Many companies have been enquiring about the new alternative End-of-Service Benefits (EOSB) Savings scheme that was announced last year. Given that enrolment is entirely optional at present, companies are weighing the pros and cons of transitioning to the new scheme.
We discussed in a previous article some key considerations for HR managers on transitioning to the new scheme during this ‘voluntary’ period. To recap: Voluntary enrollment involves a 12-month commitment and non-payment of monthly contributions does attract certain penalties.
Today, we look at an incentive for companies that contribute to EOSB funds: Tax benefits. This is a standard benefit in most countries like US, UK, Canada, Australia, Germany, France and India amongst others, where employer contributions to pension schemes are generally deductible as a business expense, thereby reducing a company’s taxable profit and therefore its tax liability.
In the UAE, however, it is a developing subject. Firstly, because the Corporate Tax Law (UAE CT Law) itself is a recent introduction with 1 June 2023 being the beginning of the first tax period and the first CT filing not falling due until nine months after the end of the first tax period i.e., 31 March 2025. Similarly, the EOSB savings scheme vide Cabinet Resolution 96 of 2023 is just starting to take shape with compliant funds yet to be launched (as of early September 2024).
The main regulatory references on the subject are Federal Decree Law No. 47 of 2022 (UAE CT Law) and Ministerial Decision No. 115 of 2023 (Decision) on Private Pension Funds (PPF) and Private Social Security Funds (PSSF). There are however, certain questions that arise:
Article (5) of Decision refers to tax benefits on contributions to PPFs only, which are defined as funds created to manage pension contributions and provide payments to retired natural persons above a defined retirement age. In contrast, Article (9) of Cabinet Resolution 96 allows employees to withdraw monies from EOSB funds on termination of each employment, and so the question arises if PPFs relate to Emirati nationals only and in furtherance, does the tax benefit on contributions to PPFs then apply for Emirati employees only?
The Decision is also silent about tax benefits on contributions to PSSFs that are defined as funds created for statutory EOSB payments and therefore presumably relate to expatriate employees. Does that mean that there is no tax benefit on EOSB contributions for expatriate employees?
What is the definition of ‘remuneration’? Is it only basic salary or allowances as well?
And lastly, which funds qualify as PPF/PSSF for tax purposes? Where should companies pay EOSB contributions?
We at Pensions Monitor have sought to obtain clarity on the above from the UAE Federal Tax Authority (FTA) which is shared below. Please note that this article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Companies should consult their own tax, legal and accounting advisors on the subject.
Tax treatment on employer contributions to PPF/PSSFs
In context of a UAE-registered company that is under the normal regime where 9% CT applies, the general rules for allowing deductions from profits for CT are set out in Article 28 of the CT Law. In principle, expenses must be incurred wholly and exclusively for the purposes of the business and should not be 'capital' in nature.
Going by the above, EOSB is a normal business expense similar to employee remuneration, and the FTA has confirmed that EOSB contribution to PPF/PSSF is therefore an allowable deduction for CT purposes, irrespective of employee nationality.
There are however some conditions that apply:
Contribution limit: The allowable deduction is capped at 15% of the ‘total remuneration’ for each employee. Now, the CT Law does not define ‘remuneration’ but we were given to understand by the FTA that in the absence of a definition, remuneration takes its usual meaning as payments to an employee under an employment contract. This will therefore include the basic salary and allowances.
That said, remuneration and deductible contribution must also comply with the arm’s length principle to be an allowable deduction as set out in Article 34 and 36 of the CT Law. Basically, this means that the contribution should be at a reasonable level for the employee concerned.
Tax period: Further, the deduction is allowed only when the contribution is actually paid (cash basis) in the relevant tax period and not when the contribution accrues (accrual basis), tax period usually being the 12 months for which financial statements are prepared.
In practice, an employer’s tax computation is adjusted to:
add back the deduction for contributions shown in the Income Statement; and
apply a deduction for contributions to pension funds on a ‘paid’ basis.
Now, noting that the allowable deduction of ‘15% of total salary’ is considerably higher compared to the statutory EOSB computation of ‘5.83% and 8.33% of basic salary’ (where employment is less than or more than five years respectively), could companies benefit from tax relief by contributing more than the statutory minimum to PPF/PSSFs on account of the accumulated EOSB liability?
If so, this could be a material incentive for cash-rich companies to voluntarily fund the accumulated EOSB by contributing to pension funds which is in fact not required by Cabinet Resolution 96 of 2023.
So which funds qualify as PPF/PSSF for tax purposes? Where can companies pay such contributions?
The CT Law does not set out any criteria for a fund to qualify as PPF/PSSF, neither does it state whether a PPF/PSSF to which employer contributions are paid, should be domiciled in the UAE and subject to local regulations. There are however, certain criteria for a PPF/PSSF to be exempt from CT (Exempt Person), such as regulatory oversight of the competent authority in the State, establishment and operations governed by law or a contract, restrictions on the type of incomes and the sign-off of an auditor.
Further, paragraph 5.4 of the Corporate Tax Guide | CTGEPF1 issued in December 2023 states that there is no requirement for a fund to be an Exempt Person in order for a company to benefit from the allowable deduction under the general principles and that the maximum deduction is applicable whether the PPF/PSSF is an Exempt Person or not.
For EOSB purposes, the fund regulators in the UAE are the Securities and Commodities Authority (SCA) and the Ministry of Human Resources and Emiratisation (MoHRE). However, the foregoing guidance of CTGEPF1 implies that employer contributions to funds not regulated by SCA and MOHRE, and not domiciled in the UAE, would also qualify as an allowable deduction.
If so, is the onus of settling EOSB liabilities that comes under the direct supervision of MoHRE, fulfilled by employers on paying contributions to such funds that are not regulated by SCA and MoHRE, and not domiciled locally?
We know of at least one such voluntary pension plan in the UAE called ‘Employee Secure Saver’ offered by HAYAH Insurance. The product was approved by the Central Bank of UAE in 2022 and reportedly manages assets of over AED 1bn, the majority of which is invested in overseas funds. Refer our previous article for more details on Employee Secure Saver.
It is however worth noting that HAYAH Insurance recently restructured some of the underlying funds of Employee Secure Saver in order to make the plan compliant for the purposes of Cabinet Resolution 96, following which the insurer secured a fund management license from SCA in July 2024 while approval from MoHRE is still awaited.
Developing pensions landscape
As pointed out, the application of UAE CT Law as well as the EOSB savings landscape is currently developing. We at Pensions Monitor expect that further guidance on the subject will be provided by the concerned regulators in due course.
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