After the announcement by the government 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 UAE Corporate Tax Law has been released on December 9, 2022.
The UAE Corporate Tax Law is Federal Decree-Law No. 47 of 2022, enacted on October 3, 2022, and will be in force 15 days following its public publication by the Official Gazette. The UAE Corporate Tax law applies to profits from businesses in financial years beginning on or after June 1, 2023.
This article offers brief highlights of the new rules which were made public by The Ministry of Finance (“MoF”) and the Federal Tax Authority (“FTA”). It is important to note 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 issued to finalize all UAE 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 the implementation is scheduled for June 2023.
Scope of Corporate Tax in uae
Corporate Tax in UAE will be applied to the adjusted net profit of the worldwide accounting of the company.
The UAE Corporate Tax regime has two rates of different types:
- A tax-free rate will be applied to tax-paying earnings up to a certain amount that is to be set in the Cabinet Decision (the FAQs relate to the threshold of AED 375,000)
- The tax statutory standard rate is 9 percent.
The relative minimal tax burden of just 9% aims to ensure that the UAE has a competitive tax rate in the global marketplace.
The UAE 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 scope 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. 3.15 billion AED) 3.15 billion) at any time in two of the preceding four years. The FAQs address the possibility of adopting within the UAE of BEPS Pillar 2.
Individuals also are affected by corporate taxation if they engage in business activities and are in line with general VAT rules of business activities. The Cabinet is expected to decide how to apply Corporate Tax in UAE to natural individuals. Thus, Corporate Tax in UAE does not apply to a person’s salary and other earnings earned through employment.
However, those who are earning income through an enterprise activity will be covered by Corporate Tax in UAE.
A clearly defined and specific policy (subject to a further Cabinet decision) is set out for companies established in UAE-free zones. These zones:
- Maintain sufficient substance and
- Earn qualifying income.
What exactly is a sufficient income will be defined by a Cabinet decision. The Public Consultation Document could refer to the requirement to not 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 for sourcing are in force and essential for the Free zone companies seeking to comply with the substance requirements.
There is a possibility of a zero-withholding tax on specific categories in the UAE State Sourced income produced by a non-resident. In turn, foreign investors who do not conduct any activities in the UAE won’t be taxed within the UAE.
Foreign entities can be considered residents in the UAE if they are managed and controlled by the UAE. In the case of foreign companies that aren’t recognized as residents of the UAE and who possess a permanent establishment in the UAE, The Definitions of Permanent Establishment have been clarified as fixed PE as well as the term “agency PE. Further details on PEs will be subject to a Ministerial decision.
The UAE Corporate Tax Law has retained the exemption for Investment Managers of the Public Consultation Document. Specific rules apply to Partnerships as well, as Family Foundations can also use to increase 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 companies) are exempt if they earn revenue from the extraction business.
Bank operations will be restricted to Corporate Tax in UAE (unless your institution operates in a Free Zone and is eligible for the zero-interest rate).
Article 69 of the UAE Corporate Tax Law provides that the Law applies to Tax Periods that begin on or after June 1, 2023.
Companies with a fiscal year that begins on January 1 are subject to CIT beginning 1. January 2024.
Financial records & Requirement to Maintain Audited Statements
Taxpayers must prepare and maintain financial statements backed by all records and documents to support UAE Corporate Tax returns. The forms should be kept for a minimum of seven years.
That will apply to every UAE entity (unless included in the Corporate Tax Group). Every entity must make separate financial statements. However, all entities will not be audited for financial information. Subsequent Cabinet Decision(s) will outline the tax-paying categories required to keep audited or certified accounts.
Small Business Tax Relief
The possibility of relief for small-sized businesses with gross or revenue less than the threshold of a specific amount is made. Qualifying businesses will be considered not to have tax-deductible income and must comply with a simplified set of requirements.
Revenues and not tax-deductible income determine the threshold. It is likely to be confirmed by an upcoming Cabinet Decision.
Deductible / Non-Deductible Expenses
The expenses incurred solely and exclusively to serve business needs (and which are not to be capitalized) can be deducted.
Deductions are not allowed for expenditures incurred to generate tax-free income. Deductibility is only permitted in the case of any price with a mixed purpose. Interest expense is deductible subject to a maximum of 30% of EBITDA.
Financial assistance rules have been implemented to prevent businesses from getting funding to pay dividends or distribute profits.
Entertainment costs are limited to 50 percent.
Non-deductible expenses include contributions to a non-qualifying Public Benefit Entity and bribes, fines, and dividends.
Importantly, amounts taken from the business by an individual who is a tax-deductible individual are not deductible.
Exempt Income & Relief
The following income categories are exempt from Corporate Tax in UAE (Article 22 of the UAE Corporate Tax Law):
- Capital Gains and Dividends, and other profits distributions from a Resident
- Capital Gains or Dividends, as well as other profits distributions from Qualifying shareholding in a legal entity of a foreign country with a holding time of 12 months and a minimum contribution of 5 percent, and at an absolute minimum of 9 percent CIT for the source country. From which they originate.
- The income from a foreign PE is subject to the conditions & an option to use an exemption (rather than credit)
- The income earned by an individual, not a country resident, comes from the operation of ships or aircraft involved in international transport.
These transactions can be subjected to a specific 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
- Restructuring of businesses is a relief from the government with specific conditions.