The UAE, known for its status as a prominent business hub and global financial center, has recently introduced a federal law decree in December 2022 to implement a corporate tax system. Previously, the region had been considered a tax haven for businesses, with minimal taxes imposed on profits and gains, except for those earned from oil exploration.
The implementation of the Corporate Tax Law was scheduled to commence from 1st June 2023. This move is aimed at supporting the UAE’s strategic objectives, accelerating its development and transformation, and enhancing its competitiveness as a preferred business destination.
The new law incorporates globally accepted principles, ensuring clarity and predictability for taxpayers. Additionally, the UAE aims to align itself with emerging international standards, particularly the global minimum tax on multinational corporations endorsed by the G20.
The imposition of the UAE Corporate Tax and the applicable tax rates are crucial aspects outlined in the UAE Corporate Tax Law. According to the law, Corporate Tax will be imposed on Taxable Persons if their Taxable Income surpasses AED 375,000.
Imposition of Corporate Tax: In accordance with Article 2 of the UAE Corporate Tax Law, Corporate Tax will be levied on the Taxable Income and must be paid to the Federal Tax Authority, as specified by the UAE Corporate Tax Law and Tax Procedures Laws. Currently, Corporate Tax has been enforced, from June 1, 2023. Taxable Persons exceeding the AED 375,000 threshold will be responsible for paying corporate tax as per the UAE Corporate Tax Law.
Corporate Tax Imposition Frequency: Corporate Tax will typically be imposed on an annual basis.
Self-Assessment: Taxable Persons will calculate their Corporate Tax liability through self-assessment. This means that they will determine and pay Corporate Tax by filing a Corporate Tax Return. Following the completion of the return, any amount owed must be paid to the Federal Tax Authority (FTA).
Who is a Taxable Person under UAE Corporate Tax Law?
A Taxable Person, as defined by the UAE Corporate Tax Law, refers to an individual or entity to whom the provisions of the law apply and who is obligated to pay Corporate Tax. Corporate Tax will be imposed based on the rates specified in Article 3 of the UAE Corporate Tax Law. A Taxable Person can be classified as either a Resident or a Non-Resident. Additionally, the Cabinet has the authority to designate specific categories of businesses subject to Corporate Tax under the UAE CT Law.
Definition of a Resident: A Resident includes a company incorporated in the UAE, such as LLCs, FZ-LLCs, PSCs, etc. It also encompasses a person engaged in business activities within the UAE. A Resident can be further classified as follows:
- Natural Person: A natural person conducting business or activities in the UAE.
- Juridical Person: A juridical person includes entities incorporated, recognized, or established under the applicable laws of the UAE, including Free Zone entities. It also includes entities incorporated, recognized, or established under the laws of a foreign jurisdiction but effectively managed and controlled within the UAE. The Cabinet has the authority to identify additional types of entities as well.
Determining “Effectively Managed and Controlled” under the UAE CT Law:
To determine the jurisdiction where a Juridical Person is effectively managed and controlled, factors such as the location where key decisions are made by the board of directors or other key decision-makers are taken into account, along with other relevant facts and circumstances.
Definition of a Non-Resident: According to the UAE CT Law, a juridical person is considered a Non-Resident if it is incorporated or established in a foreign jurisdiction and is effectively managed and controlled outside the UAE. Non-Resident Persons are also subject to Corporate Tax in the UAE, even if they are not incorporated or managed within the UAE.
For the purpose of determining Corporate Tax liability for a Non-Resident under the UAE CT Law, a Non-Resident is defined as a person who is not a Resident and meets one or more of the following conditions:
- Has a Permanent Establishment (PE) in the UAE, as per Article 14.
- Earns UAE Sourced Income, as per Article 13 (which may be subject to a withholding tax of 0%).
- Has a nexus or connection in the UAE, as determined by the Cabinet’s decision.
Corporate Tax Base (Article 12):
The Corporate Tax Base in the UAE is determined based on the Residential Status of a Person, as outlined in Article 12 of the UAE CT Law. For Residents, both juridical and natural persons, Corporate Tax is levied on their Taxable Income derived from the UAE or elsewhere.
- Non-Residents have their Corporate Tax Base determined as follows:
- Permanent Establishment (PE): Taxable Income attributable to the PE in the UAE.
- UAE Sourced Income: Taxable Income derived in the UAE that is not attributable to a PE.
- Business nexus or connection to the UAE: Taxable Income attributable to the Non-Resident’s nexus in the UAE, as specified by the Cabinet’s decision.
State Sourced Income (Article 13): State Sourced Income refers to income earned through various means, including income derived from a Resident, income derived from a Non-Resident that is paid or attributable to a PE established in the UAE, and income accrued from activities, capital, assets, rights, or services performed or used in the UAE. The Minister can specify conditions for determining State Sourced income, and such income is subject to Corporate Tax in the UAE.
Permanent Establishment for a Non-Resident (Article 14):
A Non-Resident is said to have a Permanent Establishment in the UAE if it meets one of the following criteria:
- Fixed or Permanent Place: A Non-Resident is considered to have a PE in the UAE if they have a fixed or permanent place from which they conduct business activities in the country.
- Habitual Exercise of Authority: A Non-Resident can also have a PE in the UAE if there is a person who habitually exercises authority to conduct business on behalf of the Non-Resident within the country.
- Other Forms of Nexus: The Cabinet has the authority to determine other forms of Nexus that establish a PE for a Non-Resident in the UAE.
If a PE is established for a foreign entity, it will be subject to Corporate Tax under the UAE CT Law.
Fixed or Permanent Place in the UAE: A fixed or permanent place refers to various locations or structures that can constitute a PE for a Non-Resident. Some examples include:
- Branches
- Offices
- Factories
- Workshops
- Land, buildings, or other properties
- Structures or installations for exploring renewable or non-renewable natural resources
- Places of management where essential business decisions are made
- Mines, oil wells, or gas wells
- Quarries or extraction sites for natural resources
- Vessels or structures used for extraction
- Construction sites or projects lasting more than six months, including supervisory activities
However, if a place is used solely for specific purposes, it will not be considered a PE for Corporate Tax purposes. These purposes include:
- Storage, display, or delivery of goods
- Processing of goods solely by another person
- Purchasing goods or merchandise or collecting information for the Non-Resident
- Conducting preparatory or auxiliary activities
- A combination of these activities, provided the overall activity is solely preparatory or auxiliary in nature.
Who is exempted from Tax Registration under UAE Corporate Tax Law?
Certain entities are exempt from registration under the UAE Corporate Tax Law. These entities include:
- Government Entities
- Government Controlled Entities
- Persons engaged in Extractive Business Activities as per Article 7 of the UAE CT Law
- Persons engaged in Non-Extractive Natural Resource Businesses as per Article 8 of the UAE CT Law
- Non-Residents deriving UAE-sourced income without having a Permanent Establishment (PE) in the UAE.
UAE Small Business Relief – Article 21 of the UAE Corporate Tax Law:
Article 21 of the UAE Corporate Tax Law states that small businesses below a certain revenue threshold would be exempt from UAE Corporate Tax.
Revenue Threshold Limit for Small Business Relief – Article 2:
Businesses with revenue below AED 3 million for the relevant and previous tax periods will be exempt from UAE Corporate Tax. The revenue will be calculated based on accounting standards in the UAE.
Applicability of Threshold Limit:
The small business relief will apply to taxpayers for the following tax periods:
- First Year for Relief: Tax periods starting on or after June 1, 2023
- Last Year for Relief: Tax periods ending on or before December 31, 2026
Non-Applicability of Small Business Relief – Article 3:
Small business relief will not be available to UAE tax residents who fall under the following categories:
- Qualifying Free Zone Persons
- Constituent Companies of Multinational Enterprises Groups covered under Country-by-Country reporting
Carry Forward of Tax Losses – Article 4:
Tax losses incurred in the tax period where a business claims small business relief cannot be carried forward. However, unutilized tax losses from the previous tax period, where relief was not claimed, can be carried forward to the tax period where small business relief is not claimed.
General Interest Deduction Limitation Rule – Article 5:
If a taxpayer opts for small business relief, they will not be eligible to carry forward their net interest expenditure to the subsequent tax period. However, net interest expenditure from the previous tax period, where relief was not claimed, can be carried forward to the tax period where small business relief is not claimed, subject to Article 30 of the UAE CT Law.
Effect of UAE Corporate Tax Law on International Businesses:
International businesses operating in the UAE need to review their company structures and operations to assess their exposure to Corporate Tax and ensure compliance with the law. Factors such as legal form, ownership structure, place of incorporation, business activities, and commercial license may need to be reconsidered.
Effects of UAE Corporate Tax Law on Operations in Free Zones or Mainland:
International businesses operating in Free Zones may be subject to Corporate Tax on their income derived from business activities in the UAE, while those operating outside Free Zones may be subject to other taxes or fees imposed by the relevant emirate authorities. Businesses need to compare the costs and benefits of operating in Free Zones versus outside Free Zones in the UAE.
Understanding the Implications of UAE Corporate Tax and the Role of Corporate Tax Consultants in UAE
UAE Corporate Tax presents significant implications for businesses operating in the country. With the introduction of small business relief under Article 21 of the UAE Corporate Tax Law, businesses below the revenue threshold can benefit from exemption. It is crucial for businesses, especially international ones, to evaluate their company structures and operations to ensure compliance and assess their exposure to Corporate Tax. Seeking guidance from experienced Corporate Tax Consultants in UAE can help navigate the complexities of the law and optimize tax strategies. Whether operating in Free Zones or the mainland, businesses need to carefully consider the advantages and disadvantages to make informed decisions regarding their operations. By staying informed and seeking professional advice, businesses can adapt to the UAE Corporate Tax landscape while maximizing their financial efficiency.