Key Corporate Tax Considerations for Business Mergers and Acquisitions in the UAE

The mergers and acquisitions (M&A) tax planning in the UAE could be a profitable pursuit, but have you assessed the complications regarding the corporate taxation? There are a number of tax considerations that can either make or break the deal when it comes to M&A transactions in the UAE, an aspect this blog addresses comprehensively.

Why Should One Care About the Understanding of the UAE Tax Structure Framework?

With the new corporate taxes introduced in 2023, the UAE has turned more into a tax-friendly nation as compared to years back. Now onwards, all businesses will have to register for corporate tax within the UAE and will be taxed at 9% of profits exceeding AED 375,000. Understanding all these regulations will not only ensure compliance but also provide strategic advantage.

How Does Due Diligence Contribute to M&A Success?

Tax due diligence is not a choice and is to be an obligatory part. It reveals potential risks and liabilities that might ruin an acquisition. Some of the focus areas are:

• Tax Liabilities: Corporate taxes, VAT, and other dues.
• Filing Accuracy: All tax records are spotless with the target.
• Exemption Validity: Confirm free zone benefits are legitimate.
• Controversies & Audits: Flag unresolved tax controversies.

Asset Purchase vs. Share Purchase: Which is More Tax Efficient?

The impact of an M&A tax planning UAE deal depends on what type of structure it has.

Asset Purchase:

• Pick and choose particular assets and liabilities.
• Enjoy tax depreciation benefits.
• Higher costs due to VAT or transfer taxes.

Shares Purchase:

• Acquire all of the target’s shares. Simplicity in process but increased risks of liability.
• Capital gains tax relief for sellers.

How Do Free Zone Businesses Impact M&A Tax Planning?

The UAE boasts more than 40 free zones that allow some corporate tax benefits; however, these are associated with specific conditions. Therefore, companies must comply with the eligibility needs to fully enjoy those benefits. Besides, there could be grouped tax efficiencies that will consider some entities for taxation as one instead of using individual consideration. Transferring assets out of free zones would have significant tax implications that must be thought through concerning the benefits enjoyed by such assets in those jurisdictions.

Are VAT Rules a Deal-Maker or Breaker?

At 5 percent, it can greatly affect M&A activity. Making your deal VAT optimized is necessary.Some of the considerations related to VAT are:

• TOGC: Declare the deal as a transfer of going concern so that VAT will not apply.
• Registration Status: Both parties should have valid VAT registrations.
• Input VAT: Make arrangements to recover VAT on transaction costs.
• Compliance: Obligations of both reporting and payment.

Do Tax Treaties Help Save Costs in Cross-Border M&As?

The existence of over 100 double tax treaties in the UAE has created many platforms for businesses to avoid double taxation and reduce their tax contributions. Lowered withholding tax rates on dividends and royalties, exemptions from capital gains in some countries, and strategic structuring options to minimize permanent establishment risks are among the benefits made available through such treaties.

What are common pitfalls?

Tax details are commonly neglected, and therefore, challenges that arise during M&A transactions could also be due to such oversight—examples of these pitfalls include non-compliance in free zones, overlooking transfer pricing documentation, performing shallow due diligence, and not taking full advantage of double tax treaties”. Cross-border M&A without such mistakes is a formula for success.

Exploring UAE’s Corporate Tax Landscape

There are amazing options with business mergers and acquisitions in the UAE, but it brings about its own complicated tax issues. The detailed due diligence coupled with proper structuring of the transaction, VAT, and planning after the merger is done will be very important to the entire process. Therefore, partnering with experienced tax advisors will help hold the hands of the knowledgeable people to guide you successfully and seamlessly through the M&A process.