Following the public announcement of the introduction of Corporate Tax (CT) and the Frequently Asked Questions (FAQs) on 31 January 2022, and the release of the Public Consultation Document in April 2022, the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (Corporate Tax) Law has been published as of 9 December 2022.

The UAE Corporate Tax Law is Federal Decree-Law No. 47 of 2022 issued on 3 October 2022 and is formally effective 15 days after its publication in the Official Gazette. Corporate Tax law is applicable on business profits for financial years starting on or after 1 June 2023.

This article provides summary highlights of the new regime, as announced by the Ministry of Finance (“MoF”) and the Federal Tax Authority (“FTA”). It should be noted the rules align closely with the Public Consultation Document.

Further detail is deferred to Cabinet and Tax Authority Decisions and further guidance should be expected to complete the Corporate Tax Legislation in areas such as Free Zone and Director remuneration rules. With the publication of the Corporate Tax Legislation, the MoF has confirmed the introduction will occur in June 2023.

Scope of Corporate Tax

Corporate Tax in UAE will apply to the adjusted worldwide accounting net profits of the business.

The UAE Corporate Tax regime introduces two different rates:

• A 0% tax rate will apply for taxable profits up to an amount to be specified in a Cabinet Decision (the FAQs refer to a threshold of AED 375,000)

• The standard statutory tax rate will be 9 percent.

Confirmation of the relatively low tax rate of 9% seeks to assure the UAE maintains a competitive rate globally.

The UAE Corporate Tax Law is silent in Article 3 on aspects governing the 15% global minimum tax rate. This is applicable for MNEs falling within the scope of ‘Pillar Two’ of the OECD BEPS project and applies to Multinational corporations (MNCs) with consolidated global revenues over EUR 750m (c. AED 3.15 billion), in any two of the previous four years. The FAQs refer to the possibility of adoption in the UAE of BEPS Pillar 2.

Individuals:

Individuals are also subject to corporate tax as long as they engage in business activity and align with the broad VAT definition of business activity. A Cabinet Decision is expected on the application of Corporate Tax to natural persons. Therefore, Corporate Tax in UAE will not apply to an individual’s salary and other employment income. However, individuals who are deriving income as a business activity would be covered under Corporate Tax in UAE.

Free Zones

A defined and specific regime (subject to additional Cabinet Decision) is stated for businesses established within UAE Free Zones that:

1. Maintain adequate substance, and

2. Earn qualifying income.

What precisely constitutes qualifying income will be determined in a Cabinet Decision. As outlined in the Public Consultation Document, this may include the requirement to not to conduct business with mainland UAE. It is confirmed that Free Zone businesses can voluntarily elect to be subject to Corporate Income Tax at the rate of 9 percent.

Extensive UAE sourcing rules are applicable, and of significant relevance for the Free Zone businesses seeking to meet substance requirements.

Withholding Tax

There will be a 0% withholding tax on categories of UAE State Sourced Income generated by a Non-Resident. As a result, foreign investors who do not carry on business in the UAE in principle will not be subject to tax in the UAE.

Foreign Entities

Foreign entities could be considered a resident in the UAE if they are managed and controlled in the UAE. For foreign entities not considered residents in the UAE, but who may have a Permanent Establishment in the UAE, the Permanent Establishment definitions are clarified as fixed PE and an agency PE. Further details on PEs are subject to a Ministerial Decision.

Exempt Entities

The Investment Manager Exemption from the Public Consultation Document is retained in the UAE Corporate Tax Law. Specific rules apply for Partnerships, and Family Foundations can also apply for tax transparency.

Government entities and government-controlled entities as well as qualifying public benefit entities and qualifying investment funds will be exempt from the UAE Corporate Tax Law. Extractive businesses (upstream oil & gas businesses) will also be exempt, as long as they earn income from the extractive business.

Banking operations will be subject to Corporate Tax in UAE (unless the institution is in a Free Zone and qualifies for the 0% rate).

Implementation  Date

Under Article 69 of the UAE, Corporate Tax Law provides that the Law will apply to Tax Periods starting on or after 1 June 2023.

Businesses with a financial year starting 1 January will be subject to Corporate Tax starting from 1 January 2024.

Financial Records & Requirement To Maintain Audited Statements

Taxpayers are required to prepare and maintain financial statements supported by all documents and records to support the Corporate Tax returns. Records should be maintained for at least seven years.

This requirement will apply to each UAE entity (unless part of Corporate Tax Group). Each entity is required to prepare stand-alone financial statements. However, all entities may not be subject to audited financial statements. Subsequent Cabinet Decision(s) will specify the categories of taxable persons required to maintain audited/certified financial statements.

Small Business Tax Relief

Reference to reliefs available to small businesses with revenue/gross income below a certain threshold is made. Qualifying businesses will be treated as having no taxable income and be asked to undertake simplified compliance obligations.

The threshold is based on the revenue and not the profits/taxable income and is expected to be confirmed in a subsequent Cabinet Decision.

Deductible / Non-Deductible Expenses

Expenses incurred wholly and exclusively for business purposes, (and which are not to be capitalized) are deductible.

Deductions are disallowed for expenses incurred to obtain exempt income. For any mixed-purpose expenditure, a deduction is only partially allowed. Interest expenses are deductible subject to a cap of 30% of the EBITDA.

So-called financial assistance rules are in place, which prevent businesses from obtaining financing to pay out dividends or profit distributions.

Entertainment expenses are capped at 50%.

Non-deductible expenses include donations made to a non Qualifying Public Benefit Entity, fines, bribes, and dividends.

Of key note is that amounts withdrawn from the Business by a natural person who is a taxable person are not deductible.

Exempt Income & Relief

The following categories of income will be exempt from Corporate Tax in UAE(Article 22 UAE Corporate Tax Law):

• Capital Gains, Dividends and other profit distributions from a Resident Person

• Capital Gains, Dividends and other profit distributions from a Qualifying shareholding in a foreign legal person, subject to a holding period of 12 months, minimum participation of 5%, at a minimum subject to 9% CIT in the country of source

• Income from a Foreign PE, subject to conditions and an election to apply the exemption (rather than credit)

• Income derived by a non-resident Person derived from operating aircraft or ships in international transportation

The following transactions are subject to specific relief, i.e. in effect a deferral of taxes:

• Qualifying intragroup transactions and restructurings – entities will qualify if they have 75% common ownership

• Business restructuring relief – subject to certain conditions.

Transfer Pricing

Related party transactions must be conducted in accordance with the arm’s length principle under Article 34 of the UAE Corporate Tax Law. Additionally, it outlines that the five traditional OECD transfer pricing methods are appropriate to support the arm’s length nature of related party arrangements, while allowing the use of other methods where required.

Article 34 outlines that in the event of an adjustment imposed by a foreign tax authority that impacts a UAE entity, an application must be made to the FTA for a corresponding adjustment to allow the UAE company to claim relief from double taxation. Any resulting adjustments related to domestic transactions do not require an application.

Transfer pricing documentation requirements are covered under Article 55. UAE businesses will need to comply with the transfer pricing rules and documentation requirements set with reference to the OECD Transfer Pricing Guidelines leading to three-tier reporting, i.e., master file, local file and country-by-country reporting. Reference to a controlled transactions disclosure form is made (details of which remain pending).

It is noted that no materiality thresholds have been provided. Separate legislation will be issued later. Advanced pricing arrangements will be available through the regular clarification process already in place.

The UAE has implemented provisions requiring payments and benefits made to connected persons to be at market value for those amounts to be tax deductible. For the application of this principle, the same principles are applied as in article 34 of the UAE CIT Law

Administration & Enforcement

• The MoF remains the competent authority for the purposes of multi-lateral / bilateral agreements and the international exchange of information.
• The FTA will be responsible for the administration, collection, and enforcement of the new corporate income tax regime. Penalties and fines are determined by the Tax Procedures Law.
• Businesses will need to obtain a Tax Registration Number with the FTA.
• Businesses that are subject to Corporate Tax in UAE will be required to file a Corporate Tax return electronically for each financial period within 9 months of the end of the Financial Period. (A financial period is generally any 12-month financial period year)
• Free Zone businesses subject to 0% CIT are also required to file a Corporate Tax return.

Other Elements

Foreign Tax Credits

Foreign tax credits will be allowed against Corporate Tax in UAE payable as stated in the Public Consultation Document. Businesses can claim the lower of the corporate tax due, or the amount of withholding tax effectively deducted. There will be no carry forward. There are no credits for taxes paid to the individual Emirate.

Tax Grouping

Fiscal Unity or Tax Group: UAE companies will be able to form a “fiscal unity” or Tax Group for UAE CT purposes. The prerequisite condition for a Tax Group to comply with is the (in)direct shareholding requirement of 95%. Free zone entities subject to 0% cannot enter into a Tax Group. In addition, the parent (which can be intermediate) needs to be a UAE company.

Losses

Under Article 37 of the UAE Corporate Tax Law, Losses can be carried forward up to 75% of the Taxable Income. Losses can be transferred between members of the same group of companies, provided the entities are 75% direct or indirectly commonly held. Losses cannot be transferred from exempt persons or free zone entities. The loss offset is also subject to the 75% cap, as for businesses rolling forward losses.

Tax deductible losses can be lost when there is a change of control (50% or more) except if the new owner conducts the same or a similar business. The conditions for this have now been defined.

Anti-Abuse

The UAE will implement a General Anti-Abuse rule, or “GAAR”. The GAAR applies to situations where one of the main purposes of a Transaction is to obtain a Corporate Tax Advantage not consistent with the intention or purpose of the UAE Corporate Tax Law.

The FTA will address and counteract or adjust the transaction. The GAAR only applies to transactions or arrangements entered into on or after the date the UAE Corporate Tax Law is published in the UAE Official Gazette of 10 October 2022 in issue #737.

Summary

With the publication of the UAE Corporate Tax Law and confirmation of the 9% rate, the UAE has set a globally competitive rate of Corporate Tax and confirmed the intent to introduce Corporate Tax In June 2023.

There are expected further details to be announced during the coming months that will flesh out and provide a greater understanding of implementation, nevertheless, several key aspects are confirmed including the introduction of mandatory transfer pricing regulations.

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