All you need to know about the Implementation of Corporate Tax in UAE

1

CT shall be imposed on the taxable income of businesses at the following rates:

• 0% on the portion of the taxable income not exceeding AED 375,000
• 9% on the taxable income that exceeds AED 375,000.

CT shall be imposed on a Qualified Free Zone Person at the following rates:

• 0% on Qualifying Income
• 9% on taxable income that is not Qualifying Income.

The following persons shall be exempt from Corporate Tax in UAE:

a) A Government entity;
b) A Government controlled entity;
c) A person engaged in an extractive business;
d) A person engaged in a non-extractive natural resource business;
e) A qualifying public benefit entity;
f) A qualifying investment fund;
g) A public/private pension or social security fund;
h) A juridical person incorporated in the UAE that is wholly owned and controlled by an exempt person specified in (a), (b), (f), and (g) under certain conditions.

A resident person is any of the following persons:

• A juridical person incorporated in the UAE, including a Free Zone person;
• A juridical person incorporated in a foreign jurisdiction that is effectively managed and controlled in the UAE;
• A natural person who conducts a business (Business) or business activity (Business Activity) in the UAE

Non-resident person:

A non-resident person is a person who is not considered a resident person and that either:

• Has a permanent establishment (PE) in the UAE;
• Derives UAE-sourced income;
• Has a nexus in the UAE.

Resident

• A resident juridical person is subject to CT on their taxable income derived from the UAE and from outside the UAE.
• A resident natural person is subject to CT on the income derived from the UAE and outside the UAE as it relates to the Business or Business Activity that is conducted by the natural person in the UAE.

Non-resident:

• A non-resident person is subject to CT on the following:
• The taxable income that is attributable to the PE of the non-resident person in the UAE;
• UAE sourced income that is not attributable to a PE of the non-resident in the UAE;
• The taxable income that is attributable to the nexus of the non-resident person in the UAE.

Permanent Establishment:

A non-resident person has a PE in the UAE in any of the following instances:

• Where it has a fixed or permanent place in the UAE through which the business of the non-resident person, or any part thereof, is conducted;
• Where a person has and habitually exercises an authority to conduct a Business or Business Activity the UAE on behalf of the non-resident person.

Taxable income is ascertained based on standalone financial statements prepared in accordance with the  accounting standards accepted in the UAE.

Taxable income represents accounting income, incorporating adjustments for:

1. Unrealized gains or losses
2. Income exempt from taxation
3. Reliefs
4. Deductions
5. Transactions involving related parties
6. Tax loss relief
7. Incentives or special reliefs specified by the Ministry of Finance (MoF)

Taxable entities employing an accrual accounting basis have the option to consider gains and losses on a realization basis concerning

1. Assets and liabilities subject to fair value or impairment accounting or,
2. Assets and liabilities held under capital accounts at the conclusion of the tax period.

Small business relief:

A taxable person that is a resident person may elect to be treated as not having derived any taxable income for a tax period where revenue in that tax period and previous tax periods does not exceed a threshold 3Million AED

Dividend and other profit distributions from a resident juridical person shall be exempt from CT.

Participation Exemption:

Income related to a participating interest, such as dividends, other profit distributions, capital gains, and any other income (including foreign exchange and impairment gains tied to the participating interest), is eligible for CT exemption provided that the subsequent conditions are fulfilled:

• Ownership Interest Threshold: Possession of a minimum 5% stake in the shares or capital of the participating entity.
• Ownership Duration: Sustained ownership for at least 12 consecutive months (or with the intent to retain for an equivalent period).
• Tax Jurisdiction Criteria: The participating entity is liable for CT in its respective jurisdiction at a rate not lower than 9%.
• Asset Composition Restriction: No more than half of the direct and indirect assets associated with the participation should be comprised of ownership interests that would not qualify for the participation exemption if not held directly by the taxable person.

• Subject to meeting the relevant conditions, no gain or loss shall arise for the transfer of one or more assets or liabilities between two taxable persons that are members of the same qualifying group. Note that a holding period of a minimum of two years post-date of transfer is applicable.
• Otherwise, the event of transfer shall be calculated at market value instead of net book value.

Business restructuring relief:

• Subject to meeting the relevant conditions, no gain or loss shall arise in a qualifying business restructuring exercise between two taxable persons. Note that a holding period (whether in part or whole – shares or business) of a minimum of two years post-date of restructuring is applicable.
• Otherwise, the event of restructuring shall be calculated at market value instead of net book value.

 Expenditures that are incurred entirely and solely for the purpose of the taxable person’s Business and are not of a capital nature can be deducted during the tax period in which they are incurred. This deduction is permissible unless otherwise specified in the CT Law as disallowed or partially disallowed for a tax deduction. Examples of such disallowed expenses include donations, fines or penalties, bribes, related payments, dividends or profit distribution, and taxes including VAT.

• Interest Expenses: The net interest expenditure can be deducted up to a limit of 30% of the taxable person’s Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITA), excluding exempt income, for the relevant tax period. This deduction is subject to exemptions and exclusions, if net interest expenditure for a tax period does not exceed AED 12,000,000.

• Entertainment Expenses: A deduction of up to 50% is permitted for any expenditure related to entertainment, amusement, or recreation incurred during a tax period. This deduction is subject to exclusions.

• Tax loss can be carried forward indefinitely.
• The amount of tax loss used to reduce the taxable income for any subsequent tax period cannot exceed 75% of the taxable income for that tax period before any tax loss relief.
• A tax loss relief cannot be claimed for losses incurred before the date of commencement of CT, before a person becomes a taxable person, from an asset or activity the income of which is exempt.

Transfer of tax loss:

A tax loss or a portion thereof may be offset against the taxable income of another person where the following

conditions are met:

• Both taxable persons are resident juridical persons;
• Either taxable person has direct or indirect ownership of at least 75% in the other, or a third person has a direct or indirect ownership interest of at least 75% in each of the taxable person;
• The common ownership must exist from the start of the tax period in which the tax loss is incurred to the endof the tax period in which the other taxable person offsets the tax loss transferred against its taxable income;
• None of the persons are an exempt person nor a Qualifying Free Zone Person;
• The financial year of each of the taxable person ends on the same date;
• Both taxable persons prepare their financial statement using the same accounting standard.

Limitation on tax losses carried forward:

•  Tax losses can be carried forward and utilized provided that the same person continuously owned at least 50% ownership interest in the taxable person and the taxable person continued to conduct the same of a similar business following a change in ownership of more than 50%.

• This limitation does not apply to a taxable person whose shares are listed on a recognized Stock Exchange.

All amounts must be in AED. Any non-AED amounts must be converted to AED following exchange rates set by the UAE Central Bank and subject to any decisions issued by the FTA.

The CT introduces a general anti-abuse rule where the FTA may counteract or adjust the taxable basis in cases where tax advantages are obtained as a result of any transaction or arrangement where its main purpose or one of its main purposes is to obtain a tax advantage.

• Tax returns should be submitted within 9 months from the conclusion of the relevant tax period.
•  The duty of filing a tax return with the FTA on behalf of the tax group lies with the parent company.

Financial Statements:

The Taxable Person may be requested by the Federal Tax Authority to submit the Financial Statement that was used by it  for ascertaining its Taxable Income for the relevant Tax Period.

The request by the Authority can be through a notice or decision issued by it.

Partner of an Unincorporated Partnership to provide Financial Statements

A partner of an Unincorporated Partnership may be requested by the Federal Tax Authority to submit the Financial Statements for the relevant Tax Period with additional details such as :

• Total assets, liabilities, expenditure and income of the Unincorporated Partnership
• The distributive share of each of the partners in Unincorporated Partnership

Transfer Pricing Documentation:

• In conjunction with their tax return, the FTA may require a taxable person to submit a disclosure Form containing details about transactions and agreements with Related Parties and Connected Persons.
• When a taxable person’s transactions with related parties and connected persons satisfy certain conditions prescribed by Ministry of Finance for a given tax period, the master file and local file (MF and LF) must be maintained. Submission of these files must take place within 30 days of an FTA request or a later date specified by the FTA.

Tax Period:

The tax period corresponds to the financial year or any portion thereof necessitating the filing of a tax return. Adjustment of the tax period can be sought by taxable persons, contingent upon specific conditions.

Clarifications:

Taxable persons have the option to apply for:

• Establishing an advance pricing agreement; and
• Seeking elucidation on the application of the CT Law.