Introduction of Corporate Tax in the UAE
The United Arab Emirates issued The Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses on 09 December 2022.
The Corporate Tax Law provides the legislative basis for the introduction and implementation of a Federal Corporate Tax in the UAE and is effective for financial years starting on or after 1 June 2023.
The introduction of Corporate Tax (“CT”) is intended to help the UAE achieve its strategic objectives and accelerate its development and transformation. The certainty of a competitive Corporate Tax regime that adheres to international standards, together with the UAE’s extensive network of double tax treaties, will cement the UAE’s position as a leading jurisdiction for business and investment.
As more information is released by the Federal Tax Authority (FTA) in the coming months, we will have more precise details on the impact of Corporate Tax on your business. In the meantime, please let us know should you need any assistance regarding the new tax.
Our summary…
CT rates
CT shall be imposed on the taxable income of businesses at the following rates:
0% on the portion of 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, as defined;
9% on taxable income that is not Qualifying Income.
* The amount will be specified in a Cabinet decision.
Free Zone entities
The law suggests that a Qualifying Free Zone Person can have both Qualifying Income taxed at the rate of 0%, and non-qualifying Taxable Income taxed at 9%. Although the publication outlines these initial details, further questions are raised in relation with the definition of these areas.
For example, what constitutes Qualifying Income? How do we treat transactions between Free Zone entities? What about entities located in mainland UAE?
These questions are subject to Cabinet decision and they will advise on the treatment in the coming months.
Some conditions to consider for a Qualifying Free Zone Person include maintaining adequate substance, complying with transfer pricing provisions and not electing to be subject to CT. 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. Whether the election to become subject to regular CT in the UAE is irrevocable or not is yet to be confirmed.
Exempt persons
The CT law establishes which persons will be exempt from UAE CT. The following list includes some of those persons who shall be exempt from CT however certain conditions do apply depending on the trade they are involved in:
· Government entity;
· Government controlled entity;
· Person engaged in an extractive business;
· Person engaged in a non-extractive natural resource business;
· Qualifying public benefit entity;
· Qualifying investment fund;
· Public / private pension or social security fund;
Calculation of taxable income
CT law reinforced that taxable income will be determined on the basis of the net profit or loss as included in the financial statements prepared for financial reporting purposes in accordance with acceptable accounting standards. The provisions provide insights in terms of the tax adjustments that will apply to arrive at the reported accounting income. Some of these adjustments include the treatment of unrealised gains and losses, interest expenses, related party transactions and incentives amongst others.
Taxable Person
In line with the tax regimes of most countries, the CT Law taxes income on both a residence and source basis. The applicable basis of taxation depends on the classification of the Taxable Person.
A “Resident Person” is taxed on income derived from both domestic and foreign sources, known as the residence basis.
A “Non-Resident Person” will be taxed only on income derived from sources within the UAE, known as the source basis.
Residence for Corporate Tax purposes is not determined by where a person resides or is domiciled but instead by specific factors that are set out in the Corporate Tax Law. If a Person does not satisfy the conditions for being either a Resident or a Non-Resident person then they will not be a Taxable Person and will not therefore be subject to CT.
A Resident Person is any of the following Persons:
a) A juridical person that is incorporated or otherwise established or recognised under the applicable legislation of the State, including a Free Zone Person.
b) A juridical person that is incorporated or otherwise established or recognised under the applicable legislation of a foreign jurisdiction that is effectively managed and controlled in the State.
c) A natural person who conducts a Business or Business Activity in the State.
d) Any other Person as may be determined in a decision issued by the Cabinet at the suggestion of the Minister.
A Non-Resident Person is a Person who is not considered a Resident Person under Clause 3 of the CT Law and that either:
a) Has a Permanent Establishment in the State as under Article 14 of CT Law
b) Derives State Sourced Income as under Article 13 of the CT Law
c) Has a “nexus” (business activities) in the State as specified in a decision issued by the Cabinet at the suggestion of the Minister.
CT base:
Resident
· A resident juridical person is subject to CT on their taxable income derived from both the UAE and from outside the UAE.
· A resident natural person is subject to CT on the income derived from both 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 (PE):
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 in the UAE on behalf of the non-resident person.
Foreign PE exemption:
Elections to exempt foreign PEs no longer seem to be irrevocable, but the Pes should be subject to foreign tax of at least 9%.
Group transfers and restructuring
Certain conditions were added to be able to qualify for tax neutral intra group transactions and business restructurings, and the claw-back period is established as to two years.
Anti-abuse rules
The CT law established general anti-abuse rules which apply to transactions giving rise to a tax advantage where no valid commercial reason exists and where the tax advantage was the main or one of the main purposes of the transaction.
Administration
As expected, the CT law lists the information that needs to be included in the tax return, when it should be filed, when tax should be paid and how long records should be kept.
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. Tax returns will be submitted no later than 9 months from the end of the relevant tax period. CT payable should be settled within 9 months from the end of the relevant tax period, or by the date stipulated by the FTA.
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 FTA may request taxable persons to provide the financial statements that were used to determine their taxable income. The MoF may issue a decision requiring certain categories of taxable persons to maintain audited or certified financial statements.
Companies, whether taxable or exempt, will be required to maintain all records and related documents for a period of 7 years following the end of the tax period to which they relate.
Planning and next steps
The provisions put forward in the UAE CT law build from best practices globally and incorporate principles that are internationally known and accepted. However, there are still some questions that remain to be answered. In the meantime, it is essential for companies to plan ahead and get ready for the upcoming regime as it will have profound implications on the flow of business.
Corporate tax timelines…
CT will be applicable for financial years starting on or after 1 June 2023. The below timelines will help understand how this will apply:
If you would like any further information on the corporate taxation in the UAE, please contact the Nimbus office in Dubai:info@nimbusconsultancy.com or your dedicated Nimbus account manager.
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