UAE Corporate tax Part 3

Third part of the UAE Corporate tax series.

In this part we will be going to discuss about the taxability of the Persons engaged in Extractive Business (Article 7)

1) Article 7: Extractive Business:

Let's first discuss what the term "Extractive Business" means. It is been defined in the article 2 as the Business or Business Activity of exploring, extracting, removing, or otherwise producing and exploiting the Natural Resources of the State or any interest therein as determined by the Minister.

So, the businesses like the extraction of petroleum or other natural resources will be covered under the term "Extractive Business"

Now let us have a bird eye view on the law contained in the article 7

1. A Person shall be exempt from Corporate tax and the provisions of this Decree-Law shall not apply to its Extractive Business where all of the following conditions are met:

a. The Person directly or indirectly holds or has an interest in a right, concession or License issued by a Local Government to undertake its Extractive Business.

b. The Person is effectively subject to tax under the applicable legislation of an Emirate in accordance with the provisions of Clause 6 of this Article.

c. The Person has made a notification to the Ministry in the form and manner agreed with the Local Government.

2. If a Person that meets the conditions of Clause 1 of this Article derives income from both an Extractive Business and any other Business that is within the scope of this Decree-Law, the following shall apply:

a. The income derived from the Extractive Business shall be calculated and taxed according to the applicable legislation of the Emirate.

b. The income derived from the other Business shall be subject to the provisions of this Decree-Law, unless that other Business meets the conditions to be exempt from Corporate Tax under Article 8 of this Decree-Law.

3. For the purposes of Clause 2 of this Article, a Person shall not be considered to derive income from any other Business where such other Business is ancillary or incidental to that Person’s Extractive Business and the Revenue of such other Business in a Tax Period does not exceed 5% (five percent) of the total Revenue of that Person in the same Tax Period.

4. For the purposes of calculating the Taxable Income of the Person’s other Business, the following shall apply:

a. The other Business shall be treated as an independent Business, and financial statements shall be kept for this Business separately from the Extractive Business.

b. Any common expenditure shared between the Extractive Business and the other Business of the Person shall be apportioned in proportion to their Revenue in the Tax Period, unless such expenditure is taken into account in different proportions for the purposes of calculating the tax payable by the Person under the applicable legislation of the relevant Emirate in respect of its Extractive Business, in which case the expenditure will be apportioned in the latter proportion.

c. The Person shall calculate the Taxable Income for its other Business independently for each Tax Period in accordance with the provisions of this Decree-Law.

5. Transactions between the Extractive Business and the other Business of the same Person shall be considered Related Party transactions subject to the provisions of Article 34 of this Decree-Law, unless such other Business is exempt from Corporate Tax under Article 8 of this Decree-Law.

6. A Person shall be considered effectively subject to tax under the applicable legislation of the Emirate for the purposes of this Article if the Local Government imposes a tax on income or profits, a royalty or revenue tax, or any other form of tax, charge or levy in respect of such Person’s Extractive Business.

7. The exemption under this Article shall not apply to contractors, subcontractors, suppliers or any other Person used or contemplated to be used in any part of the performance of the Extractive Business that does not in its own right meet the conditions to be exempt from Corporate Tax under this Article or Article 8 of this Decree-Law.

2) Brief Commentary on the above provisions:

a) Paragraph 1 talks about the conditions to be fulfilled by persons to claim exemption from corporate tax in regards to its Extractive Business:

The Conditions one has to fulfill are as under:

i) The Person shall hold or has an interest in a license or a right or any other kind of approval whether directly or indirectly as given by the Local Government for extractive business.

So, for conducting the extractive business in UAE one has to obtain license from the Local Government of Emirates. The entities that will be covered by this conditions will be the entities who are directly involved in the extraction of natural resources. Persons who are into the trading of the natural resources are not covered under this exemption. The reference can be drawn from the Clause 8 of the article.

ii) Person is effectively taxed under the respective emirates legislation. Clause 6 of this article defines when a person is said to be effectively taxed, if the local government applies tax on income or profits, royalty or revenue tax or any other taxes.

So, any kind of tax whether direct or indirect on the income or the profit will said to be an effective taxation on the person by the Local Government. So if local government applies a certain % of VAT/Excise on the extractive business.

Till now the natural resources like the crude oil, natural gas or other precious materials are exempted from VAT and Excise is leviable on the goods that are injurious to health. The Foreign Oil Companies are subject to 55% of Tax by Local Government so they will be exempted from corporate tax

iii) The person who wishes to avail this exemption must apply to the Ministry in the prescribed form as in agreement with the Local Government.

b) Paragraph 2 provides guidance on where a person is simultaneously having Extractive and other business which requirements he has to fulfill for both the businesses

i) The income from extractive business shall be calculated and taxed as per the Emirates Law

ii) The income derived from the other business shall be subject to the Corporate tax, unless such business fulfils the conditions of the Article 8 "Non Extractive Business". So, if a person is engaged both in Extractive and Non Extractive Business and fulfils the conditions of both the articles will not be liable to corporate tax

Likewise if Al Masood Oil Company have two business verticals like Extraction of Petroleum and Transportation of the Petroleum both will be exempt from corporate tax if the conditions mentioned in the article 7 & 8 are satisfied.

c) Paragraph 3 provides relief to certain persons in case where the other business will not be required to be separated from the Extractive business provided that the other business conducted is incidental or ancillary to the Extractive business and the revenue from such other business doesn't exceeds the 5% of the total revenue of the said person in a tax period.

So, one has to comply with both the conditions mentioned in the paragraph that the other business must be ancillary or incidental to the main business and must have income from the other business at less than or equal to 5% of the total revenue.

d) Paragraph 4 provides method for Calculating the Taxable Income for persons having other business

(i) The other business will be treated as a separate business from extractive business and separate set of Financial statements are to be prepared for such business.

(ii) Common Expenditure for both the business shall be apportioned on the basis of their revenues. Likewise the fees payable to director or the Electricity expenses of a common place to be apportioned on the basis of the revenues of both the business

However, in case where the emirates legislation provides a different method for apportionment of expenses to the extractive business, such method shall be followed as it overrides the method given in the law and the remaining expense shall be allocated to other business.

(iii) The person shall calculate the taxable person of the other business independently for each tax period.

e) Paragraph 5 provides that the transaction between the Extractive Business and other Business will be considered as related party transaction and transfer pricing provisions will be applicable to such transaction but if the other business is exempt under the Article 8, then such transaction is not a related party transaction.

Thanks, and regards

CA Shivam Sharma

Email: [email protected]

Website: www.caaass.in