UAE corporate tax: Can a building be subdivided for tax purposes?

The difficulty facing companies is a matter of interpretation of a few words. In some cases, words are remarkably malleable, so the fewer you have, the more you invite whataboutery.

Commercial innovation, necessary to compete and survive, means there is a myriad of product and service possibilities for customers. As business owners we are left to interrupt and decide how our niche(s) fit into such narrow language.

I liaised with Dr Peter Wilson, an international tax expert from PB First, in writing this article.

Today, starting with ships, I want to lead you into a rabbit hole demonstrating the difficulty your business might face in deciding whether or not your entity qualifies for not paying corporate tax.

Manufacturing and logistics, with as yet not completely understood limitations, are two sectors that qualify. Shipping can be part of a logistical supply chain solution; moving goods from place to place.

It would seem logical that the ownership, management and operation of ships that support the same is what is also covered by virtue of what appears to be the law’s intent.

What about pleasure cruises? With so much coastline, the UAE offers relaxing, fishing and other activity excursions to tourists and residents.

Would it matter if these excursions left UAE territorial waters? Cruises moving around the Gulf and into the Indian Ocean might increase capacity utilisation by transporting some cargo.

Assuming a cruise is non-qualifying, are we really going to have bifurcated environments, where cargo and leisure are split, like VAT?

No, thankfully. The de minimis rule, allowance for non-qualifying income, would appear to clear this up. Less than 5 per cent of turnover or under Dh5 million ($1.36 million) of invoicing, whichever is lower, may be earned without it affecting your non-taxable status.

That said, the additional revenue for cargo, which might otherwise sit outside corporate tax, are likely to become taxable. We now potentially introduce structural inefficiency into the marketplace by situational accident.

Further, one of the elements of a contract we often forget are the vanilla clauses that ubiquitously sit towards the end. Specifically, force majeure.

What happens where an event(s) forces an activity that inadvertently is a non-qualifying one? This might shunt a business from a non-taxable position to a taxable one.

As the law stands, it is binary. Either you are or you are not. We have seen action by governments when the situation demanded it, Covid-19 for example.

Next, from ships to planes using the same base scenario. Let’s add a twist drawing on VAT law, where in-country and international movements are treated differently, and treated differently again if they are part of a continuous scheduled journey.

The UAE issued its federal corporate tax law that will levy a headline 9 per cent rate on taxable income exceeding Dh375,000. Silvia Razgova / The National

Taxable income below the aforementioned threshold will be subject to a 0 per cent rate of corporate tax. Chris Whiteoak/ The National

No corporate tax will apply on salaries or other personal income from employment — be it in the government, semi-governmental, or private sector, the Ministry of Finance said. Chris Whiteoak/ The National

Businesses will become subject to the UAE corporate tax from the beginning of their first financial year that starts on or after June 1, 2023. Victor Besa / The National

The UAE corporate tax regime builds from best practices globally and incorporates principles that are internationally known and accepted. Victor Besa / The National

Should cargo be flown from one side of the country to the other, would this affect corporate tax treatment?

Be conscious that much explanatory law is still awaited. That said, for the examples I’ve using here, I haven’t seen normative legislation account for such unknowns. Yes, there are official consultative documents, but we have been told that we cannot rely on their content.

With many entities having January to December financial years, this meaning that their first corporate tax year will begin in only two and half months, what are they to do?

Smaller firms can take advantage of small business relief or shelter under the tax-free allowance, but if you are a large entity the numbers can be very material.

Missing clarifying tax law might have the unintended consequence of increasing the number of UAE juridical entities as businesses seek to separate trading verticals in absence of clarity.

The amount of time to review, plan and implement such changes is fast disappearing.

In this last section I want to explore immovable property in a free zone. A building is leased by its juridically registered free zone owners to another similar legal person for a business purpose. In this situation those rents don’t attract corporation tax.

What if the building was developed initially as residential? Is it the original intent of the building that drives its tax treatment?

Assuming a change in usage is allowable, what happens when there is a period of non-occupancy? Does the original classification automatically return by default?

Is there going to be a test, a form of de minimis usage, maybe the same 5 per cent as revenue within the annual reporting period?

Were the building to be a villa, the scenario is simpler. There is one clearly demarked location. Where it is a multistorey building and the lease relates to a part thereof, can the building be subdivided for corporate tax purposes?

One solution might be for such lease agreements to include a clause that the parties on exit of the tenant agree that the landlord immediately and simultaneously becomes the new tenant.

Interesting times!

David Daly is a partner at the Gulf Tax Accounting Group in the UAE