UAE CORPORATE TAX (UAE CT)

Introduction

On Friday 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 (yet to be confirmed by a cabinet decision) 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.

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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 SlabCorporate Tax Rate
Taxable income upto AED 375,0000%
Taxable income above AED 375,0009%
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, individual partners in an unincorporated partnership).
  • Legal Persons (LLC.,PSC,PJSC, other entities legally incorporate in UAE as well as foreign entities having permanent establishment in UAE.
    Note: Legal persons incorporated outside UAE that are effectively managed and controlled in UAE will be covered under the scope of UAE CT.

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, investment funds and 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.

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 ExpensesLimitation
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 expenditure30% of EBITDA

Exempt Income

To avoid double taxation and recognizing its position as a leading holding company location, the following forms of income is proposed to be exempt:

  • Dividend and Capital gain tax earned by UAE company from its qualifying shareholding.
  • Foreign branch profit exemption, provided foreign branch subject to sufficient level of tax.
  • Income earned by a non-resident from operating or leasing aircrafts or ships used in international transport.
  • Employment and personal income earned by UAE and foreign nationals in their personal capacity.
  • Intra-group transactions and group reorganization profits subject to conditions.

Tax Groups

  • Two or more Taxable Persons treated as a single Taxable Person.
  • All taxable persons in the group should be resident & juridical.
  • Parent company holds at least 95% of shares or voting rights in the subsidiary directly or indirectly.
  • Neither Parent nor Subsidiary is an exempt person or qualifying free zone person.

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

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.
  • Representation Services before tax authorities.

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