Mergers and Acquisitions: Tax Implications Under the UAE Corporate Tax Regime

Blog Article

As the UAE continues to solidify its position as a global financial and investment hub, mergers and acquisitions (M&A) have become a key strategy for companies looking to expand, diversify, and remain competitive. The recent introduction of the UAE Corporate Tax regime, effective from June 1, 2023, has added a new layer of complexity to these transactions. Understanding the tax implications of M&A activity under this framework is critical for stakeholders, especially in a jurisdiction where tax was historically not a central concern in deal structuring.

This article explores the key tax considerations for M&A transactions under the UAE Corporate Tax regime, with practical insights tailored for investors, business owners, and legal and financial professionals operating within the country. It also highlights the importance of obtaining sound corporate tax advice to navigate the regulatory landscape effectively.

The Evolution of Tax in the UAE

Historically, the UAE maintained a tax-free environment for most business sectors outside of oil, gas, and banking. This has changed significantly with the introduction of VAT in 2018 and the corporate tax regime in 2023. The corporate tax is set at a standard rate of 9% on taxable profits exceeding AED 375,000, aligning the UAE more closely with international tax standards while maintaining competitiveness.

These regulatory changes mean that due diligence for M&A transactions now extends beyond legal and financial audits. Tax has become a critical pillar in evaluating the feasibility and future obligations of a deal. For buyers and sellers alike, the availability of corporate tax advice has shifted from a value-add to a necessity.

Corporate Tax and M&A Transactions

M&A transactions in the UAE can take several forms, including asset acquisitions, share purchases, and mergers. Each structure has distinct tax implications, both in the short and long term.

1. Asset Acquisition

In an asset acquisition, the buyer acquires specific business assets and liabilities. This can result in a taxable event for the seller, as capital gains on the disposal of assets may be subject to corporate tax. However, buyers may benefit from a step-up in the tax base of the acquired assets, leading to future tax deductions through depreciation.

Under the UAE Corporate Tax regime, taxable gains from asset sales must be reported and may be taxed at 9%, provided the entity’s income exceeds the threshold. The seller must also consider whether the assets being disposed of are capital or revenue in nature, as this influences the tax treatment.

2. Share Purchase

Purchasing shares in a target company usually does not trigger immediate corporate tax for the selling shareholder, especially if the sale is of a capital nature. However, this hinges on the nature of the transaction, the structure of the holding entity, and the classification of the asset.

One advantage of share deals is that they allow the buyer to acquire the target along with its tax history, liabilities, and potential benefits, such as tax losses carried forward. This emphasizes the need for robust tax due diligence and highlights the critical role of tax advisory in UAE, where the nuances of corporate tax law can significantly affect the outcome of a transaction.

Group Relief and Restructuring Provisions

The UAE Corporate Tax regime includes provisions for group relief and tax-neutral restructuring, a notable development that supports business consolidation and growth.

Under Article 26 of the UAE Corporate Tax Law, qualifying group companies can transfer assets and liabilities between them without triggering a taxable event, provided certain conditions are met. These conditions include a minimum 75% ownership threshold and common control requirements.

This is particularly beneficial in the context of internal group restructurings or pre-deal structuring ahead of a third-party sale. However, these exemptions come with anti-abuse rules and compliance obligations. Entities that benefit from tax-neutral treatment must retain the assets for at least two years, or risk retroactive taxation.

This regime mirrors global practices, making the UAE more aligned with international M&A taxation frameworks. But the need for strategic corporate tax advice becomes even more critical to ensure compliance and avoid pitfalls that can arise from poorly executed transfers or failure to meet conditions.

Tax Losses and Transfer Pricing

Two additional areas of concern during M&A due diligence are tax losses and transfer pricing.

Tax losses can be carried forward and offset against future taxable income under certain conditions. When acquiring a company with accumulated tax losses, buyers must assess whether these can be retained and utilized post-acquisition. This may depend on whether there is a continuity of ownership and business activity, similar to provisions in other jurisdictions.

Transfer pricing regulations in the UAE also influence M&A transactions, especially those involving cross-border entities or related-party dealings. Transfer pricing documentation must demonstrate that all related-party transactions are conducted at arm’s length. This becomes particularly relevant when assets are transferred within a group or when evaluating intercompany financing structures.

Engaging with experienced firms offering tax advisory in UAE can help ensure that transfer pricing rules are respected, and that tax losses are preserved and appropriately applied post-deal.

Due Diligence: A Tax-Centric Approach

Tax due diligence has always been a part of M&A, but under the UAE’s evolving tax regime, it is more critical than ever. Key areas of focus include:

Verification of historic and current tax filings

Assessment of tax liabilities and exposure, including pending disputes

Review of transfer pricing policies and documentation

Evaluation of the target’s group structure and potential for group relief

Confirmation of the target’s eligibility for tax incentives (e.g., Free Zone benefits)

As businesses in the UAE adapt to the new tax landscape, investors must anticipate the long-term tax implications of their deals, not just immediate gains. This shift demands proactive and ongoing corporate tax advice, from deal structuring through to post-merger integration.

Free Zone Considerations

Many companies in the UAE operate from Free Zones, which may offer preferential tax treatment under the new regime, provided specific conditions are met. When acquiring or merging with a Free Zone entity, it’s essential to assess whether the entity qualifies as a “Qualifying Free Zone Person.”

Failure to meet the criteria could result in the loss of preferential tax rates, thereby impacting the overall valuation and viability of the transaction. This is another instance where deep regulatory knowledge and expert tax planning are essential to avoid unexpected liabilities.

The UAE’s Corporate Tax regime has introduced a new dimension to mergers and acquisitions, requiring a shift in how deals are evaluated, structured, and executed. From group relief provisions and transfer pricing rules to tax-neutral restructuring and Free Zone considerations, the tax landscape is now a fundamental component of any M&A strategy.

Businesses planning mergers or acquisitions must invest in detailed tax planning and risk assessment to maximize value and ensure compliance. This makes corporate tax advice not just a strategic asset but a crucial enabler of sustainable growth.

As regulatory enforcement becomes more robust and the business environment matures, those who take proactive steps to understand and apply the new tax rules will be best positioned to thrive. Whether you’re a buyer, seller, or investor in the UAE, a strategic approach to tax – backed by experienced professionals – is no longer optional. It is essential.

MERGERS AND ACQUISITIONS: TAX IMPLICATIONS UNDER THE UAE CORPORATE TAX REGIME

Mergers and Acquisitions: Tax Implications Under the UAE Corporate Tax Regime