tax return filing not due until many months from the close of the year. For instance 30 September 2025 in case of a calendar year end. However, it is just that the acquirer should consider a proforma overview of the UAE Target entities. This from a corporate tax in the UAE point. This is under the hypothesis that if UAE CT law were to apply, what might be the potential impact or exposures? Certain areas that can be checked within this review can include these things:
- Free Zone entities are eligible for the possible 0% tax rate. Also, the satisfaction of mandatory demands, i.e. qualifying income, substance, transfer pricing laws;
- Inter-company transactions and movement pricing considerations;
- Tax grouping and loss transfer stock ownership thresholds;
- Tax attributes such as tax issues and interest limitation;
- Foreign tax exposures such as long-term establishment, entities deemed to be UAE citizens based on control and management, withholding taxes and their worth on payments received from non-UAE businesses;
- Impact of M&A Accounting on future taxes includes things like unrealized gains / losses. Also, provision for outlays and their write back, revaluation, etc
Issues related to corporate tax in the UAE
Understandably, recourse for exposures shown in a tax due diligence may generally put in an indemnity. A value adjustment depends on the level of risk and sum. Given the nascency of corporate tax in the UAE. Also, absence of material historical returns to see as a part of a deal. Since the initial tax return may only be filed on 30 September 2025 for firms following a calendar year. Thus, there might not be a serious recourse with respect to indemnity or valuation changes in the immediate future.
However, a proforma review as seen above may enable acquirers to identify issues that may arise immediately after acquisition. Also, potentially discuss any changes / documentation that the sellers / Target might need to put into place prior to the transaction. Such areas can form a part of the compulsory conditions to close a deal. This can be part and parcel as a part of the transaction papers to provide additional protection to the acquirer.
B. Structuring considerations
An acquirer / purchasing group can consider various options to acquire a potential Target. For instance direct share acquisition from the seller (secondary transfer) in retun for cash or shares, infusing equity/ debt into the Target (main infusion) or business deal. Each of these modes should have considerations under the rules of corporate tax in the UAE. Unlike a due diligence exercise that is designed to identify historical exposures, acquisition structuring could have a direct impact on areas such as modes of acquisition, inclusion of debt to undertake the acquisition, acquiring entity jurisdiction and the post-buyout structure. Some areas that may merit consideration as a piece of acquisition structuring include:
- Primary Tests: Under Article 23 of corporate tax int he UAE Participation Exemption is provided for dividends and capital gain made by a UAE resident from their interests. Whilst dividends received from UAE firms are automatically exempt, from capital gains on sale of shares (UAE and non-Emirati and dividends received from foreign entities, the Participation initially needs to meet the three primary tests. For instance minimum shareholding, minimum holding period of 12 months and the Participation needs to be subject to corporate tax in its home area at a rate not less than 9%.
- Relaxation for holding companies from meeting a basic test:
Further, Article 23(3) of the corporate tax in the UAE mentions that a Participation will be said to have met the minimum 9% corporate tax test. if its basic objective and activity is the purchase and holding of shares / equitable stakes (that in turn meet the above-mentioned terms). Secondly, the Participation’s income greatly consists of income from its relevant interests.
Further, this easing is also extended under Article 23(4) of corporate tax in the UAE. This is to Participations that are eligible as Qualifying Free Zone individual. Alternatively, an exempt Person which usually may not be subject to tax at 9% under corporate tax in the UAE. Therefore, this condition seeks to give the Participation Exemption in instance of Intermediate Hold Co. structures. This in nations such as BVI, Cayman, etc. Also, at the same time for Intermediate Holding groups located in an Emirati Free Zone (subject to laws).
Additional terms in case of multi-tiered investments:
For structures having lots of layers of investments. For instance, indirect subsidiaries, and corporate tax in the UAE also gives an additional condition. That is under Article 23(2) (d) in order to be eligible for Participation Exemption. It should not be more than half of the direct and other assets of the Participation should consist of ownership interests that will not have qualified for an exemption from corporate tax in the UAE. This is if they were held directly by the Taxable guy. Hence, in cases where the worth of ownership interests in step-down parts held by a Participation fails to meet the basic and primary tests and such value exceeds more than half of its total assets. Then the Participation Exemption should not be there.
To test this additional condition, the following steps may be followed:
- At the outset, the Participation (straight holding) in question should satisfy the basic 3 tests mentioned above. That is 5% minimum shareholding, bare holding period of more than a year. Also, the Participation being subject to a corporate rate in the UAE of at least 9% in its home area.
- Once the above tests are met the total value of assets. This is including the investment made by the relevant parts in each direct / indirect subsidiary) of the stake should be determined. It is currently unclear whether book value or reasonable value will need to be taken;
- Next, each direct/indirect subsidiary need to be tested against the aforementioned some basic primary tests. Now assuming that they were owned directly by the Taxable Person (and not by the ownership); and
- The worth of all the direct / not direct subsidiaries failing the conditions (in step one) should be added on them. For instance an indirect subsidiary in Manama (where no CT applies), ownership of less than five percent by the Participation in a subsidiary.