UAE Corporate Tax (CT) on Mergers and Acquisitions (M&A): A Comprehensive Overview

The introduction of the UAE Corporate Tax (CT) in 2023 represents a significant development in the country’s tax landscape. As part of this tax regime, the UAE has laid down specific provisions for mergers and acquisitions (M&A), with a focus on ensuring tax neutrality and clarity for business restructuring activities.

1. Introduction to UAE Corporate Tax (CT)

The UAE Corporate Tax (CT), introduced by Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, aims to enhance the UAE’s competitiveness and ensure it remains in line with international tax standards, such as the OECD’s Base Erosion and Profit Shifting (BEPS) framework.

The tax applies to businesses engaged in commercial activities in the UAE, subject to certain exemptions. The standard CT rate is 9% for taxable income exceeding AED 375,000, and it applies to both domestic and foreign businesses operating in the UAE.

The M&A provisions within the UAE CT framework are designed to facilitate corporate restructuring while maintaining tax neutrality, preventing unnecessary tax burdens during mergers, acquisitions, or other corporate reorganization processes.

2. Key Laws, Regulations, and Decisions Related to M&A under UAE CT

2.1. Federal Decree-Law No. 47 of 2022 on Taxation of Corporations and Businesses

This is the principal law that governs corporate tax in the UAE, including provisions related to mergers and acquisitions. Key aspects of the law include:

• Taxable Person: Defines who is subject to UAE Corporate Tax.
• Taxable Income: Specifies what constitutes taxable income and the adjustments that can be made in M&A scenarios.
• M&A Provisions: Addresses the tax treatment of mergers, demergers, spin-offs, and other corporate restructuring activities.

2.2. Cabinet Decision No. 83 of 2022 (Implementation Regulations)

This regulation provides more detailed rules for implementing the provisions of Federal Decree-Law No. 47/2022. It covers a wide range of tax matters, including the treatment of M&As.

• M&A Transactions: The decision outlines specific scenarios where M&A activities may be carried out with tax neutrality.
• Transfer of Losses: In cases of mergers or acquisitions, provisions for the transfer of tax losses or carry-forward of losses are also discussed.

2.3. Ministerial Decision No. 120 of 2023 (Corporate Tax Guide)

This decision clarifies technical aspects of the corporate tax law, including those applicable to M&A. It includes:

• Tax Consequences of Mergers: Detailed guidance on how mergers and acquisitions will be treated for tax purposes.
• Tax Rulings: Provides businesses the opportunity to request advance tax rulings on M&A transactions to confirm the tax treatment of specific deals.

2.4. UAE Federal Tax Authority (FTA) Publications

The Federal Tax Authority (FTA) issues various guidelines and FAQs regarding M&A and corporate tax, providing additional clarification and interpretations of the law. Some key publications include:

• M&A FAQ: Clarifies the treatment of tax losses, carry-forward provisions, and transfer pricing in M&As.
• Corporate Tax Manual: Offers practical guidance on corporate restructuring, mergers, and acquisitions from a tax perspective.

3. Applicability of UAE Corporate Tax (CT) on Mergers and Acquisitions

3.1. M&A Transactions Covered under UAE CT

Under the UAE Corporate Tax Law, mergers and acquisitions involving UAE companies are subject to the following provisions:

• Mergers: A merger occurs when two or more companies combine to form a new entity or one company absorbs another. The law provides for tax neutrality during mergers to avoid taxing the transaction at the corporate level.
• Acquisitions: In an acquisition, one company buys another. The tax treatment of acquisitions is structured to ensure that there is no immediate tax burden on the transaction, allowing for carry-forward of losses in certain situations.
• Corporate Reorganization: The tax law also applies to other forms of corporate restructuring, including spin-offs, demergers, and asset transfers, ensuring tax neutrality where possible.
• Cross-Border M&As: While the focus of the UAE CT law is on domestic M&A activities, international M&A transactions involving UAE entities may also be subject to special provisions, particularly with respect to transfer pricing and foreign tax credits.

3.2. Key Conditions for Tax Neutrality in M&As

To achieve tax neutrality during M&A, specific conditions must be met:

• Continuity of Interest: The acquiring company must assume the economic interests of the merged entity.
• Continuity of Ownership: A significant portion of the ownership interest in the merging companies must be maintained post-transaction.
• No Immediate Tax Liabilities: Generally, M&A transactions that meet these criteria will not trigger immediate capital gains taxes or other tax liabilities

4. Exemptions and Reliefs in M&A Transactions under UAE CT

The UAE Corporate Tax law offers several exemptions and reliefs designed to make M&As smoother and tax-efficient:

4.1. Tax Neutrality in Mergers

Mergers that meet certain conditions are treated as tax-neutral events. This means that:

• No immediate tax is levied on the transfer of assets or liabilities from one company to another.
• Carry-forward of tax attributes, including tax losses, credits, and depreciation, may be possible post-merger, depending on the specific circumstances.

4.2. Loss Transfer in Mergers

In a merger scenario, the transferring entity’s tax losses may be carried over to the surviving company, subject to meeting the prescribed conditions in the law.

4.3. Tax Relief for Small and Medium Enterprises (SMEs)

There are specific provisions for SMEs involved in M&A transactions to benefit from tax reliefs. These reliefs are designed to foster consolidation and growth among smaller businesses.

4.4. Exemption for Reorganizations

Certain types of corporate reorganizations, such as spin-offs and asset transfers, can also be exempted from tax if the main purpose is a genuine business reorganization and not tax avoidance.

5. Compliance Requirements under UAE CT for M&A Transactions

5.1. M&A Transaction Reporting

The UAE Corporate Tax law mandates that businesses must report M&A transactions to the Federal Tax Authority (FTA). Companies involved in M&As must:

• Notify the FTA about the M&A transaction, including any related asset transfers, mergers, or acquisitions.
• File a formal tax return reflecting the M&A transaction, providing documentation of the tax treatment applied, including any losses carried forward.

5.2. Documentation and Record-Keeping

Companies involved in M&A transactions must maintain thorough records to ensure compliance with the tax rules. This includes:

• Contractual documentation of the merger or acquisition.
• Financial statements showing the treatment of assets, liabilities, and tax attributes.
• Valuation reports (if applicable), especially for cross-border M&As.

5.3. VAT Considerations in M&A

While corporate tax is the main focus, Value Added Tax (VAT) may also apply in M&A scenarios, particularly if the transaction involves the transfer of assets or services. VAT-compliant invoices must be issued, and VAT obligations must be settled in line with UAE VAT laws.

5.4. Transfer Pricing and Related Party Transactions

For M&A involving related entities, transfer pricing rules may apply. These rules require businesses to ensure that transactions between related parties are conducted at arm’s length, and appropriate documentation must be maintained to avoid penalties.

5.5. Corporate Tax Audits

The FTA may carry out audits to ensure that M&A transactions are in compliance with UAE corporate tax law. Businesses must be prepared for audits and must maintain clear and accurate documentation.

5.6. Tax Rulings and Clarifications

To ensure clarity and avoid disputes, businesses may request a tax ruling from the FTA on the treatment of specific M&A transactions, especially in complex cases or when the tax neutrality provisions are in question.