UAE CORPORATE TAX (UAE CT)
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.
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) | Different tax rate (with reference to Pillar 2 of BEPS 2.0) |
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:
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.
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
| 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
- To follow Arm’s length principle.
- Arm’s length price to be determined based on acceptable transfer pricing methods like the CUP method, Resale price method, cost plus method, transactional net margin / profit split method.
- Methods used should be in line with OECD TP guidelines.
- Definitions of Related Parties, Control & Connected Persons are covered.
- Taxpayers to prepare TP documentation. Conditions and format to be provided under separate ministerial decisions and tax authority guidance.
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 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.
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.
- Representation Services before tax authorities.
UAE Corporate Tax Document
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