In the wake of the public announcement of the implementation of Corporate Tax (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 on Taxation of Corporations and Businesses UAE 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 public publication in the Official Gazette. The UAE Law on Corporate Tax applies to business profits in financial years beginning from or after June 1, 2023.
This article gives brief highlights of the new system, which was made public by officials from the Ministry of Finance (“MoF”) and the Federal Tax Authority (“FTA”). It is worth noting that the rules closely match that of the Public Consultation Document.
More details are awaiting Cabinet and Tax Authority Decisions, and further guidance is anticipated to finish this UAE Corporate Tax legislation areas like the Free Zone and Director compensation regulations. Following the release of UAE Corporate Tax Legislation, The MoF has confirmed the Law’s implementation in June 2023.
Scope of CT
UAE Corporate Taxes will be applied to the Business’s worldwide adjusted accounting net earnings.
It is the UAE Corporate Tax system has two different rates:
- A tax-free rate is available for tax-deductible earnings up to a certain amount that is to be determined in the Cabinet Decision (the FAQs relate to the threshold of AED 375,000)
- The standard tax rate is 9 percent.
Confirming the lower tax rates of 9 percent aims to ensure that the UAE keeps a competitive rate in the global marketplace.
The UAE Corporate Tax Law is stipulated in Article 3 on the global minimum tax rate. That applies to MNEs that fall within the definition of Pillar Two in BEPS. OECD BEPS project and applies to multinational corporations (MNCs) that have consolidated global revenue over EUR 750 million (c. the equivalent of AED 3.15 billion) at any time in two of the last four years. The FAQs discuss the possibility of adopting the UAE of BEPS Pillar 2.
Individuals are taxed under corporate taxation as long as they engage in business activities and comply with general VAT rules. The Cabinet is expected to decide on applying UAE Corporate Tax for natural individuals. That means that UAE Corporate Tax will not apply to the individual’s salary or 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 any other Cabinet decision) is provided for all businesses established in UAE-free zones.
- Maintain adequate substance and
- Earn qualifying income.
What precisely the qualifying income will be decided by a Cabinet decision. According to the Public Consultation Document, this could refer to the obligation not to do Business with the mainland UAE. It is stated that Free Zone businesses can choose to be taxed as a corporation at a rate of 9 percent.
The extensive UAE rules on sourcing are applicable and essential for the Free zone companies seeking to comply with the substance requirements.
There is a possibility of a no withholding tax for UAE State Sourced income categories produced by a non-resident. Therefore, foreign investors who don’t carry out any activities in UAE, in general, will not be taxed within the UAE.
Foreign entities can be considered to be residents of the UAE if they are operated and controlled in the UAE. However, foreign entities that aren’t to be residents of the UAE may have a permanent establishment in the UAE and are managed by the UAE. The Permanent Establishment definitions have been defined as fixed PE and the term “agency PE. Further details on PEs will be subject to a 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 firms) are exempt as long as they profit from their extractive Business.
Bank operations will be subject to UAE corporate tax (unless the bank is located in the Free Zone and is eligible for zero rates).
Article 69 of the UAE Corporate Tax Law provides that the Law will apply to Tax Periods that begin from or after June 1, 2023.
Companies with a fiscal year that begins on January 1 are subject to CIT beginning January 1, 2024.
Financial records & Requirement To Maintain Audited Statements.
Taxpayers must prepare and keep financial statements backed by all records and documents to be used in preparing UAE Corporate Tax tax returns. The forms should be kept for a minimum of seven years.
That will apply to every UAE entity (unless it is part of the Corporate Tax Group). Every entity must make stand-alone financial statements. However, every entity may not be required to submit audited financial statements. Subsequent Cabinet Decision(s) will outline the tax-paying categories that must keep certified or audited accounting statements.
Small Business Tax Relief
The possibility of reliefs for small-sized companies with revenues or gross income that are below an amount that is a minimum. Qualifying businesses will be considered to have no tax-deductible income and must meet a simplified compliance obligation.
The threshold is determined by the revenue, not the tax-deductible income. It is likely to be confirmed by an upcoming Cabinet Decision.
Deductible / Non-Deductible Expenses
All expenses incurred exclusively and solely for business reasons (and which are not to be capitalized) can be deducted.
The deduction is not permitted when the expenses are incurred to earn tax-free income. Deductibility is only allowed in the case of any expenditure with a mixed purpose. Interest expense is deductible subject to a maximum of 30% of EBITDA.
The so-called financial assistance regulations are in effect that prevents businesses from getting funding to pay dividends or distribute profits.
Entertainment costs are set at 50 percent.
Donations not tax-deductible include those made to non-Qualifying Public Benefit Entity and bribes, fines, and dividends.
The most important thing to note is that the amounts withdrawn from the Business by any natural person who is a tax-deductible individual are not deductible.
Exempt Income & Relief
The following income categories are not subject to UAE Corporate Tax (Article 22 of the UAE Corporate Tax Law):
- Capital Dividends, gains, and other distributions of profits from a resident
- Capital gains, dividends, and other profits derived from Qualifying shares held by the name of a foreign legal entity subject to a hold time of 12 months, a minimum contribution of 5 percent, and an absolute minimum of 9 percent CIT for the source country. From which they originate.
- The income from a foreign PE is subject to certain conditions, and the right to use exempted (rather than credit)
- The income earned by an individual who is not a resident of the country comes from the operation of ships or aircraft operating in international shipping.
These transactions can be subjected to notable reduction, i.e., it is essentially tax deferral:
- Restructurings and intragroup transactions that qualify as qualifying entities are eligible when they hold 75 percent common ownership
- Restructuring relief for businesses with specific conditions.
Related parties must conduct transactions in conformity with the arm’s length principle in article 34 of the UAE Corporate Tax Law. In addition, it states that the five conventional OECD methods of Transfer Pricing are suitable to help support the arm’s-length nature of the related party arrangement. However, it allows the use of different ways when needed.
Article 34 stipulates that when there is an adjustment made by a tax authority of another country that impacts the tax structure of a UAE entity. It is necessary to submit an application to the FTA for an appropriate adjustment that allows 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 must follow the transfer pricing regulations and the documentation requirements set by references to the Transfer Price Guidelines that lead to three-tier reports, i.e., master file, local file, and country-by-country reporting. The connection to a controlled transactions disclosure form is provided (details of which are to be determined).
It is important to note that no thresholds of materiality are provided. Separate legislation will be released later. Advance pricing plans will become accessible via the current clarification process.
UAE has enacted laws requiring the payment and benefits given to persons connected to be of their market value to be tax-deductible. For the application of this principle, the same rules apply as per section 34 of UAE CIT Law.
Administration & Enforcement
- The MoF is the sole authority to enforce multilateral or bilateral agreements and exchange information between countries.
- The FTA is responsible for the new corporate income tax system’s administration, collection, and implementation. Fines and penalties are governed under The Tax Procedures Law.
- Companies will require a VAT Registration UAE to be able to use the FTA.
- Businesses subjected to UAE Corporate Tax must complete the CT tax return online for every period of financial activity within nine months from closing the 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 have to submit a CT tax return.
Foreign Tax Credits
Tax credits from foreign countries can be claimed against UAE corporate tax due as per the Public Consultation Document. Businesses can claim less of the tax due to corporations and the sum of withholding tax that is effectively removed. There is no way to tax carry forward. There will be no credit for taxes that are paid by the person Emirate.
Fiscal Unity, also known as a Tax Group: UAE companies can form a “fiscal unity” or Tax Group to serve UAE Corporate Tax-related purposes. The main requirement for starting a Tax Group is to comply with an (in)direct sharing requirement, which is 95 percent. Free zone entities subject to zero percent cannot join Tax Groups. Tax Group. The parent (which may be intermediate) is also required to be a UAE company.
Under article 37 of the UAE Corporate Tax Law, losses can carry forward 70% of taxable income. Losses can be transferred between members of the same group of companies as long as they are 75% directly or indirectly common. Losses cannot move from exempt individuals and free zone companies. Loss offsets are subject to the cap of 75 for businesses that roll forward failures.
Tax-deductible losses could be lost if there is an ownership change (50 percent or more) if the new owner runs the same or similar Business. The requirements are established now.
UAE will implement the General Anti-Abuse Rule, “GAAR.” The GAAR applies to cases where one of the principal reasons for a transaction is to earn a Corporate Tax Advantage incompatible with the purpose or intent of the UAE Corporate Tax Law.
The FTA will deal with and adjust or counteract the transaction. The GAAR only applies to arrangements or transactions made after 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 the confirmation of the 9% rate, The UAE has set a worldwide affordable rate for CT and confirmed its intention to implement Corporate Tax in June 2023.
The information will be released in the next few months, clarifying and giving a better knowledge of its implementation. Nevertheless, several vital aspects, such as introducing compulsory transfer pricing rules, are confirmed.