The UAE Ministry of Finance and Federal Tax Authority (FTA) have announced significant updates to corporate tax and VAT compliance, effective January 2025.
1. Key Updates on Participation Exemption – Ministerial Decision No. 302 of 2024
The UAE Ministry of Finance has issued Ministerial Decision No. 302 of 2024, replacing Ministerial Decision No. 116 of 2023 concerning participation exemption under the UAE Corporate Tax Law. This new decision introduces refined definitions, conditions, and clarifications applicable to tax periods starting 1 January 2025. Below are the critical highlights:
Key Change Introduced by Ministerial Decision No. 302
A. Minimum Ownership Threshold and Acquisition Costs
Under the previous rules, the Participation Exemption provided a pathway for investments meeting an AED 4 million acquisition cost threshold to bypass the 5% minimum capital ownership requirement. However, to qualify, taxpayers also had to demonstrate:
- A right to at least 5% of the company’s assets upon liquidation.
- Eligibility for 5% of total dividend distributions.
This structure meant the AED 4 million threshold was rarely applicable, as it only benefitted situations where ownership of less than 5% of the capital still provided rights to over 5% of profits and liquidation proceeds.
The New Framework: Starting in 2025, the AED 4 million threshold will fully replace the 5% ownership requirement for all criteria, including:
- Capital ownership
- Dividend distributions
- Liquidation entitlements
B. Foreign Permanent Establishment (PE) Exemption
For the purposes of the PE exemption:
- Tax losses incurred by qualifying foreign PEs must be fully offset by the aggregate taxable income of such establishments before applying for the exemption.
- Where all assets and liabilities of a qualifying foreign PE are transferred to participation, the participation exemption will only apply to income exceeding any unutilized tax losses from the foreign PE.
C. Ownership Transfers
The rules for ownership transfers have been enhanced:
- Ownership interests exchanged under a no-gain or no-loss transfer will now be treated as continuous ownership interests, provided the conditions of the Business Restructuring Relief are met.
- The two-year clawback period now begins from the date of the first qualifying transfer and applies to subsequent qualifying transfers, ensuring consistency in application.
D. Liquidation Proceeds and Losses
- The decision specifies that losses realized by the taxable person on the liquidation of participation may be recognized in the relevant tax period and the preceding seven tax periods.
- Detailed guidance is provided on how to calculate such losses, ensuring accuracy and compliance.
E. Expanded Definitions
The decision introduces new terms, including:
- Qualifying Foreign Permanent Establishment
- Non-Qualifying Foreign Permanent Establishment
- Parent Company
This update simplifies the rules by eliminating the inconsistencies in the previous approach, making the Participation Exemption more straightforward and more manageable for taxpayers to apply.
2. Update on FTA’s New Mechanism for Correcting VAT Returns
The Federal Tax Authority (FTA) has recently issued Decision No. 8 of 2024, introducing a new mechanism for correcting errors or omissions in VAT returns. This decision, effective from 1 January 2025, outlines specific procedures for addressing mistakes in tax filings where there is no difference in the amount of due tax.
Key Highlights of the Decision
1) Scope of Application
- This mechanism applies when taxpayers identify errors or omissions in previously submitted VAT returns, provided there is no change in the tax due.
2) Cases of Errors or Omissions Without Tax Differences
The decision specifies three key scenarios where taxpayers can correct errors without altering the due tax amount:
- Reporting standard-rated taxable supplies in the wrong Emirate’s box.
- Incorrect reporting of zero-rated taxable supplies, either understated or overstated.
- Incorrect reporting of exempt supplies, either understated or overstated.
3) Correction Process
- Taxpayers must submit a Voluntary Disclosure if any of the above cases apply.
- The correction mechanism aims to streamline compliance by allowing adjustments while avoiding penalties typically associated with errors.
4) Implementation Timeline
- The decision, published on 1 November 2024, becomes effective from 1 January 2025.
