UAE CORPORATE TAX (UAE CT)

FAQ

Introduction

On 9th December 2022, UAE published the much-awaited Corporate Tax Law vide Federal Decree-Law No. 47 of 2022. The law provides a legislative basis for the implementation of Federal Corporate Tax at the rate of 9% effective for financial years commencing on or after 1st June 2023. Broadly in line with the public consultation document, one of the main changes is the conditions to be satisfied by UAE free zone entities to be eligible for a 0% corporate tax rate.

The tax levy will be on taxable profits exceeding AED 3,75,000 and any profits below this limit will be subject to 0% thus providing small businesses & startups relief.

Timeline

    • On 31 January, 2022

      Ministry of Finance (MoF) announced UAE corporate tax and published Frequently asked questions (FAQ).

    • On 28 April, 2022

      MoF launched public consultation document and invited comments by 20 May 2022.

    • On 9 December, 2022

      The Federal Tax Authority issued the Corporate tax decree law.

    • On 1 June, 2023

      CT Applicable on Tax period starting on or after 1st June, 2023.

    • 9 Months after FYE

      Corporate tax report regime.

      CT chargeable, File CT return as early as February 2025.

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Scope & Rate

The UAE Corporate Tax will be applicable to all businesses and commercial activities alike with the following slab rates

Taxable Income Slab Corporate Tax Rate
Taxable income upto AED 375,000 0%
Taxable income above AED 375,000 9%
Large Multinationals (with consolidated global revenue > AED 3.15Bn(Euro 750mn) Effective tax rate 15%

Taxable Persons:

  • Natural persons carrying on business/commercial activities (includes sole establishments, Civil company & individual partners in an unincorporated partnership).
  • Legal Persons (LLC.,PSC,PJSC, other entities legally incorporated in UAE as well as foreign entities having permanent establishment in UAE.
    Note: The UAE CT will apply to foreign entities that are managed and controlled from within the UAE, or that generate income from UAE sources, even if they are legally incorporated outside of the UAE.

Exempted Persons:

Natural resource extraction & Persons involved in specified non-extractive activities in the country are exempt from Corporate Tax in UAE; however, they remain subject to existing local emirate-level taxation. Other exemptions are available to organisations such as government entities, government controlled entities, pension funds, Qualifying Investment Funds and Qualifying Public Benefit entities due to their vital importance and contribution to the economy of the UAE.

Free Zone Persons:

A highly anticipated area of the corporate tax was the treatment of Free Zone Persons.
To satisfy the following conditions to be eligible for 0% CT:

  • Maintains adequate substance in the State.
  • Complying with transfer pricing provisions.
  • Derives Qualifying Income.
  • Has not elected to be subject to Corporate Tax
  • All Free Zone entities will be required to register and file a CT return, irrespective of whether they are a Qualifying Free Zone Person or not.

A number of points remain unanswered such as what constitutes qualifying income, the treatment of transactions between Free Zone entities and group entities located in mainland UAE, and whether the election to become subject to regular CT in the UAE is irrevocable.

Juridical persons after satisfying certain conditions can become a qualified freezone person and can get benefit of 0% Corporate tax rate.
A Qualifying Free Zone Person (‘QFZP’) under the UAE Corporate Tax Law is defined in Article 18 and must satisfy the following conditions:
1. Maintain sufficient substance in the UAE.
2. Derive Qualifying Income.
3. Have not explicitly elected to be subject to Corporate Tax in UAE.
4. Comply with Transfer Pricing regulations.
5. Maintain audited financial statements in accordance with IFRS/IFRS for SMEs.
6. Furthermore, the Non-Qualifying Revenue of a Free Zone person should not exceed the lower of the following De Minimis requirements in a given Tax Period:

  • 5% of the Total Revenue of a Free Zone Person, or
  • AED 5 million (as specified in the relevant Ministerial Decision).

If a Qualifying Free Zone Person (QFZP) fails to meet any of the specified conditions during a Tax Period, it will lose its QFZP status from the beginning of that relevant Tax Period and for the subsequent four Tax Periods. Consequently, the Free Zone person will be treated as a Taxable Person subject to corporate income tax at a rate of 9% for a minimum term of five years.
According to the Ministerial Decision No. 100 of 2023, The following business activities are considered to be Qualifying Activities doing which a person is considered to be a Qualifying free zone person:-

  • Manufacturing of goods or materials.
  • Processing of goods or materials.
  • Trading of Qualifying Commodities.
  • Holding of shares and other securities for Investment Purpose, requiring an uninterrupted period of 12 months.
  • Ownership and operation of ships.
  • Reinsurance services.
  • Fund management services.
  • Wealth and investment management services.
  • Headquarter, treasury, and financing services to related parties.
  • Financing and leasing of aircraft.
  • Logistics.
  • The distribution of goods in or from a designated zone (as defined in the VAT Law), subject to specific conditions.
  • Any ancillary activities related to the above-listed activities.

Excluded activities- Any activities conducted by a Qualifying Free Zone Person from which non-Qualifying Income is derived.

  • Transactions involving natural persons, with certain exceptions applicable under Qualifying Activities related to the ownership and operation of ships, fund management services, wealth and investment management services, and financing and leasing of aircraft.
  • Banking activities.
  • Insurance activities, with the exception of reinsurance services and headquarter services to related parties.
  • Financing and leasing activities, excluding ownership, management, and operation of ships, treasury and financing services to related parties, and financing and leasing of aircraft.
  • Ownership or exploitation of immovable property, except for Commercial Property situated in a Free Zone, where transactions are conducted with a Free Zone Person.
  • Any ancillary activities related to the above-excluded activities.

Income Derived from Immovable Property in a Free Zone:

Income derived from immovable property located in a Free Zone, resulting from the transactions outlined below, is considered Taxable Income subject to corporate tax at 9%, without the benefit of the basic monetary threshold exemption of AED 375,000 of taxable income:

    • Transactions with Non-Free Zone Persons concerning Commercial Property.
    • Transactions with any person regarding an immovable property that is not Commercial Property.

Commercial Property is defined as an immovable property or part thereof:

  • Used exclusively for a Business or Business Activity.
  • Not used as a place of residence or accommodation, including hotels, motels, bed and breakfast establishments, serviced apartments, and the like.

Basis of taxation

Residency is a key determinant in deciding the applicability of CT on business profits.
Resident person:

  • A legal person incorporated in UAE.
  • A natural person engaged in business/commercial activity in UAE.
  • Foreign company treated as resident if it is effectively managed and controlled in the UAE.

UAE resident companies will be subject to UAE CT on their worldwide income.

Foreign Persons:
Non-residents will be subject to UAE CT on:
● Taxable income from their Permanent Establishment in the UAE; and
● Income which is sourced in the UAE.

Taxable Income

To reduce the complexity in the computation of CT, it is proposed that the ‘accounting net profit (loss)’ as per the financial statements will be considered for the computation of taxable income. For this purpose, financial statements should be prepared as per accounting standards and principles acceptable in the UAE (IFRS). However, small businesses and startups are allowed to use alternative reporting standards and simplified mechanisms.
Deductible expenditure
Expenditure incurred wholly and exclusively for the purposes of the Taxable Person’s Business that is not capital in nature.
Non-Deductible Expenses Limitation
Bribes, Fines & Penalties, Donations, Dividends & profits distribution, Corporate Tax & VAT,
Exp. Not incurred for business purposes, Expenditure incurred for deriving exempt income,
Amounts withdrawn from the Business by a natural person
No deduction at all
Entertainment expenditure
(Meals, accommodation, transportation, admission fees, etc… for customers,
Shareholders, suppliers, business partners, etc…)
50% allowable
Net Interest expenditure 30% of EBITDA

Exempt Income

The Following income and related expenditure shall not be taken into account in determining taxable income:-

  • Dividends and other profit distributions received from a resident juridical person
  • Dividends and other profit distributions received from a participating interest (at least 5% holding for an uninterrupted period of 12 months, and applicable tax rate is at least 9%)
  • Any other income from a participating interest.
  • Income derived by a non-resident person from operating aircraft or ships in international transportation (if same exemption is available to UAE operators of aircrafts and ships in that country)
  • Income of a foreign permanent establishment (if the person opted and the foreign tax rate is at least 9%).

Small Business Relief

  • If the Revenue of a Resident Person does not exceed a threshold of AED 3 million in relevant tax period and previous tax period each, then such business may elect to be treated as not having derived any taxable income for the relevent tax period.
  • If the above applies then Exempt income, reliefs, deductions, tax loss and transfer pricing provisions shall not apply.

Tax Groups

  • Two or more Taxable Persons can be treated as a single Taxable Person.
  • All taxable persons in the group should be resident & juridical.
  • Parent Company owns at least 95% of the shares or voting rights or Profit/Net Assets either directly or indirectly.
  • None of them is exempt and qualifying free zone person.
  • Following same financial year.
  • Using same accounting standards to prepare the financial statements.

Transactions with related parties & connected persons – Transfer Pricing

Transfer Pricing: –

Transfer Pricing refers to the pricing of transactions between Related Parties or Connected Persons. The UAE CT regime will have Transfer Pricing rules to ensure that the price of transaction is not influenced by relationship between parties involved.

The Arm’s Length Principle: – Corporate Tax Law mandates fair pricing for transactions between Related Parties or Connected Persons, treating them as if conducted between independent parties in similar circumstances.

The OECD Transfer Pricing guidelines recommend five widely used methods of establishing transfer pricing. They are: –

  • Comparable Uncontrolled Price method
  • Resale Price Method
  • Cost Plus Method
  • Transactional Net Margin Method
  • Profit Split Method

Transfer Pricing Documentation requirements: –

Taxable persons must maintain a Local File and a Master File if they meet either of the following conditions during the tax period:

The taxable person is a Constituent Entity (i.e., mainland or free zone subsidiary, branch, or permanent establishment) of a Multinational Enterprise Group, with annual consolidated group revenues exceeding AED 3.15 billion, as defined under Cabinet Decision No. 44 of 2020.

The taxable person’s revenues exceed AED 200 million.

Tax Period

  • Businesses will use their financial accounting period as their annual tax period. Where a business does not have a financial accounting period, their default tax period will be the Gregorian calendar year.

Registration and Deregistration

Every business to which corporate tax is applicable should register with FTA and obtain a Tax Registration number within the prescribed period.Where a business ceases to operate or ceases to be subject to CT due to any reason, it should apply to the FTA to be deregistered within 3 months from the date of cessation.

Filing, Payment and Refund

  • One tax return for each tax period.
  • Return filing and tax payment due date: Within 9 months from the end of the relevant tax period.

Transitional Provisions

The CT Law states that the opening balance sheet for tax purposes will be the prior period closing accounting balance sheet.

Record Retention

All financial records and information related to taxes must be kept in a way that allows the tax authority or its authorized employees to check them.
The retention periods are specified as follows:
a. For taxable individuals or businesses- keep records for five years after the relevant tax period.
b. For all other individuals or businesses- keep records for five years from the end of the calendar year in which the document was created.
c. For real estate records- keep records for seven years from the end of the calendar year in which the document was created.

The impact of corporate tax on UAE business

Moving from a tax free economy to an economy with corporate tax compliance, the ministry has taken an important milestone in building an integrated tax regime that supports the strategic objectives of the UAE as well as providing the economy with sufficient flexibility to step up with international financial systems. The Ministry of Finance will remain the competent authority and Federal Tax Authority will be responsible for the administration, collection and enforcement of the corporate tax law.

With the assistance of Corporate Tax Consultants in Dubai having exceptional experience in local and international taxation, the transition to corporate tax compliance will be hassle free. Our expert tax consultants can help you maintain your accounting & financial records in a way that would optimize your liability of taxes on corporate income.

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How can we help you?

Our team of experts can help you assess the challenges and opportunities UAE CT brings in.

  • Corporate Tax Consultancy Services.
  • Corporate Tax Training and Awareness.
  • Corporate Tax Registration Services
  • Preparation and filing of Tax Returns.
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