The UAE implemented a new General Anti-Abuse Rule (GAAR) effective 1 June 2023 under the new corporate tax regime. GAAR applies to a transaction or arrangement if, considering all relevant circumstances, it can be reasonably concluded that:
- The transaction or arrangement is not conducted for a valid commercial or non-tax purpose that aligns with economic reality; and
- The main or one of the main reasons for the transaction or arrangement, or any part of it, is to gain a corporate tax advantage that does not align with the intention of the domestic corporate tax law (Federal Decree-Law No. 47 of 2022).
A corporate tax advantage includes, but is not limited to the following:
- A refund or an increased refund of corporate tax;
- Avoidance or reduction of corporate tax payable;
- Deferral of payment of corporate tax or advancement of a refund of corporate tax; or
- Avoidance of an obligation to deduct or account for corporate tax.
Where GAAR applies to a transaction or arrangement, the tax authorities are empowered to make an adjustment to the transaction to negate the corporate tax advantage resulting from such a transaction or arrangement. The tax authorities must issue an assessment to implement this determination, which may include:
- Approving or denying any exemptions, deductions, or relief in determining taxable income or corporate tax liability;
- Allocating any such exemption, deduction, or relief to any other persons;
- Recharacterizing for corporate tax purposes the nature of any payments or other sums; or
- Disregarding the effect that would otherwise arise from applying other corporate tax law provisions.
Further, the tax authorities can make compensating adjustments to the corporate tax liability of any other person affected by the tax authorities’ determination.
For determining whether GAAR applies to a transaction or arrangement, the following factors are considered:
- The manner in which the transaction or arrangement was entered into or carried out;
- The form and substance of the transaction or arrangement;
- The timing of the transaction or arrangement;
- The result of the transaction or arrangement in relation to the application of the domestic federal corporate tax law;
- Any change in the financial position of the taxable person that has resulted, will result, or may reasonably be expected to result, from the transaction or arrangement;
- Any change in the financial position of another person that has resulted, will result, or may reasonably be expected to result, from the transaction or arrangement;
- Whether the transaction or arrangement has created rights or obligations which would not normally be created between persons dealing with each other at arm's length; and
- Any other relevant information and circumstances.
Prior to June 2023, the UAE’s domestic law did not contain any general anti-avoidance measures.