What corporate tax means for mergers and acquisitions in the UAE

Merging with or acquiring another business is far from a simple task, and corporate tax adds another layer of interrelated elements to consider. Today, we are going to look at some of them. Most of these would not have applied if everything had been completed before the first date that corporate tax impacted the involved companies . Currently, the most interesting movements in the market are not driven by traditional entities targeting industry rivals or inevitable mergers caused by external factors. Instead, much investible wealth is coming from private equity funds and sovereign wealth funds , making the battle for strong returns fiercer than ever. In M&A, some things have not changed. Data rooms will still need to include information on the parties' VAT history. A mock Federal Tax Authority (FTA) audit on the positions would go a long way to ensuring the veracity of the data. However, some things have changed. Whereas once where international parties were involved, a review of any issues that might arise with permanent residence could allow the preparation of a suitable strategy to manage the UAE entity, this got a lot more complicated. Critical is the question of nexus of control. The classic M&A question has always been who is now in charge. In an expanded universe, who is in charge of what and where becomes more urgent. With changes continuing at the top, the operational companies can often risk being overlooked. What trading will be conducted between the newly merged entities? These will all need transfer pricing projects to ensure that transactions are align with regulations in the UAE. Existing trading before any acquisition would make such work simpler. If there has been no trade, the outcome of such an exercise may challenge some of the underlying financials that underpinned the deal. If there is a foreign country involved, they may have their own compliance requirements. Add a deeper review of the relevant double taxation agreements to the list. A business that is growing quickly is one constantly seeking additional funding. These are very attractive takeover targets. With the possibility of high interest bearing leverage in place, the total value of the annual interest charge needs to be monitored to ensure it does not breech the 30 per cent of Ebitda (earnings before interest, taxes, depreciation and amortisation) rule. It might have been part of the planning to replace the lenders in place with a party from the newly formed or enlarged group. If it is all UAE players, there may be issues if the lender is not subject to 9 per cent corporate tax. Fundamentally, consider the premise as follows. The borrower is getting a deduction for interest paid, therefore for balance, the lender should pay tax of the interest charged. If one does not happen, why should the other? The most interesting conundrum would be if one entity had already elected to be a qualifying free zone business in their tax return. What potential impact might there be on the new group member? Given how much work is required to comply and prove on an ongoing basis that a business is entitled to claim a zero per cent corporate tax rate, you do not want a change in structure and operation to unwind this. Further, if this was not modelled at the time of acquisition, the feasibility of the project could be adversely affected. Finally, let us move from operational entities to holding entities. There are two matters that should concern everyone. How will dividends from operational companies be managed? The other concerns the end game of this exercise. How is it unwound in an exit? And where? Once you begin involving additional jurisdictions, the initial planning and continuing future proofing will require careful continuing periodic review. Just once a year may not be sufficient. Our scenario planning must also include unwinding what we have just so carefully put together.