We are pleased to present the latest edition of
- The '
Focus Point ' sheds light on aspects ofUAE corporate tax. - Under the 'From the Judiciary' section, we provide in brief, the key rulings on important cases, and our take on the same.
-
Our 'Tax Talk' provides key updates on the important tax-related news from
India and across the globe. - Under 'Compliance Calendar', we list down the important due dates with regard to direct tax, transfer pricing and indirect tax in the month.
We hope you find our newsletter useful and we look forward to your feedback.
You can write to us at taxstreet@nexdigm.com. We would be happy to hear your thoughts on what more can we include in our newsletter and incorporate your feedback in our future editions.
An overview of
The
All resident judicial persons incorporated in
The
- Apply at 9% on taxable income above AED 3,75,000;
- For free zone entities, Corporate Tax shall be at 0%, subject to the satisfaction of conditions.
For free zone entities, it had been mentioned in the tax law that as long as they derive 'Qualifying Income,' the tax will be 0%. However, qualifying income had not been defined in the corporate tax law and the clarification in this regard has been long awaited. Recently, the cabinet finally came out with Ministerial Decision No. 55 and 139 of 2023, where the meaning of 'Qualifying Income' has been finally provided.
Free zone taxation regime in
Entities established in a free zone in
Sr.No | Condition | Description |
1 | Substance |
The free zone entity should maintain adequate substance in |
2 | Qualifying Income | The entity should derive qualifying income only and its non-qualifying revenue should meet the de minimis conditions. |
3 | Meets the 'De minimis' requirements | The non-qualifying revenue of a free zone entity should not exceed 5% of its total revenue or AED 5 million, whichever is lower. |
4 | Election to be subject to corporate tax | The free zone entity should not have elected to be subject to corporate tax. |
5 | Transfer Pricing | The entity should comply with the arm's length principle for related party transactions and connected persons. |
6 | Books of accounts | The free zone entity must prepare and maintain audited financial statements. |
7 | Others | The entity must comply with such other conditions as may be prescribed from time to time. |
What is Qualifying income?
Qualifying income shall comprise of the following:
- Income derived from transactions with another free zone person from activities that are not 'Excluded Activities';1
-
Income derived from transactions with any other person (including outside of
UAE ) only form 'Qualifying Activities';2 - Any other income subject to the satisfaction of De minimis requirements.
The entire Qualifying Income of a free zone entity shall be subject to a 0% Corporate Tax rate, subject to the satisfaction of other conditions.
Points to consider for all
- To ensure that
UAE Corporate Tax registration is complete. Currently, the procedure for registration of certain entities (like a branch of a foreign company) are yet to be prescribed. - The appropriate evaluation of incomes and expenses to be made in order to determine the taxability;
- The free zone entities need to be mindful of substance requirements, Transfer Pricing (TP) compliance and evaluate whether its income meets the definition of 'Qualifying Income.'
- The entities should maintain appropriate books of accounts and get them audited wherever required;
- The entities need to evaluate the timelines for the first tax return filing based on the tax periods followed.
From the Judiciary
Direct Tax
Whether pre-clinical lab services fall under FTS and whether 'make available' benefit can be claimed under the treaty?
Charles River Laboratories Inc TS-296-ITAT-2023(Bang)
Facts
The taxpayer is a tax resident of the
The Revenue contended that the taxpayer provides a report to the companies in
The taxpayer contended that while the services qualify as FTS under the Income-tax Act( the Act), the Revenue has not appreciated the true impact of the word 'make available' used in the treaty while arriving at a conclusion. Test reports generated do not transfer any technology knowledge to the customers, nor do they grant any right to access or use.
Held
Our Comments
The 'make available' clause under the tax treaty would involve careful consideration on whether an assessee would be eligible for claiming the benefit or not. In this case,
Whether payment made by the Indian company to its sister concern would be taxable in
Trusted Aerospace Engineering Pvt. Ltd TS-324-ITAT-2023(CHNY)
Facts
The taxpayer (TASE India) is engaged in the business of manufacturing. TASE India entered into a project agreement with
TASE India, as an entity, is not equipped with the necessary parts/components to manufacture the product. TASE India outsourced the manufacturing to its sister concern
The Revenue was of the contention that the design that was being developed in the
Hence, provisions of Tax Deducted at Source (TDS) are attracted, and TDS should be withheld in
The taxpayer contended that the amount remitted has no income element involved and has been paid to the NR company, which has no Permanent Establishment (PE) in
Held
The
Our Comments
The Chennai ITAT upheld the decision of CIT(A) and relied on the decision of the Hon'ble Supreme Court in the case of
Transfer Pricing
Whether taxpayer can resile from the method used for the determination of Arms Length Price (ALP) during the course of assessment proceedings?
Star India Private Limited ITA No. 7872/MUM/2019
Facts
The taxpayer engaged in the business of broadcasting and distribution of various satellite channels entered into a Master Rights Agreement (MRA) with its associated enterprise (AE) to purchase a Bundle of Sports Broadcasting Rights (BSB). The said BSB was purchased by the AE for lumpsum consideration from various Independent Sports Bodies (ISBs) in erstwhile years. However, the same was transferred to the taxpayer on a novation basis (75%) and the balance (25%) was sub-licensed. Overall, the BSBs were purchased at a discount of 9.5% (from the AE) vis-ŕ-vis the value paid by the AE to the ISBs. The taxpayer claimed a deduction of INR 3,075 (approximate) for such purchases. It was determined to be at ALP using Other Method (OM) as the most appropriate method (MAM) basis the value determined by the independent valuer using Discounted Cash flow (DCF) method.
The Transfer Pricing Officer (TPO), in the case of the taxpayer for the preceding assessment year, had disregarded the valuation report on the grounds of the projections used in the valuation being inflated and also assigned the terminal value in the valuation to be nil. Considering the facts of the case being akin to last year, the TPO made an adjustment of INR 20.31 billion for the year under consideration. During the assessment proceedings, the taxpayer changed the MAM to Comparable Uncontrolled Price (CUP) method stating that the amount paid by the taxpayer to AE is lesser than the amount paid by AE to third parties.
Issues before the SB and SB Ruling
- Can taxpayers resile from the MAM adopted in the TP study - SB held that taxpayers may resile from the MAM selected in the Transfer Pricing Study Report (TPSR). However, the onus of proving whether the new method substantiates the ALP is on the party that resiles from the originally selected MAM.
- Which is the MAM - The SB highlighted the critical differences between the application of the CUP method and OM and stated that the CUP method emphasizes the actual price paid for the property transferred, unlike OM considers the price which has been paid or would have been paid for same or similar uncontrolled transactions. Thus, while selecting OM as the MAM, quotations and valuation reports assist in determining the ALP of the underlying transaction. Also, in order to apply for CUP, there has to be a comparable uncontrolled transaction with an independent party. In the instant case, the price paid by the AE to ISB cannot be construed as a comparable transaction to the purchase consideration paid by the taxpayer to the AE. Thus, the SB held that in the absence of CUP only method that can be applied as MAM is OM.
- Determination of ALP - The matter was directed to be placed before the Division Bench using OM as MAM.
The ruling provides respite to the taxpayers wherein they may resile from the MAM selected at the time of concluding the TP study report at a later point during the course of assessment proceedings.
Footnotes
1. Meaning of Excluded Activities has been provided in the Cabinet Decision No. 139 of 2023
2. Meaning of Qualifying Activities has been provided in the Cabinet Decision No. 139 of 2023
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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