After the announcement by the government regarding the availability of Corporate Tax (CT) and the frequently asked questions (FAQs) on January 31, 2022, and the release of the Public Consultation Document in April 2022, The Federal Decree-Law No. 47 of 2022 on Taxation of Corporations and Businesses UAE Corporate Tax Law was published at December 9, 2022.
The UAE Corporate Tax Law is Federal Decree-Law No. 47 of 2022, enacted on October 3, 2022, and becomes effective 15 days after its public publication in the Official Gazette. This UAE corporate tax law applies to the profits of businesses for fiscal years beginning from or after June 1, 2023.
This article offers brief highlights of the new system that was made public by officials from the Ministry of Finance (“MoF”) and the Federal Tax Authority (“FTA”). It is important to note that the rules closely match that of the Public Consultation Document.
More details await Cabinet and Tax Authority Decisions, and further guidance will be anticipated to finish all UAE Corporate Tax Law areas like Free Zone and Director compensation guidelines. Following the release of UAE Corporate Tax Legislation, The MoF has confirmed its introduction of the Law in June 2023.
Scope of Corporate Tax
UAE Corporate Tax, a tax on profits from the UAE, will be imposed on the company’s worldwide adjusted accounting net income.
It is the UAE corporate tax regime is a new one that introduces two rates that differ:
- A tax-free rate applies to tax-deductible profits that exceed a threshold that will be specified in the Cabinet Decision (the FAQs relate to the point of AED 375,000)
- The tax standard for the statutory rate is 9 percent.
The relatively lower tax rate of 9 percent ensures that the UAE has a competitive tax rate in the global marketplace.
The UAE Corporate Tax Law is stipulated in Article 3 on the global minimum 15% tax rate. That applies to MNEs that fall within the scope of Pillar Two, which is part of BEPS Pillar 2. OECD BEPS project and applies to multinational corporations (MNCs) with consolidated global revenues of more than EUR 750 million (c. the equivalent of AED 3.15 billion) for any two of the preceding four years. The FAQs discuss the possibility of adopting within the UAE of BEPS Pillar 2.
Individuals result from corporate taxation as long as they are involved in business activity and comply with an overall VAT concept. The Cabinet is expected to decide to apply UAE Corporate Tax for natural individuals. That means that UAE Corporate Tax will not apply to an individual’s salary and other earnings earned through employment. However, those earning income through part of a business venture would be protected under UAE Corporate Tax.
A clearly defined and specific policy (subject to a further Cabinet decision) is set out for companies inside UAE-free zones.
- Maintain sufficient substance and
- Earn qualifying income.
a Cabinet decision will decide precisely the qualifying income. According to the Public Consultation Document, this could refer to the obligation not to do Business with the mainland UAE. It is also confirmed that Free Zone companies can be taxed as a corporation at a rate of 9 percent.
A wide range of UAE rules on sourcing is applicable and essential for Free zone companies seeking to satisfy the requirements of substance.
There is a possibility of a zero withholding tax for UAE State Sourced income categories produced by a non-resident. In turn, foreign investors who don’t carry any businesses in the UAE won’t be taxed on their income in the UAE.
Foreign entities can be considered residents in the UAE when they are controlled and managed in the UAE. For foreign entities that aren’t residents of the UAE, possess a permanent establishment in the UAE, and are governed by the UAE, the permanent establishment definitions have been defined as fixed PE and an agent PE. Further details on PEs are subject to Ministerial decision.
The exemption for Investment Managers of the Public Consultation Document is retained in the UAE Corporate Tax Law. Particular rules apply to Partnerships, and Family Foundations can also use to ensure tax transparency.
Government entities and government-controlled entities, as well as qualifying public benefit entities and investment funds, will be exempt from the UAE Corporate Tax Law. Extractive companies (upstream oil and gas companies) are exempt if they profit from their extractive Business.
Banking operations are subject to UAE corporate tax (unless the bank is in the Free Zone and eligible for zero rates).
Article 69 of the UAE Corporate Tax Law provides that the Law applies to tax periods beginning from or after June 1, 2023.
Companies with a fiscal year beginning on January 1 are subject to CIT starting January 1, 2024.
Financial records & Requirement To Maintain Audited Statements.
Taxpayers must create and maintain financial statements backed by all records and documents to support UAE Corporate Tax tax returns. Papers must be kept for a minimum of seven years.
This obligation will apply to all UAE entities (unless it is part of the Corporate Tax Group). Every entity must create its financial statements. However, all entities will not be audited for financial information. Subsequent Cabinet Decision(s) will define the types of tax-paying individuals that must keep certified or audited accounts.
Small Business Tax Relief
The possibility of relief for small businesses having revenues or gross income below the threshold of a specific amount is made. Qualifying businesses will be considered not to have tax-deductible income and must meet a simplified compliance obligation.
The threshold is determined by revenues and not earnings or tax-deductible income. That is likely to be confirmed by the following Cabinet Decision.
Deductible / Non-Deductible Expenses
All expenses incurred exclusively and solely for business reasons (and which are not to be capitalized) are tax-deductible.
Deductions are not allowed for expenditures incurred to generate tax-free income. If a mix-purpose spending is made, the removal is not permitted. Interest expense is deductible subject to a maximum of 30% of EBITDA.
Financial assistance rules are in effect and prevent companies from receiving funding to pay dividends or distributions of profits.
Entertainment costs are set at 50 percent.
Donations not tax-deductible include those made to a non-Qualifying Public Benefit Entity, such as fines, bribes, fines, and dividends.
The most important thing to note is that any money withdrawn from the Business by any natural person who is tax-deductible is not tax deductible.
Exempt Income & Relief
The below income categories are free of UAE Corporate Tax (Article 22 of the UAE Corporate Tax Law):
- Dividends, Capital Gains, and other profits distributions from a resident
- Capital Gains, Dividends, and other profits derived from shares that are Qualifying in the name of a foreign legal entity that is subject to a hold duration of 12 months, at a minimum of five percent participation, and at the minimum, subject to 9 percent CIT for the source country. From which they originate.
- The income from a foreign PE is subject to the conditions and the option to apply exempted (rather than credit)
- The income earned by an individual who is not a resident of the country comes from operating ships or aircraft operating in international shipping.
These transactions can be subjected to notable reduction, i.e., effectively an exemption from taxation:
- Restructurings and intragroup transactions that qualify as qualifying Entities will be eligible when they hold 75 percent common ownership.
- Restructuring relief for businesses under specific conditions.
Related parties must conduct transactions per the arm’s length principle outlined in article 34 of the UAE Corporate Tax Law. Furthermore, it clarifies the five conventional OECD Transfer Pricing techniques are suitable to help support the arm’s-length nature of the related party arrangement. However, it allows the use of alternative methods if needed.
Article 34 states that should there be an adjustment by a tax authority from a foreign country that affects a UAE entity, it is necessary to submit an application submitted to the FTA to request a similar adjustment for the UAE firm to be exempt from double taxation. Any adjustments that result from domestic transactions do not require an application.
Documentation requirements for transfer pricing are covered by Article 55. UAE businesses will have to follow the rules for transfer pricing and document requirements that are set according to the Transfer Price Guidelines, which lead to three-tier reports, i.e., master file and local file, as well as country-by-country reporting. The reference to a controlled transactions disclosure form is provided (details of which are still to be determined).
It should be noted that no thresholds of materiality have been set. Separate legislation will be announced shortly. Advance pricing plans will become accessible via the normal clarification process that is in place.
UAE has enacted laws requiring the payment and benefits given to persons connected to be of their market value to be tax-deductible. For applying this principle, the same rules apply per section 34 of UAE CIT Law.
Administration & Enforcement
- The MoF is the sole authority for multilateral or bilateral agreements and the exchange of information between countries.
- The FTA is responsible for the new corporate income tax system’s administration, collection, and implementation. Fines and penalties are set through a Law known as the Tax Procedures Law.
- Companies will require a VAT Registration UAE through the FTA.
- Companies subject to UAE Corporate Tax are required to submit the CT tax return online for every period of financial activity within nine months from the end of the financial period. (A Financial period is typically any year with a 12-month economic term.)
- Free Zone companies subject to the 0 percent CIT must submit a Corporate Tax Return.
Foreign Tax Credits
According to the Public Consultation Document, tax credits for foreign taxation are allowed for UAE corporate tax. Businesses are entitled to claim the lesser amount of corporate tax due and the total amount of tax withholding effectively taken out. There is no carry-forward. There will be no credit for taxes paid to an individual Emirate.
Fiscal unity or Tax Group: UAE companies can form a “fiscal unity” or Tax Group to serve UAE Corporate Tax-related tax purposes. The main requirement for starting a Tax Group is to comply with an (in)direct minimum shareholding of 95 percent. Free zone entities subject to zero percent cannot join the Tax Group. Furthermore, the parent (which may be intermediate) is required to be a UAE company.
According to Section 37 under the UAE Corporate Tax Law, Losses can be carried forward for up 70% of taxable income. Losses can be transferred between members of the same group of companies so long as the entities are 75 percent direct or indirectly owned. Losses cannot be transferred from exempt individuals or entities in the free zone. Loss offsets are also subject to the cap of 75 for businesses that roll forward losses.
Tax-deductible losses may be lost if there is an ownership change (50 percent or more) if the new owner runs the same or similar Business. The criteria are now established.
UAE will adopt an Anti-Abuse General Rule, also known as “GAAR.” The GAAR applies to cases where one of the principal motives of a transaction is to earn a Corporate Tax Benefit that is not in line with the purpose or intent of the UAE Corporate Tax Law.
The FTA will be able to address and alter or counteract the transaction. The GAAR is only applicable to agreements, or transactions entered following the date when the UAE Corporate Tax Law was published by the UAE Official Gazette on October 10, 2022, in issue #737.
With the release of the UAE Corporate Tax Law and confirmation of a rate of 9, The UAE has established a globally cost-effective rate Corporate Tax. It has confirmed its intent to introduce Corporate Tax in June 2023.
Additional information is expected to be released in the next few months, which will clarify and give a better knowledge of its implementation. Nevertheless, several key elements are already confirmed, including introducing compulsory transfer pricing rules.