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 47 of 2022 regarding the taxation of Corporations & 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, which was issued on October 3, 2022, and will be in force 15 days following its announcement by the Official Gazette. The UAE corporate tax law applies to businesses’ profits for fiscal years beginning from or after June 1, 2023.
This article offers an overview of the new system, which was it was announced by The Ministry of Finance (“MoF”) and the Federal Tax Authority (“FTA”). It is worth noting that the rules closely match those in the Public Consultation Document.
Additional details will be deferred to Cabinet and Tax Authority Decisions. Further guidance is expected to be completed by this UAE Corporate Tax legislation areas like the Free Zone and Director compensation guidelines. Following the release of the new UAE Corporate Tax Legislation, The MoF has confirmed that the implementation is scheduled for June 2023.
Scope of Corporate Tax
UAE Corporate Taxes will be applied to the Business’s worldwide adjusted accounting net earnings.
It is the UAE Corporate Tax system introduces two tax rates:
- A tax-free rate is available for tax-deductible profits that exceed a threshold that is to be determined in the Cabinet Decision (the FAQs relate to the threshold of AED 375,000)
- The tax standard for the statutory rate is 9 percent.
A confirmation of the lower tax rates of 9 percent aims to ensure that the UAE keeps a competitive rate in the global marketplace.
It is the UAE Corporate Tax Law stipulated in Article 3 on aspects governing 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 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 address the possibility of adopting the UAE of BEPS Pillar 2.
Individuals:
Individuals are a result of corporate tax if they engage in business activities and comply with general VAT rules. The Cabinet is expected to decide to apply UAE Corporate Tax for natural people. Thus, UAE Corporate Tax will not apply to the individual’s salary or other income earned by an employer. However, individuals earning income through part of a business venture would be subject to UAE Corporate Tax.
Free Zones
A specific and defined regime (subject to a further Cabinet decision) is set out for companies in UAE-free zones. These zones:
- Maintain adequate substance and
- Earn qualifying income.
What is a sufficient income will be defined by a Cabinet decision. The Public Consultation Document could include 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.
A wide range of UAE rules for sourcing are in force and are of great importance to businesses in the Free zone who want to comply with the substance requirements.
Withholding Tax
There is a possibility of a zero withholding tax for categories in the UAE State Sourced income produced by a non-resident. Therefore, foreign investors who do not conduct any business in the UAE, in general, will not be taxed on their income in the UAE.
Foreign Entities
Foreign entities may be considered residents in the UAE if they are managed and controlled by the UAE. However, foreign entities that are not residents of the UAE may have a permanent establishment in the UAE and are managed by the UAE. The definitions of a Permanent Establishment are clarified as fixed PE and the term “agency PE. Further details on PEs are subject to Ministerial decision.
Exempt Entities
The UAE Corporate Tax Law retains the exemption for Investment Managers from Public Consultation Documents. Particular 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 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.
Banking operations are subject to UAE corporate tax (unless the institution is an exemption zone Zone and is eligible for a tax rate of 0%).
Implementation Date
In Article 69, 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 that begins on January 1 are subject to CIT starting 1 . January 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. Records must 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, all entities will not be required to submit audited financial statements. A subsequent Cabinet Decision(s) will define the types of tax-paying individuals who are required to keep audited or certified accounts.
Small Business Tax Relief
Reliefs are available to small-sized businesses that have gross or revenue that is less than an amount that is a minimum. Qualifying businesses will be considered to have no tax-deductible income and must meet a simplified compliance obligation.
Revenues and not tax-deductible income determine the threshold. It 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) can be deducted.
The deduction is not permitted when the expenses are incurred to earn tax-free income. Deductibility is only permitted in the case of any expenditure with a mixed purpose. Interest expense is deductible subject to a maximum of 30% of EBITDA.
Financial assistance rules are in effect and prevent companies from getting financial assistance to pay dividends or distributions of 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 below income categories are free of 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 distributions of profits from shares that are Qualifying in the name of a foreign legal entity that is subject to a hold duration of 12 months, the minimum contribution of 5 percent, and an absolute minimum of 9 percent CIT within the nation from which they originate.
- Earnings from a foreign PE are subject to certain conditions and the right to use an exemption (rather than credit)
- The income earned by non-residents comes from operating ships or aircraft operating in international shipping.
Some of the following activities are eligible for specific exemptions, i.e., effective 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.
Transfer Pricing
Related parties must conduct transactions under the arm’s-length principle outlined in article 34 of the UAE Corporate Tax Law. In addition, it states that the five standard OECD methods of Transfer Pricing are suitable to help support the arm’s-length nature of the related party arrangement, but also allow for the use of different methods if needed.
Article 34 states that when an adjustment is made by a tax authority of another country that impacts the tax structure of a UAE entity, it is necessary to apply to the FTA to request a similar adjustment that allows the UAE firm to be exempt from 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 must adhere to the transfer pricing regulations and the documentation requirements set by OECD Transfer Price Guidelines that lead to a three-tier report, i.e., master file, local file, and country-by-country reporting. The reference to a controlled transactions disclosure form is provided (details of which are in the process of being finalized).
It should be noted that no thresholds of materiality are provided. Separate legislation will be announced shortly. Advance pricing plans will become made available 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 market value to be tax-deductible. For applying this principle, the same rules apply as per Article 34 in the UAE CIT Law.
Administration & Enforcement
- The MoF is still the authority in charge for purposes of multi-lateral or bilateral agreements as well as the exchange of information between countries.
- The FTA will be in charge of the corporate tax system’s administration, collection, and application. Penalties and fines will be determined under The Tax Procedures Law.
- Companies will require a VAT Registration UAE through the FTA.
- Businesses subjected to UAE Corporate Tax must complete a CT tax return online for every financial year within 9 months from the close 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 have to submit a CT Return.
Other Elements
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 of the tax due to corporations & 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.
Tax Grouping
Fiscal Unity, also known as a Tax Group: UAE companies can form a “fiscal unity” or Tax Group to serve UAE Corporate Taxation purposes. The main requirement for forming a Tax Group is to comply with that (in)direct minimum shareholding of 95 percent. Entities from free zones that have to pay zero percent cannot join Tax Groups. Tax Group. Furthermore, the parent (which could be intermediate) is required to be a UAE company.
Losses
According to Section 37 under the UAE Corporate Tax Law, losses can be carried 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 held. Losses cannot be transferred from exempt individuals as well as free zones. Loss offsets are also subject to the cap of 75 for businesses that roll forward losses.
Tax-deductible losses could be lost in the event of an ownership change (50 percent or more); however, the new owner runs the same or similar Business. The criteria are now clarified.
Anti-Abuse
UAE will adopt the General Anti-Abuse Rule, known as “GAAR.” The GAAR will apply to transactions where one of the principal reasons for a transaction is to earn a Corporate Tax Advantage incompatible with the intent, goal, or purpose of UAE Corporate Tax Law.
The FTA will be able to address and alter or counteract the transaction. The GAAR is only applicable to arrangements or transactions entered into after the UAE Corporate Tax Law was published by the UAE Official Gazette on October 10, 2022, in issue #737.
Summary
With the release of the UAE Corporate Tax Law and the confirmation of the 9% rate, The UAE has established a globally affordable rate for CT. It has confirmed the intention to implement Corporate Tax in June 2023.
The information to be released in the next couple of months is to be fleshed out and provide a greater knowledge of its implementation. Nevertheless, several key elements are already confirmed, including introducing compulsory transfer pricing rules.