In the wake of the public announcement regarding the benefits of Corporate Tax in UAE (CT) and the frequently asked questions (FAQs) on January 31, 2022, as well as the publication of the Public Consultation Document in April 2022, the Federal Decree-Law no. 47 of 2022 regarding the Taxation of Corporations and Businesses Corporate Tax Law has been released on December 9, 2022.
The UAE Corporate Tax Law is Federal Decree-Law No. 47 of 2022, issued on October 3, 2022, and becomes effective 15 days following its announcement in the Official Gazette. The Corporate Tax law applies to the profits of businesses for fiscal years that begin on or after June 1, 2023.
This article gives brief highlights of the new rules, which were it was announced by The Ministry of Finance (“MoF”) and the Federal Tax Authority (“FTA”). It is important to note that the new rules align with the Public Consultation Document.
More details are awaiting Cabinet and Tax Authority Decisions, and further guidelines are expected to be issued to finalize all Corporate Tax Legislation in areas such as the Free Zone and Director compensation guidelines. Following the publication of Corporate Tax Legislation, the MoF has confirmed that its introduction is scheduled for June 2023.
Scope of Corporate Tax in UAE
Corporate Tax in UAE applies to the adjusted net profit of the worldwide accounting of the company.
The Corporate Tax in UAE Regime has two rates of different types:
A tax-free rate applies to tax-deductible earnings up to a certain amount that is to be set in a Cabinet Decision (the FAQs relate to the threshold of AED 375,000)
The tax standard for the statutory rate is 9 percent.
Confirming the minimal tax burden of just 9% aims to ensure that the UAE has a competitive tax rate worldwide.
The Corporate Tax Law is silent in Article 3 on aspects governing the global minimum of 15% tax rate. That applies to MNEs that fall within the definition of Pillar Two, which is part of BEPS Pillar 2. OECD BEPS project and applies to multinational corporations (MNCs) that have consolidated worldwide revenues exceeding EUR 750 million (c. the equivalent of AED 3.15 billion) at any time in two of the last four years. The FAQs address the possibility of adopting within the UAE of BEPS Pillar 2.
Individuals are affected by corporate taxation if they engage in business activities that are in line with an overall VAT concept for business activities. A Cabinet decision is anticipated regarding how to apply Corporate Tax in UAE to natural people. That means that Corporate Tax does not apply to a person’s salary and other earnings earned through employment. However, those earning income through part of a business venture would be covered by Corporate Tax in UAE.
A specific and defined regime (subject to a further Cabinet decision) is provided for all businesses in UAE-free zones. These zones:
What is a sufficient income will be defined by a Cabinet decision. According to the Public Consultation Document, this could refer to the requirement not to do Business with the mainland UAE. It is stated that Free Zone companies can choose to be taxed as a corporation at a rate of 9 percent.
A wide range of UAE rules for sourcing is in force and essential for businesses in the Free zone who want to satisfy the requirements of substance.
There will be no withholding tax on specific categories of UAE State Sourced income produced by a non-resident. In turn, foreign investors who don’t carry any businesses in the UAE, in general, will not be taxed within the UAE.
Foreign entities can be residents of the UAE if they are operated and controlled in the UAE. Foreign entities who aren’t considered to be residents in the UAE, however, may have a permanent establishment in the UAE. The Definitions of Permanent Establishment have been clarified as fixed PE and the term “agency PE. Further details on PEs will be subject to a Ministerial decision.
The UAE Corporate Tax Law retains the exemption for Investment Managers exempted from Public Consultation Documents. Rules apply to Partnerships, and Family Foundations can also use to increase 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 earn revenue from their extractive businesses.
Banking operations are affected by Corporate Tax in UAE (unless an institution falls located in a Free Zone and is eligible for the zero-interest rate).
Article 69 of the UAE Corporate Tax Law provides that the Law will apply to Tax Periods that begin on or after June 1, 2023.
Businesses with a financial year that begins on January 1 are subject to CIT starting on January 1, 2024.
Financial records & Requirement to Maintain Audited Statements
Taxpayers must create and keep financial statements backed by all records and documents to support Corporate tax returns. The forms must be kept for a minimum of seven years.
This obligation will apply to every UAE entity (unless included in the Corporate Tax Group).
Every entity must create its financial statements. However, only some entities may be audited for financial information. A subsequent Cabinet Decision(s) will define the types of tax-paying individuals that must keep certified or audited accounting statements.
Small Business Tax Relief
Reliefs for small-scale businesses with revenues or gross income below the threshold of a specific amount are made. Qualifying businesses will be considered to have no tax-deductible income and must comply with a simplified set of requirements.
The threshold is determined by the revenue, not the earnings or taxable income. That is likely to be confirmed by an upcoming Cabinet Decision.
Deductible / Non-Deductible Expenses
The expenses incurred solely and exclusively for business reasons (and which are not to be capitalized) can be deducted.
Deductions are not allowed when expenses are incurred to earn tax-free income. In the case of any expenditure with a mixed purpose, removal is not permitted. Interest expense is deductible subject to a limit of 30% of EBITDA.
Financial assistance rules are in effect and prevent companies from getting funding to pay dividends or distribute profits.
Entertainment costs are set at 50 percent.
Donations not tax-deductible include those made to a non-Qualifying Public Benefit Entity and bribes, fines, and dividends.
Notably, the amounts withdrawn from the Business by any natural person who is a tax-deductible individual are not deductible.
The following income categories will be exempted from Corporate Tax in UAE (Article 22 of the UAE Corporate Tax Law):
Capital Gains and Dividends, and other distributions of profits from a Resident
Capital Gains such as dividends, capital gains, and other distributions from Qualifying shareholding in a legal entity of a foreign country that is subject to a hold duration of 12 months, the minimum contribution of 5 percent, 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 certain conditions and the option to apply an exemption (rather than credit)
Earnings of an individual who is not a resident of the country come from operating ships or aircraft involved in international transport.
These transactions can be subjected to a specific 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 party’s transactions should be carried out under the arm’s-length principle as outlined in Section 34 under the UAE Corporate Tax Law. In addition, it states that the five conventional OECD Transfer Pricing strategies are suitable to help support the arm’s length character of arrangements with related parties and allows the use of alternative methods when needed.
Article 34 provides that when a tax authority adjusts to a foreign country that affects the tax structure of a UAE entity, the application must be submitted to the FTA to request a similar adjustment that allows the UAE firm to be exempt against double taxation. Any adjustments that result from domestic transactions do not require an application.
The requirements for documentation on transfer pricing are covered in Article 55. UAE businesses will have to follow the rules for transfer pricing and the documentation requirements set by OECD Transfer Price Guidelines, which lead to three-tier reports, i.e., master file, local file, and country-by-country reporting. A reference to a controlled transaction disclosure form is provided (details of which are still to be determined).
It should be noted that no thresholds for the materiality of the product are provided. Separate legislation will be released later. Advance pricing plans will become made available via the normal clarification process currently in place.
UAE has introduced provisions requiring the payment and benefits given to persons connected to be tax-deductible in their market value. The same rules are followed in Article 34 of the UAE CIT Law.
Administration & Enforcement
The MoF is the sole authority for purposes of multilateral bilateral or multilateral agreements as well as for the exchange of information between countries.
The FTA is accountable for the corporate tax system’s administration, collection, and application. Fines and penalties are governed under a law known as the Tax Procedures Law.
Companies will require a VAT Registration UAE from the FTA.
Companies that are required to comply with UAE Corporate Tax are required to submit the Corporate Tax return online for every financial year within nine months from the date of the end of that Financial Period. (A financial period generally refers to any financial period that is 12 months long)
Free Zone companies that are subject to CIT at 0 percent CIT must also submit a CT Return.
Tax credits for foreign taxation are allowed for Corporate Tax in UAE due as per the Public Consultation Document. Businesses can claim less corporate tax owing and the sum of tax withholding effectively removed. There is no way to carry forward. There will be no credit for taxes paid to the individual Emirate.
Fiscal unity or Tax Group: UAE companies can form a “fiscal unity” or Tax Group to serve UAE purposes. The main requirement for a Tax Group is to comply with the (in)direct sharing requirement, which is 95 percent. Free zone entities subject to zero percent cannot join the Tax Group. Additionally, the parent (which may be intermediate) must be a UAE company.
By article 37 of the UAE Corporate Tax Law, losses can be carried forward for up 75 percent of taxable income. Losses can be transferred between members of the same group of corporations if those entities have 75 percent direct or indirectly owned. Losses cannot be transferred from exempt individuals or entities that are free zone. Loss offsets are also subject to the cap of 75 for businesses that roll forward losses.
Tax-deductible losses may be lost in the event of an ownership change (50 percent or more) if the new owner runs the same or similar Business. The criteria to be considered for this have been established.
UAE will adopt an Anti-Abuse General Rule, also known as “GAAR.” The GAAR applies to cases where one of the primary reasons for a transaction is to gain an income tax benefit for the corporation that is incompatible with the purpose or intent of the UAE Corporate Tax Law.
The FTA will deal with and alter or counteract the transaction. The GAAR only applies to agreements or transactions entered after the UAE Corporate Tax Law is published in the UAE Official Gazette on October 10, 2022, in issue #737.
With the publication of the UAE Corporate Tax Law and confirmation of a 9% tax rate and a 9% rate, UAE has established a globally competitive rate for Corporate Tax in UAE and confirmed its intention to implement Corporate Tax in June 2023.
It is expected that additional information to be released over the coming months to be fleshed out and provide more excellent knowledge of its implementation. Nevertheless, several key elements are already confirmed, including introducing compulsory transfer pricing rules.