Navigating M&A transactions, restructurings in the face of UAE’s corporate tax 

The UAE has long been known for its business-friendly policies and tax-free environment. Following the introduction of VAT back in 2018 and corporate tax being rolled out starting in June 2023, UAE businesses and investors are getting used to the new reality – tax is here and it’s here to stay.  

While some industries have had exposure to tax at an emirate level, most UAE businesses had to ensure that their accounting and reporting systems are able to capture the necessary data and produce accurate tax returns to enable them to comply with the reporting requirements.  

Tax considerations are essential in a transactional context. In jurisdictions with developed tax regimes, tax implications are a priority when contemplating an M&A transaction or corporate restructuring. Not considering tax from the outset can be a costly oversight.

M&A transactions involve complex legal and financial arrangements that can span multiple countries and therefore, consequences of efficient tax structuring (or lack of) can reverberate across various jurisdictions.

In the UAE, companies will have to consider the tax implications of their deals, including the impact on their financial statements, cash flows, and tax obligations. UAE corporate tax structuring will have its own challenges, given the difference in treatment between free zone entities and mainland entities, and requirements around tax holidays afforded to free zone companies.  

Companies will also need to evaluate the tax treaties that are relevant to their operations and transactions (including double taxation treaties) to ensure that they are able to take advantage of any relief provisions. 

Corporate tax and its impact

For M&A transactions, the tax residency of the target company will be a critical factor in determining the tax implications of share deals. In transactions involving asset acquisitions, the tax liability will be based on the location of the assets.

Buyers will need to evaluate the tax status of the target company or target assets and consider whether any restructuring is required to optimise tax efficiency. This may involve restructuring the target company’s operations, such as moving its intellectual property or other assets to a tax-efficient jurisdiction (this may, in the UAE, be a free zone). 

Similarly, restructurings, such as mergers or spin-offs, may trigger tax liabilities under the new regime. Companies must evaluate the tax implications of any restructuring and ensure compliance with the new tax laws. For example, companies may need to restructure their debt or equity to ensure that any tax liability exposure is optimised. 

The new corporate tax may also impact company valuations. Potential investors will need to consider the impact of the tax on the company’s profits and cash flows, which may affect valuations. This may lead to a decrease in the value of companies that are subject to corporate tax, particularly if the tax rate is higher than the rates in other jurisdictions. 

It is inevitable that at times tax disputes will arise, and companies will need to be prepared to deal with such events and engaging with reputable, competent advisers will be essential. Companies have the right to appeal any decisions made by the tax authorities. The UAE has established a specialised court for tax disputes.  

It will be interesting to see how the introduction of the corporate tax in the UAE will impact the country’s economy. The country has been a hub for business and investment in the region, and its tax-free environment has been a key factor in attracting businesses to the country.

Investors committed to the region are unlikely to be discouraged by the introduction of this new tax, especially given the favourable rate and the various options for tax optimisation that they will have at their disposal.

The government has indicated that the revenue from the corporate tax will be used to fund public services and infrastructure projects in the UAE. This will likely have a positive impact on the country’s economy, as the increased revenue will likely lead to improved infrastructure and services, which may attract further investment and business. 

In conclusion, while the new tax regime may add complexity to transactions, it may also provide new opportunities for businesses to optimise their tax strategies and improve their overall financial performance.

It will be interesting to see how businesses in the UAE adapt to the new tax regime and how it will shape the future of the country’s economy. 

Adela Mues is a partner at Reed Smith.