CFC rules applicable to UAE subsidiaries in 2024

Introduction

New global tax standards are coming into effect. Many businesses want to know how rules like the Controlled Foreign Company (CFC) rules may affect their UAE operations next year. This article gives a full overview of the CFC rules under Pillar Two reforms. It examines how they might affect UAE-based companies in 2024.

What are CFC Rules?

CFC rules are part of a two-pillar solution. The Organization for Economic Cooperation and Development (OECD) adopted the solution. It is meant to curb profit shifting by multinational companies. Under Pillar Two, countries agreed on new standards. They will help ensure a minimum tax rate of 15% on corporate profits worldwide.
Two main tools make up Pillar Two – the CFC rules and other regulations for where corporate tax must be paid on earnings. The CFC rules check if a company’s foreign business units pay enough tax in their local domains. If profits face an effective tax rate below 15%, then tools under the CFC rules may collect extra tax to make up the difference.

How Do CFC Rules Work?

There are three key components to the CFC rules:

Qualified Domestic Minimum Top-up Tax (QDMTT)

This allows the country where a foreign business unit is located to directly collect any additional tax owed to meet the 15% target.

Income Inclusion Rule (IIR)

If the foreign unit’s country will not or cannot collect the tax itself, then the IIR empowers the parent company’s country of residence to recover taxes by imposing charges on the parent entity.

Undertaxed Payment Rule (UTPR)

This acts as a safety net, enabling any jurisdiction worldwide where a multinational operates to collect unpaid taxes if the first two rules fail to capture everything owed.
By using these tools together, authorities aim to make sure corporate profits face taxation of at least 15% no matter where in the world a company conducts its activities.

Will CFC Rules Impact UAE Subsidiaries in 2024?

Though the new UAE Corporate Tax regime takes effect from 1 January 2024, the UAE government has clarified it will not fully implement Pillar Two and apply the CFC rules locally until the following year, on 1 January 2025.
However, for 2024, there are still considerations for some UAE companies:

• If a UAE-based business is part of a larger parent group exceeding certain revenue thresholds, the parent entity’s country may invoke Pillar Two rules and require worldwide financial disclosures.
• Even if UAE-levied CFC rules do not apply, the UAE tax authority may still accept informational filings documenting global compliance for 2024 fiscal periods, avoiding disruption for groups unable to report to tax offices elsewhere.

Therefore, affected UAE subsidiaries of multinational groups need to understand whether the group falls within scope for 2024, and if so, prepare to participate in corporate-wide CFC assessments and disclosures this year.

Checking for 2024 CFC Applicability

Businesses must determine their overall group revenue for the last two fiscal years to assess CFC obligation status:

• If combined annual turnover exceeded €750 million Euros both years, the group likely qualifies as an MNE (multinational enterprise) under Pillar Two.
• Conversely, if combined revenue stayed under €750 million each year, then group units can safely assume no CFC tasks for 2024 filings at least.
• Edge cases near the threshold should consider additional guidance which examines factors like balance sheet size in addition to pure revenues.

Those qualified as MNEs must then collect standardized financial data from all constituents worldwide and conduct preliminary calculations for 2024. Let’s break down the preparation process further.

Gathering Financial Details

Once an MNE Group has been established, affected UAE subsidiaries must coordinate with parent entities and sister offices globally to compile two years’ worth of key annual financial highlights. Information to retain includes:

• Revenue recognized and sources of income
• Total expenses, itemized costs and deductions claimed
• Taxable income calculated in each domain
• Taxes accrued and settled by jurisdiction
• Any rulings or exemptions also impacting the tax liability

Consolidating details across legal entities, branches and permanent establishments helps authorized representatives later model whether certain economic zones face tax levels endangering the overall group’s minimum 15% tax burden.

Running Trial Calculations

With data in hand, corporate tax, finance, accounting or other authorized teams can test whether real-world operations nominally comply with Pillar Two standards for past accounting cycles already concluded.
Calculations assess profit amounts in higher and lower tax locations, then compute blended Effective Tax Rates (ETRs) to spot any potential shortfalls needing mitigation under CFC provisions.
Taking an early peek establishes familiarity with Pillar Two formulas and facilitates accurate mandatory disclosures ahead without disrupting core commercial activities.

Introduction to GloBE Information Returns (GIRs)

Parent entities leading MNE groups must file standardized informational annual GIR returns documenting global salary liability conditions.
The GIR outlines key facts about the MNE group overall like primary activities, group members involved and management structures in place. Most importantly, it incorporates outcome results from trial minimum tax rate computations at both individual unit and aggregate company-wide levels.
Filing locations depend on each MNE’s worldwide registration status and headquarters sites. Affected UAE subsidiaries have the option to voluntarily share their market contribution data through the Emirate in 2024 for smoother future compliance when CFC rules take local impact later.

Consulting with Tax Experts

Navigating the nuances of Pillar Two and completing multinational tax filings accurately holds administrative complexities even for global conglomerates. Consulting experienced advisers assists in critical tasks like:

• Clarifying any dubious points around a group’s CFC status determination
• Streamlining information gathering processes across functions and sites
• Choosing the ideal GIR submission locations and deadlines
• Submitting finished reports and interacting with worldwide authorities
• Adjusting future group structures proactively to meet standards organically

Professional guidance from consultants like PwC further helps MNEs gauge forthcoming CFC influence on growth strategies and long-term tax strategies. Early consultations streamline inevitable market adjustments.

Conclusion

While the UAE does not directly impose CFC rules this year, qualifying companies here still require attentiveness to impending changes. With initial compliance tasks frontloaded to 2024, MNE stakeholders avoid disruption later and stay in governments’ good standing globally.
Proactive engagement now using local resources ensures multinationals leverage upcoming UAE tax dispensations judiciously upon full implementation. Reach out for personalized counsel addressing your group’s circumstances.

Frequently Asked Questions