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The UAE has introduced corporate income tax (CIT) with effect from 1 June 2023 .  Every business registered in the UAE will need to consider its tax position and, in most cases, submit a CIT tax return to the Federal Tax Authority of the UAE (FTA) for the business's first financial year commencing after 1 June 2023. 

This applies to construction and EPC contractors registered to conduct business in the UAE who will need to submit a CIT return, and must now be ready for:

  • CIT to be paid at the rate of 9% on their audited annual profits (rising to 15% in the case of a business that is part of a multinational group with global turnover in excess of EUR 750 million);
  • VAT (at 5%) to be paid out on their purchases of goods and services in the UAE and on imports of goods and services (which they must reverse (self)-charge and account for to the FTA);
  • VAT (at 5%) to be applied to their invoices and collected, offset against their VAT costs and the balance paid to the FTA; and
  • excise duties to be paid on imports save to the extent that an exemption applies.

It has been common in other jurisdictions overseas where income tax applies to the conduct of business within the jurisdiction, to mitigate the exposure to income tax where part of the business activity can genuinely be said to have been performed wholly outside the jurisdiction where the tax applies. This concept is now gaining traction in the UAE construction sector, namely through the splitting of works under an EPC contract into 2 or more separate contracts. 

The concept of splitting EPC Contracts

A split EPC structure is intended to offer reduced tax obligations on the EPC contractor by allowing it to avoid tax on plant, equipment and materials sourced from outside the UAE (Offshore Equipment), by reducing the profit element of any Offshore Equipment supplied which would attract CIT and by reducing the tax on engineering services (design) performed offshore. The savings should result in a reduced project capital cost, which may be passed onto the project developer (Owner) (and, by extension, its lenders). 

To achieve this, the EPC contract is typically divided into 2 separate contracts, commonly referred to as the "Onshore Contract" (for the construction of the works within the UAE by an "Onshore Contractor") and the "Offshore Contract" (for the engineering and procurement of the works outside of the UAE by an "Offshore Contractor").

The responsibilities of the Offshore Contractor will usually be restricted to performance of design and engineering services and supply of Offshore Equipment performed wholly outside the UAE, whereas those of  the Onshore Contractor will usually be restricted to the supply of "local / onshore" Equipment and installation of the Offshore Equipment into the works or facility, and the construction, testing, commissioning and other onsite activities (including any onshore design and engineering, if applicable) by a business registered within the UAE.

In general, the contractual terms and conditions of the Offshore Contract will mirror those of the Onshore Contract, save that the Offshore contracts do not include "local construction-related provisions", such as those relating to construction permits, localization and local content, provision of utilities and raw materials, site access, security and operations (including HSE), start up, testing and commissioning, covering and uncovering the works, supply of spare parts, provision of training, and searching for and rectifying defects.

Umbrella / Coordination Agreement

From a bankability and risk allocation perspective, the Owner must ensure that the splitting of an EPC contract into an Offshore Contract (E&P) and Onshore Contract (C) with different (albeit usually affiliated) contractors does not undermine the single point of responsibility provided by the EPC contractor for the entire works. As such, an additional bridging agreement (often called an Umbrella Agreement or Coordination Agreement) is typically required to coordinate and wrap the obligations of the Onshore and Offshore Contractors to the Owner to ensure that any gaps which may arise as a result of the split structure are appropriately covered and that the Owner has recourse to a single entity (as would have been the case in a traditional EPC structure) in the event of a failure or breach by either the Onshore Contractor or the Offshore Contractor.

The Coordination Agreement is entered into between the Owner, Onshore Contractor, the Offshore Contractor and an EPC guarantor (who may be the Offshore Contractor or a separate parent entity) and the effect of such an agreement is to stitch the EPC liabilities back together as though the overall arrangement remained akin to a single EPC Contract between the Owner and the EPC guarantor (as the single point of liability).

10 key issues to consider when splitting an EPC Contract

Generally, the Onshore Contract and Offshore Contract should work together seamlessly as if they were a single EPC contract. The following practical issues arising out of the EPC contract splitting exercise should be addressed adequately in the Offshore Contract, Onshore Contract and Coordination Agreement (as appropriate):

  1. the Owner should ensure that the whole scope of the works is comprehensively covered between the Offshore Contract and Onshore Contract (without any gaps or inconsistencies), and should carefully consider how (if at all) the specification or Owner's requirements should be split;
  2. the Onshore Contractor and Offshore Contractor should not be able to claim "horizontal defences" (i.e. to rely upon each other's defaults to avoid liability). The Onshore Contractor should not be entitled to any extension of time or additional costs due to a breach or delay under the Offshore Contract and vice versa. Similarly, the EPC contractor should not be able to duplicate and double-recover by allowing the Onshore Contractor and Offshore Contractor to independently claim under both contracts in respect of the same event or circumstance; 
  3. the Offshore Contractor should be under an obligation to deliver to the Onshore Contractor design information and Offshore Equipment at times which enable the Onshore Contractor to achieve the milestones in the Onshore Contract; 
  4. the Onshore Contractor should check and assume all responsibility for all Offshore Equipment supplied; 
  5. the Owner should ensure that the overall design liability for the works are assumed by a single entity – usually the Onshore Contractor who should check and assume responsibility for any design prepared by the Offshore Contractor;
  6. completion under the Offshore Contract should occur only when completion under the Onshore Contract is achieved; 
  7. performance security, liquidated damages and the limitation of liability should be sized by reference to the aggregate values of the Onshore Contract and the Offshore Contract and should apply appropriately to each; 
  8. all EPC Contracts should allow for joinder of disputes between them;  
  9. the insurance cover between the Onshore Contract and the Offshore Contract should be seamless; and
  10. the effects of delays or events giving rise to extensions of time under one contract on the time for completion and payment milestones and triggers under the other contract (i.e. the relative independence of the Onshore Contract from the Offshore Contract and vice versa).  

Caveats on tax splitting

Different legal and tax jurisdictions have their own specific requirements which will impact on how the split contracts and the Coordination Agreement are structured and drafted, and specialist advice should be sought on issues such as the extent to which the Onshore Contract and Offshore Contract can refer to one another without undermining the tax advantages sought by the arrangement. For example, in developing the UAE's tax legislation the FTA has given itself wide powers (under "transfer pricing rules") to regulate related party transactions (such as those involving onshore and offshore affiliates of the EPC contractor) to the extent that the FTA can ignore the actual pricing allocations provided where related parties deal with one another and in such circumstances the FTA can deem an arm's length or market price to apply).

However if some EPC services can properly and legitimately be performed outside the UAE and if they are so performed by an entity based outside the UAE then they should not fall within the remit of the UAE tax legislation.  This element of the price of the work may be calculated without CIT if either the overseas contracting entity successfully avoids UAE tax, or if it pays UAE tax and recovers the same value under the terms of a bilateral double tax treaty.


If EPC contract splitting is done correctly, overseas contracting groups may be able to reduce their tax burden and hence their overall pricing on UAE construction projects by splitting large EPC contracts into offshore (E&P) and onshore (C) elements and having different group companies perform them. Our team has developed model forms for our clients to achieve this, so please do get in touch if this issue is relevant to your business.