UAE corporate tax: Companies need to closely examine fees under new regime

Since corporate tax is calculated on net taxable income (i.e. income minus expenses), UAE entities need to conduct a scrutiny of their expenses. Fees have not been a huge issue until now, simply because UAE entities are not taxed.

As the UAE is home to Multinational Corporations (MNCs), the review of intra-group services also requires a “transfer pricing analysis” to prevent the transfer of profits from the UAE to other jurisdictions.

Transfer pricing analysis is more than just a benchmark for measuring the adequacy of fee volumes. Both the OECD Transfer Pricing Guidelines and the UN Transfer Pricing Guidelines propose a double test to determine the arm’s length nature of intra-group services.

The first test needs to determine if the service has been provided. It needs to determine whether the intra-group service:

a) provide economic and commercial benefits to UAE entities (“Benefits Test”);

b) services that are not already being performed by the UAE entity for itself (“duplicate service test”); and

c) Not a Shareholder Service

If the first test is met – i.e. the in-group service is indeed provided – the second test needs to pass to ensure that:

a) the cost basis is appropriate for the service;

b) the markup is fair; and

c) Assign keys commensurate with the service

Failure of the first test may result in the refusal or reduction of charges for intra-group services.

The benefit test must demonstrate that the intra-group services provide economic or commercial value to the UAE entity. However, these services may or may not bring any direct value to the UAE entity.

For example, a shared services sector can provide accounting services to group companies, which brings direct benefits to group companies. The recharging of centralized research and development expenses may not bring any direct benefits to the group company, but it will still pass the benefit test.

It also needs to be demonstrated that the UAE subsidiary is not compelled to provide intra-group services. In other words, independent entities in similar situations pay for such services. Intra-group services can be of the nature of general centralized services, or they can be specific services provided separately to specific group companies.

Intra-group services received by a UAE entity may be considered duplicate services if IT has already incurred costs for the same activity. However, repeated testing is subjective and requires careful testing.

For example, a UAE entity engages a local law firm to combat intellectual property infringement and bears the necessary legal fees. Meanwhile, the UAE entity sought a second opinion from the conglomerate’s legal counsel on the same issue. In this case, there is no duplication, as obtaining a second legal opinion is the usual proper course of action.

Even if the intra-group services have the same name as those performed by the UAE entity, there may be no duplication, such as marketing activities. Strategic marketing functions such as branding and corporate websites may be performed by the parent company and carried out by its group companies.

Subsidiaries in various places can also perform marketing functions such as marketing analysis and participation in exhibitions. Due to the different nature of marketing services within the group, they should not be considered duplicate services.

When a parent company charges a fee to its UAE subsidiary, it is important to discern whether the parent company is fulfilling the role of a service provider, or simply shifting the cost of shareholder services. The latter cannot be deducted as an expense.

If the parent company chooses to supervise its investment in the UAE subsidiary through a commissioned employee, the commissioned employee’s fee cannot be charged to the subsidiary. Likewise, the costs of the supervisory board’s supervision and protection of global investments cannot be counted as costs for internal group services.

Intra-group services can no longer be reported as expenses under a general description such as “management fee”. Nor is it enough to justify the fee for what it is worth. Entities headquartered in the UAE will need to demonstrate that inter-group services meet the revenue test and duplication test in particular.