After the announcement by the government of the implementation of Corporate Tax (CT) and the frequently asked questions (FAQs) on January 31, 2022, and the release 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 published at December 9, 2022.
The UAE Corporate Tax Law is Federal Decree-Law No. 47 of 2022, enacted on October 3, 2022, and becomes effective 15 days after the Official Gazette’s announcement. This 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 rules announced by officials from 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.
Additional details refer to Cabinet and Tax Authority Decisions, and further guidance anticipate to finish all UAE Corporate Tax Law areas like free ZoneZone and Director compensation guidelines. Following the release of the new UAE Corporate Tax Legislation, The MoF has confirmed the Law’s implementation in June 2023.
Scope of CT
UAE Corporate Taxes will impose on the Business’s worldwide adjusted accounting net earnings.
It is the UAE Corporate Tax system introduces two tax rates:
- A tax-free rate applies to tax-deductible profits that exceed a threshold that determine in the Cabinet Decision (the FAQs relate to an AED 375,000 threshold)
- The standard tax rate is 9 percent.
A confirmation of the minimal tax burden of just 9% aims to ensure that the UAE keeps a competitive rate in the global marketplace.
The UAE Corporate Tax Law included Article 3 on the global minimum 15% tax rate. That applies to MNEs that fall within the scope of Pillar Two, which is part of BEPS. OECD BEPS project and applies to multinational corporations (MNCs) that have consolidated global revenues of more than EUR 750,000 (c. the equivalent of AED 3.15 billion) at any time in two of the preceding four years. The FAQs address the possibility of adopting the UAE of BEPS Pillar 2.
Individuals:
Individuals also result from corporate taxation as long as they engage in business activities and comply with an overall VAT concept for business activities. The Cabinet expected to decide to apply UAE Corporate Tax on natural people. Thus, UAE Corporate Tax will not apply to the individual’s salary or other income earned by an employer. However, those making money through part of a business venture would be subject to UAE Corporate Tax.
Free Zones
A clearly defined and specific policy (subject to other Cabinet decisions) set for companies established in UAE-free zones. These zones:
- Maintain adequate substance and
- Earn qualifying income.
What is the qualifying income will be decided by a Cabinet decision. The Public Consultation Document could include the obligation not to do Business with the mainland UAE. It states that Free Zone companies can choose to tax 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 ZoneZone that want to comply with the substance requirements.
Withholding Tax
There will be no withholding tax on specific categories of UAE State Sourced income non-residents earn. In turn, foreign investors who don’t carry any businesses in the UAE, in principle, won’t be taxed within the UAE.
Foreign Entities
Foreign entities consider residents in the UAE when they are operated and controlled in the UAE. However, foreign entities that are not to be residents of the UAE may have a permanent establishment in the UAE and manage by the UAE. The Permanent Establishment definitions have been clarified as fixed PE and agent 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 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 if they generate income from the extractive Business.
Bank operations will be affected by UAE corporate tax (unless the institution is an exemption zone Zone and is eligible for the zero rates).
Implementation Date
>Article 69 of the UAE Corporate Tax Law states that the Law will apply to Tax Periods beginning on or after June 1, 2023.
Businesses with a financial year beginning on January 1 are subject to CIT beginning January 1, 2024.
Financial records & Requirement To Maintain Audited Statements.
Taxpayers must create and maintain financial statements backed by all records and documents to support UAE Corporate Tax tax returns. Forms are 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 stand-alone financial statements. However, every entity may not be required to submit audited financial statements. A subsequent Cabinet Decision(s) will outline the types of tax-paying individuals who are required to keep audited or certified accounting statements.
Small Business Tax Relief
The possibility of reliefs for small-sized businesses with revenues or gross income below an amount that is a minimum. 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 tax-deductible income. That 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 when the expenses are incurred to earn tax-free income. If a mix-purpose expenditure makes, deductibility is only permitted. Interest costs are deductible up to a limit of 30% of EBITDA.
The so-called financial assistance regulations are in effect that prevents businesses from getting financial assistance to pay dividends or distributions of profits.
Entertainment costs are set at 50 percent.
Non-deductible expenses include contributions to non-Qualifying Public Benefit entities such as fines, bribes, fines, and dividends.
Notably, the amounts withdrawn from the Business by any natural person who is tax-deductible are not tax 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, dividends, and other profits derived from Qualifying shares held by an entity that is a legal person from another country with a holding duration of 12 months, the minimum contribution of 5 percent, and at the minimum, subject to 9 percent CIT within the nation of origin.
- The income from a foreign PE is subject to the conditions and the option to apply exempted (rather than credit)
- Earnings of non-residents come from the operation of ships or aircraft involved in international transport.
Some of the following activities are eligible for specific exemptions, i.e., it is essentially an exemption from taxation:
- Qualifying intragroup restructurings and transactions entities are eligible when they own by 75 percent common ownership.
- He relieved business restructuring with specific conditions.
Transfer Pricing
Related party transactions should conform to the arm’s length principle in article 34 of the UAE Corporate Tax Law. In addition, it states that the five standard OECD Transfer Pricing techniques are suitable for ensuring the arm’s length character of related-party arrangements but also allow for the use of alternative methods when needed.
Article 34 stipulates that when an adjustment is made by a tax authority of another country that affects a UAE entity, it is necessary to submit an application submitted to the FTA for an appropriate adjustment for the UAE business to benefit against double taxation. The resulting adjustments relating to domestic transactions do not require an application.
The requirements for documentation on transfer pricing are covered by Article 55. UAE businesses must adhere to 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. A reference to a controlled transaction 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. Pricing arrangements for advanced pricing will be accessible through the normal process of clarification that is in place.
UAE has enacted laws requiring payments and benefits to persons connected to be in the 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 the sole authority to enforce multilateral or bilateral agreements and exchange information between countries.
- The FTA will be in charge of the new corporate income tax system’s administration, collection, and implementation. Penalties and fines will be determined through a law known as the Tax Procedures Law.
- Companies will require a VAT Registration UAE through the FTA.
- Companies subject to UAE Corporate Tax must complete a CT electronic return for every period of financial activity within nine months from the end of that Financial Period. (A financial period generally refers to any year with a 12-month economic term.)
- Free Zone companies subject to the 0 percent CIT must submit a Corporate Tax Return.
Other Elements
Foreign Tax Credits
According to the Public Consultation Document, tax credits from foreign countries are allowed for UAE corporate tax due. Businesses are entitled to claim the lesser tax due to corporations and the amount of withholding tax that is effectively taken out. There is no way to tax carry forward. There will be no credit for taxes paid directly to an individual Emirate.
Tax Grouping
Fiscal unity or Tax Group: UAE companies can form a “fiscal unity” or Tax Group to serve UAE Corporate Taxation purposes. The main requirement for creating a Tax Group is to comply with an (in)direct sharing requirement 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) must be a UAE company.
Losses
Under article 37 in 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 as long as they are 75% directly or indirectly held. Losses cannot be transferred from exempt people as well as free zones. Loss offsets are also subject to the cap of 75 in the case of 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 is operating the same or similar Business. The criteria to be considered for this have been established.
Anti-Abuse
UAE will implement the General Anti-Abuse Rule, also known as “GAAR.” The GAAR will apply to transactions where one of the principal reasons for a trade 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 adjust or counteract the transaction. The GAAR only applies to arrangements or transactions made after the UAE Corporate Tax Law was published in the UAE Official Gazette on October 10, 2022, in issue #737.
Summary
The publication of the UAE Corporate Tax Law and the confirmation of a rate of 9 in the UAE have established a globally affordable rate for CT. They have confirmed the intention to introduce Corporate Tax in June 2023.
The information will be released in the next couple of months to be fleshed out and provide a greater understanding of the implementation process. Nevertheless, several key elements are already confirmed, including introducing compulsory transfer pricing rules.