Middle East M&A Tax Landscape Updates

The M&A landscape in the Middle East has been seeing a surge in activity lately. Sovereign Wealth Funds (SWFs) are ramping up their investments, and private equity funds, both global heavyweights and local mid-market players, are making a comeback. Corporate M&A deals are on the rise too, involving acquisitions of entire businesses, assets, or carved out assets for synergies, along with some strategic cross-border M&A between corporations. With all this growth and restructuring happening, the introduction of the UAE Corporate Tax (CT) from June 1, 2023, brings a new set of considerations to the table, especially for UAE companies now approaching the end of their first tax year.

In a related article from Q2 of 2023, we discussed the relevance of UAE CT across different stages of a deal. This article will focus on practical tax considerations observed throughout the life cycle of a deal, from the Non-Binding Offer stage to closing, and key factors to remember during due diligence and structuring for transactions involving UAE businesses.

A. Tax Due Diligence
Previously, tax due diligence for a UAE company mainly focused on VAT compliance, permanent establishment risks in other countries, and economic substance filings. Lately, acquirers are showing more interest in the corporate tax readiness of UAE targets. This includes assessing whether UAE CT impact assessments have been conducted and the status of implementation efforts. While this due diligence isn’t a full UAE CT impact assessment, having such a report can reassure the acquirer about the target’s preparedness for UAE CT.

Here are some key areas to consider during the deal process:

– Formation of a UAE CT group by the target companies and its impact on the acquirer. The UAE CT law has intricate rules for companies joining an existing UAE CT group, which can be structured if the acquiring company is a newly established UAE entity.
– Utilization of free zone benefits with a 0% tax rate by the target companies. Assess if the target has met all conditions per Article 18 of the UAE CT law, as this directly affects the acquirer’s tax costs and cash flows.
– Impact of transfer pricing. While transfer pricing is standard globally, it wasn’t a concern in the UAE before the UAE CT law. Many UAE groups may have conducted related party transactions that need to be reviewed for compliance with OECD TP Rules and the UAE CT law. Adjusting pricing arrangements can significantly impact the financials of the target.
– Risk of overseas entities within the target structure being deemed UAE tax residents due to effective control and management exercised in the UAE.

By addressing these key tax considerations throughout the deal process, businesses can navigate the changing M&A tax landscape in the Middle East more effectively and efficiently.