Tax Treatment and Compliance Risks of Facilitation Payments and Intercompany Recharges under UAE Corporate Tax Law
Scenario
Company X incurred commission expenses (Example, the payment of facilitation fees to staff of a contracting company to secure a contract) paid to natural persons.
Secondly, what if the facilitation fee is recharged to a group company?
The payment of facilitation fees to staff of a contracting company to secure a contract raises serious deductibility and compliance concerns under UAE Corporate Tax Law, and potentially even under anti-bribery and ethical business regulations.
Key Issues:
1.Nature of Expense Test:
Is the facilitation fee deductible under UAE Corporate Tax?
Under the UAE Corporate Tax Law (Federal Decree-Law No. 47 of 2022), the general rule is:
“Expenditure shall be deductible if it is incurred wholly and exclusively for the purposes of the Taxable Person’s Business.” (Article 28(1))
However, certain non-deductible expenditures are expressly disallowed under Article 33, including:
“Bribes or other illicit payments.” (Article 33(1)(a))
If the facilitation fee is paid directly or indirectly to an employee of another company, particularly in exchange for awarding a contract, it may fall under:
- Illicit payments or bribes (even if described otherwise), and
- Be considered a non-deductible expense for corporate tax purposes.
2.Recharge to Related Party Test:
If the original company recharges the expense to a group entity, a few things need to be carefully evaluated:
a. Substance and Arm’s Length Principle
- Under Article 34 & 55, recharges between related parties must follow arm’s length pricing.
- But if the underlying cost is not valid, recharging it doesn’t make it deductible in the hands of the recipient either.
b. Deductibility at the recipient end
- If the group company receives the recharge and records it as an expense, the same rules apply, i.e. If the cost is not incurred “wholly and exclusively” for business, or is illicit, it’s not deductible.
c. Accounting and Transfer Pricing Exposure
- Recharging such payments without proper documentation or without valid underlying contracts/explanations can expose both entities to transfer pricing adjustments, penalties, and disallowances.
From a transfer pricing and GAAR perspective, the FTA will look through the transaction to assess the substance over form.
Key Test:
If the payment violates ethical standards, anti-corruption laws (like UAE Penal Code), or is undocumented/unjustifiable in the course of business, it will be non-deductible.
Tax Impact on Company Y:
Point | Analysis |
1. Was the recharge genuine and at arm’s length? | If it’s just a pass-through of an illegal/bribe expense, it lacks commercial substance. The FTA may disregard the deduction for Company Y under Article 50 (GAAR). |
2. Is Company Y entitled to deduct it? | No. The underlying nature of the expense is illegal and therefore non-deductible for any taxpayer (Article 33). |
3. Does this affect Company Y’s taxable income? | Yes. The taxable income should be adjusted upwards to remove this disallowed expense. Thus, Company Y cannot use the recharge to nullify its taxable profit. |
4. Is there a risk of penalties? | Yes. If the transaction is seen as tax avoidance or abusive arrangement, penalties under GAAR provisions could apply to both companies. |
Final Comments:
The expense in the books of Company X and the recharged to Company Y both are disallowed for Corporate Tax purposes.
It does not matter that the expense was originally incurred by Company X, the nature of the expense (illegal/bribe) makes it non-deductible for any related party. Company Y must add it back in its CT return, and should not reduce its taxable profits on this basis.
Disclaimer: Content posted is for informational and knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.
Contributor
Neetu Jose is a Partner at Stuart & Hamlyn Chartered Accountants and a Fellow member of the Institute of Chartered Accountants of India. With over 20 years of professional experience in both India and the UAE, she is a seasoned finance professional. Neetu has accumulated over a decade of industry experience in the UAE, demonstrating proficiency in accounting, auditing, financial advisory services, and UAE VAT. Her diverse background includes working in various sectors such as retail, manufacturing, health & hospitality, and shipping.
