After the announcement by the government 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 was published on 9 December 2022.
The UAE Corporate Tax Law is Federal Decree-Law No. 47 of 2022 which was enacted on October 3, 2022, & will be in force 15 days after the date of its public publication in the Official Gazette. This UAE corporate tax law applies to business profits in financial years that begin from or after 1 June 2023.
This article offers brief highlights of the new rules that were made public by officials from the Ministry of Finance (“MoF”) and the Federal Tax Authority (“FTA”). It is worth noting that the new rules are in line with those in 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 as well as Director compensation regulations. Following the release of the new UAE Corporate Tax Legislation, The MoF has confirmed that its introduction of the law in June 2023.
Scope of Corporate Tax
UAE Corporate Taxes will be imposed on the global accounting-adjusted net earnings of the business.
It is the UAE Corporate Tax system has two distinct rates:
- A tax-free rate applies to tax-deductible earnings up to a certain amount that is to be determined in the Cabinet Decision (the FAQs relate to an AED 375,000 threshold)
- The standard tax rate is 9 percent.
A confirmation of the lower tax rates of 9 percent aims to ensure that the UAE keeps a competitive rate worldwide.
The UAE Corporate Tax Law is stipulated within Article 3 on aspects governing the global minimum tax rate. This applies to MNEs that fall within the scope of Pillar Two in BEPS Pillar 2. OECD BEPS project and applies to multinational corporations (MNCs) that have 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 the UAE of BEPS Pillar 2.
individuals are taxed under corporate taxation if they engage in business activities and follow an overall VAT concept of business activities. The Cabinet is expected to decide regarding applying UAE Corporate Tax on natural individuals. This means that UAE Corporate Tax is not going to apply to an individual’s salary as well as other income earned by an employer. However, those who are making money through an enterprise activity will be subject to UAE Corporate Tax.
A clearly defined and specific policy (subject to a further Cabinet decision) is provided for all businesses which are in UAE-free zones.
- Maintain sufficient substance and
- Earn qualifying income.
What a qualifying income will be decided by a Cabinet decision. In the Public Consultation Document, this could include the obligation to not do business with the mainland UAE. It is also confirmed that Free Zone businesses can choose to be taxed as a corporation at a rate of 9 percent.
A wide range of UAE rules on sourcing is applicable and important for the Free zone companies seeking to satisfy the requirements of substance.
There will be no withholding tax for categories that are UAE State Sourced income produced by a non-resident. Therefore, foreign investors who don’t carry out any activities in UAE in principle won’t be taxed within the UAE.
Foreign entities may be considered residents in the UAE if they are operated and controlled in the UAE. For foreign entities that aren’t to be residents of the UAE and who have a permanent establishment in the UAE and are managed by the UAE, the Permanent Establishment definitions have been clarified as fixed PE as well as an agent 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. Rules apply to Partnerships and Family Foundations can also apply to ensure tax transparency.
Government entities and government-controlled entities as well as qualifying public benefit entities and qualifying investment funds will be exempt from the UAE Corporate Tax Law. Extractive companies (upstream oil and gas firms) are also exempt if they generate income from the extractive business.
Banking operations are as such subject to UAE corporate tax (unless the institution is an exemption zone and is eligible for a tax rate of 0%).
In Article 69, the UAE Corporate Tax Law provides that the Law applies to tax periods beginning from or after the 1st of June 2023.
Companies with a fiscal year beginning on 1 January are subject to CIT starting 1. January 2024.
Financial records & Requirement to Maintain Audited Statements
Taxpayers must prepare and keep financial statements that are backed by all records and documents to be used in the preparation of UAE Corporate Tax returns. Records 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, every entity may not be audited for financial statements. Subsequent Cabinet Decision(s) will define the types of tax-paying individuals that must keep certified or audited accounting statements.
Small Business Tax Relief
The possibility of reliefs for small-sized companies with gross or revenue that is less than the threshold of a specific amount is made. Qualifying businesses will be considered to have no tax-deductible income and are required to meet a simplified compliance obligation.
The threshold is determined by the revenue, not the tax-deductible income. It is likely to be confirmed by the next Cabinet Decision.
Deductible / Non-Deductible Expenses
All expenses that are 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. In the case of any expenditure with a mixed purpose, deductibility is only permitted. Interest expense is deductible subject to a maximum of 30% of EBITDA.
Financial assistance rules have been put in place that prevents businesses from receiving financial assistance to pay dividends or distribute profits.
Entertainment costs are set at 50 percent.
Non-deductible expenses include contributions made to a non-Qualifying Public Benefit Entity such as fines, bribes, fines, and dividends.
Importantly, the amounts that are withdrawn from the Business by an individual who is a tax-deductible individual are not deductible.
Exempt Income & Relief
The below 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 and Dividends, and other profits derived from shares that are Qualifying in an entity that is a legal person from another country with a holding time of 12 months and a minimum contribution of 5 percent, and at the minimum, subject to 9 percent CIT for the source country. of origin.
- The income from a foreign PE subject to the conditions and the right to use exempted (rather than credit)
- The income earned by non-residents comes from the operation of ships or aircraft operating in international shipping
Some of the following activities are eligible for a special reduction, i.e., it is essentially an exemption from taxation:
- Restructurings and intragroup transactions that qualify as qualifying entities are eligible when they hold 75 percent common ownership
- Relieved business restructuring with specific conditions.
Related party transactions should be carried out by the arm’s-length principle in article 34 of the UAE Corporate Tax Law. In addition, it states that the five standard OECD methods of Transfer Pricing are suitable for ensuring the arm’s-length nature of related-party arrangements however, it allows the use of different methods when needed.
Article 34 stipulates that should there be an adjustment made by a tax authority from a foreign country that affects a UAE entity it is necessary to applications submitted to the FTA to request a similar adjustment for the UAE firm to be exempt against double taxation. The resulting adjustments relating to domestic transactions are not subject to an application.
Documentation requirements for transfer pricing are covered by Article 55. UAE businesses will be required to adhere to the rules for transfer pricing and the documentation requirements that are set by references to the Transfer Price Guidelines that lead to a three-tier report, i.e., master file local file, country-by-country reporting. The reference 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 have been set. Separate legislation will be released later. Pricing arrangements for advanced pricing will be made available through the regular process of clarification currently in place.
UAE has implemented laws that require payments and benefits to persons who are connected to be of market value to be tax-deductible. For the application of this principle, the same rules are followed as laid out in Article 34 of the UAE CIT Law
Administration & Enforcement
- The MoF is the sole authority for purposes of multi-lateral /bilateral agreements as well as for the exchange of information between countries.
- The FTA is responsible for the administration, collection, and implementation of the brand-new corporation income tax system. Fines and penalties are governed by The Tax Procedures Law.
- Businesses must obtain a VAT Registration UAE through the FTA.
- Businesses that are subjected to UAE Corporate Tax must complete the CT electronic return for every financial year within 9 months from the date of the end of that Financial Period. (A financial period generally refers to any year with a 12-month financial term.)
- Free Zone companies that are subject to the 0 percent CIT must submit a Corporate Tax Return.
Foreign Tax Credits
Tax credits for foreign taxation are allowed for UAE corporate tax due as per the Public Consultation Document. Businesses can claim less amount of corporate tax due as well as the sum of tax withholding effectively taken out. There is no tax carry-forward. There will be no credit for taxes that have been paid directly to an individual Emirate.
Fiscal Unity, also known as a Tax Group: UAE companies can create a “fiscal unity” or Tax Group to serve UAE Corporate Taxation purposes. The main requirement for forming the formation of a Tax Group is to comply with an (in)direct sharing requirement, which is 95 percent. Entities from free zones that must pay 0% shareholding cannot be part of Tax Groups. Tax Group. Additionally, the parent (which may be intermediate) must be a UAE company.
According to Section 37 under the UAE Corporate Tax Law, losses can be carried forward 75 percent of taxable income. Losses can be transferred between members of the same group of companies if they are 75% directly or indirectly held. Losses cannot be transferred from exempt people and free zone companies. Loss offsets are also subject to the cap of 75 when it comes to 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 is operating the same or similar business. The criteria are now established.
UAE will be implementing an Anti-Abuse General Rule also known as “GAAR”. The GAAR will apply to transactions in which one of the primary reasons for a transaction is to gain a Corporate Tax Benefit that is not in line with the intent or goal of the UAE Corporate Tax Law.
The FTA will deal with and alter or counteract the transaction. The GAAR is only applicable to agreements or transactions that are entered into after the date that the UAE Corporate Tax Law has been published in the UAE Official Gazette on 10 October 2022, in issue #737.
With the release of the UAE Corporate Tax Law and the confirmation of the 9% rate in the UAE have established a globally cost-effective rate CT and have confirmed the intention to implement Corporate Tax in June 2023.
The information to be announced in the next couple of months is to be fleshed out and provide a greater understanding of the implementation process, nevertheless, several key aspects are confirmed, such as the introduction of compulsory transfer pricing rules.