Overview- UAE Corporate Tax

Introduction: Embark on a journey through the intricacies of UAE Corporate Tax, exploring tax rates, residency criteria, deductions, and compliance mandates. The Federal UAE Corporate Tax Law, effective since June 2023, brings significant changes to the taxation landscape. From understanding applicable tax rates to delving into residency considerations, this guide provides a thorough overview of corporate taxation in the United Arab Emirates.

UAE Corporate Tax

1. Corporate – Taxes on corporate income

2. Federal UAE Corporate Tax Law: The Federal UAE Corporate Tax (CT) Law, effective for each taxable person’s new financial year beginning on or after 1 June 2023, marks a significant shift in the taxation landscape. This federal law is applicable across all Emirates and encompasses all business and commercial activities. However, certain entities are exempted from the application of UAE CT, subject to specific conditions. The exempt persons include:

• UAE government entities. 
• UAE government-controlled entities. 
• Persons engaged in extractive and non-extractive natural resource businesses in the UAE. 
• Qualifying public benefit entities. 
• Qualifying investment funds. 
• Public pension or social security funds, or private pension or social security funds subject to regulatory oversight. 
• Juridical persons wholly owned and controlled by exempt entities. 
• Any other person determined by a Cabinet decision upon the suggestion of the Minister. 

3. Applicable Tax Rates: UAE CT is imposed at different rates based on the nature of taxable income. The rates are as follows:

• Taxable income not exceeding 375,000 UAE dirham (AED): 0%. 
• Qualifying income of a Qualifying Free Zone Person (QFZP): 0%. 
• Taxable income exceeding AED 375,000: 9%. 
• Non-qualifying income of a QFZP: 9%. 

Corporate Residence in the United Arab Emirates 

1. Residency under the UAE Corporate Tax (CT) Law: According to the UAE CT Law, companies and other juridical persons that are incorporated, formed, or recognized under the laws of the United Arab Emirates are considered resident persons. This encompasses entities incorporated in the UAE under mainland legislation or applicable Free Zone regulations.

Foreign companies and other juridical persons may also be treated as resident persons for CT purposes if they are effectively managed and controlled in the United Arab Emirates. 

2. Non-Resident Persons and Taxable Status: A non-resident person, identified as a UAE taxable person, is defined as an entity that is not considered a person and either:

• Possesses a permanent establishment (PE) in the United Arab Emirates. 
• Derives state-sourced income. 
• Has nexus in the United Arab Emirates by earning income from immovable property in the country. 

3. Permanent Establishment (PE) Definition: The definition of a PE under the UAE CT Law aligns with the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention. According to the law, a non-resident person is generally considered to have a PE in the UAE when:

• It has a fixed or permanent place in the UAE where its business or part thereof is conducted. 
• An individual habitually exercises authority to conduct a business or business activity on behalf of the non-resident person in the UAE (including habitual contract negotiation or conclusion). 
• The non-resident person has any other form of nexus in the UAE specified through a Cabinet decision. 

4. Exclusions from PE Consideration: A fixed or permanent place in the UAE used solely for preparatory or auxiliary activities will not be considered a PE. Additionally, the mere presence of a natural person in the UAE will not create a PE under specific circumstances:

• The presence is due to a temporary and exceptional situation. 
• The natural person is employed by the non-resident person, and their activities in the UAE are not part of the core income-generating activities of the non-resident person or its related parties. 

5. Investment Manager Exemption: The UAE CT Law provides an investment manager exemption, allowing an investment manager providing brokerage or investment management services, subject to regulatory oversight in the UAE, to be considered an independent agent. This exemption is relevant when determining whether the investment manager creates a PE in the UAE, especially for transactions involving commodities, real property, bonds, shares, derivatives, securities, or foreign currency.

Corporate – Income Determination in the United Arab Emirates

1. Tax Decrees and Income Determination: Historically, the various Emirates in the United Arab Emirates (UAE) have employed tax decrees specifying that taxable income is calculated based on financial accounting profit, subject to certain book-tax adjustments. However, the UAE Corporate Tax (CT) Law introduces a comprehensive approach to income determination, impacting resident and non-resident entities differently.

2. Resident Persons – Tax Base: For resident persons, including entities incorporated in the UAE (including Free Zone entities), the tax base encompasses worldwide income. This also extends to foreign entities that are effectively managed and controlled in the UAE, natural persons conducting business activities in the UAE, and any other person as determined by a Cabinet decision.

3. Non-Resident Persons – Tax Base: Non-resident persons, considered UAE taxable persons, have a tax base determined based on specific criteria:

• If having a Permanent Establishment (PE) in the UAE, taxable income is attributable to the PE. 
• If deriving UAE-sourced income not attributable to the PE, the taxable income is based on that income. 
• If having nexus in the UAE, taxable income is attributable to the nexus. 

4. Capital Gains: The UAE CT Law does not have separate provisions for capital gains. Gains or losses on the disposal of capital assets are included in taxable income, subject to the applicable 0% or 9% tax rate.

5. Unrealised Gains or Losses: Taxable persons adopting accrual basis accounting can opt for:

• Recognizing gains and losses on a ‘realisation basis’ for CT Law purposes. 
• Applying ‘realisation basis’ only to assets and liabilities held on capital account. 

6. Exempt Income: To prevent double taxation and support the UAE’s status as an international business hub, the CT regime exempts certain income:

• Dividends and profit distributions received by a UAE tax resident entity. 
• Income from ownership interest (participation) in a foreign juridical person, subject to conditions. 
• Income from a foreign Permanent Establishment (PE) if subject to tax at a rate not less than 9% in the foreign jurisdiction. 
• Income earned by a non-resident from international transportation. 
• Income earned by partners in an unincorporated partnership. 
• Income earned by foreign partnerships treated as unincorporated partnerships. 

7. Family Foundations: Family foundations, trusts, and similar entities are recognized as independent juridical persons. Family foundations can apply to be treated as a transparent ‘unincorporated partnership’ for UAE CT purposes, potentially avoiding CT on the foundation’s income.

Corporate – Deductions in the United Arab Emirates

1. General Deductibility Principle: Expenditure not of a capital nature and incurred wholly and exclusively for the purposes of the taxable person’s business is generally considered tax-deductible under the UAE Corporate Tax (CT) Law. However, certain expenses are disallowed or restricted to prevent abuse or excessive deductions.

2. Allocation of Expenses: When expenditure serves multiple purposes, a deduction is allowed for the identifiable part or proportion of expenses incurred wholly and exclusively for deriving taxable income. An appropriate proportion of any unidentifiable part is also deductible if determined on a fair and reasonable basis.

3. Depreciation and Amortization: The CT Law is silent on the tax treatment of depreciation and amortization.

4. Interest Expenses: The UAE CT Law introduces an interest limitation rule, allowing the deduction of net interest expense (NIE) up to 30% of tax-adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). The threshold is AED 12 million, and if exceeded, the deduction is the higher of the threshold or 30% of EBITDA. Certain interest components, including those related to Islamic Financial Instruments and financial derivative instruments, are covered by the rule. Interest capping rules do not apply to banks, insurance businesses, certain regulated entities, or business carried on by natural persons.

5. Charitable Contributions: Donations to non-qualifying public benefit entities are not deductible for UAE CT purposes.

6. Entertainment Expenses: Expenses related to the entertainment of customers, shareholders, suppliers, and other business partners are deductible up to 50% of the incurred amount.

7. Bribes, Kickbacks, and Illegal Payments: Bribes or illegal payments are not considered deductible for UAE CT purposes.

8. Fines and Penalties: Fines and penalties (excluding compensation for damages) are not deductible.

9. Taxes: Corporate tax (CT), recoverable VAT, and taxes imposed outside the UAE are not deductible.

10. Other Non-Deductible Expenses: Dividends, profit distribution, and expenses specified in a Cabinet decision are not deductible.

11. Net Operating Losses: Businesses can offset tax losses against taxable income of subsequent tax periods, not exceeding 75% of taxable income for the period. Tax losses can be carried forward indefinitely. Transfer of tax losses is allowed between group entities with 75% or more common ownership. For unlisted entities, tax losses can only be carried forward and utilized if certain conditions are met, including continuous ownership of at least 50%.

Corporate – Group Taxation and Transfer Pricing in the UAE

1. Group Taxation: UAE group entities have the option to form a tax group under the following conditions:

• The parent company, a UAE tax resident, directly or indirectly holds at least 95% of share capital, voting rights, and entitlement to profits and net assets. 
• They share the same financial year and prepare financial statements using the same accounting standards. 
• Neither the parent company nor the subsidiary is an exempt person or a Qualifying Free Zone Person (QFZP). When a tax group is formed, the parent entity takes responsibility for administration, submitting one tax return, and settling the tax liability for the entire tax group. 

2. Transfer Pricing: The UAE Corporate Tax (CT) Law introduces transfer pricing rules and regulations to ensure that transactions between related parties, both domestic and cross-border, adhere to the arm’s-length standard.

Arm’s-Length Principle: All transactions between related parties, including those involving Free Zone entities, must follow the arm’s-length standard. Payments and benefits to connected persons should be at market value, determined by applying the arm’s-length standard. 

Transfer Pricing Methods: The CT Law prescribes five methods, in alignment with the OECD Transfer Pricing Guidelines, to determine the arm’s-length nature of transactions. If none of these methods can be reasonably applied, taxpayers can use any other method. Factors considered include contractual terms, characteristics of the transaction, economic circumstances, functions, assets, risks, and business strategies. 

Related Parties: The definition of related parties includes natural persons up to the fourth degree of kinship, ownership or control relationships, persons with permanent establishments, partners in the same unincorporated partnership, and others. The term ‘control’ includes the ability to influence through voting rights, board composition, profit receipt, or significant influence over conduct/affairs. 

Connected Persons: Payments or benefits from a taxable person to a connected person should correspond to market value and be incurred wholly and exclusively for business purposes to be deductible. Specific exclusions apply for listed entities, those under regulatory oversight, and others to be determined by a separate decision. 

Transfer Pricing Adjustments: The Federal Tax Authority (FTA) may adjust taxable income if related party transactions fall outside the arm’s-length range. Corresponding adjustments are made to related parties. Foreign competent authority adjustments allow taxable persons to apply for corresponding adjustment relief. 

Advance Pricing Agreement (APA): The CT Law permits the application for an APA for existing or proposed transactions. Detailed guidance is expected from the FTA at a later date. 

Transfer Pricing Documentation: Taxpayers, especially those in multinational enterprises (MNE) groups or with significant revenues, must maintain transfer pricing documentation, including a Master File and a Local File. Additional disclosure forms and information may be required by the FTA to support the arm’s-length nature of transactions. 

Corporate – Tax Credits and Incentives in the UAE

1. Foreign Tax Credit: A credit is available for foreign taxes paid on a UAE taxable person’s income, limited to the amount of Corporate Tax (CT) due on the relevant income. Unutilized foreign tax credits cannot be carried forward or back and are lost.

2. Small Business Relief: Eligibility: Tax resident persons with revenue not exceeding AED 3 million per tax year.

• Tax relief: Eligible entities may elect not to derive taxable income. 
• Exemptions: Small businesses relieved from exempt income, reliefs, deductions, tax loss relief, and transfer pricing compliance. 
• Compliance Verification: Federal Tax Authority (FTA) may request records or supporting information. 

3. Transfers within a Qualifying Group: Conditions for Tax Relief:

• Taxable persons are 75% commonly owned and are part of the same qualifying group. 
• Clawback: Two-year period for potential asset/liability transfers outside the permitted group. 

4. Business Restructuring Relief: Eligible Transactions:

• Mergers, spin-offs, or corporate restructuring transactions meeting conditions. 
• Conditions: Undertaken in accordance with UAE regulations, valid commercial or economic reasons, same financial year, and accounting standards. 
• Clawback: Two-year period for subsequent transfers or disposal of received shares/ownership interests. 

5. Free Trade Zones (FTZs) – Qualifying Free Zone Persons (QFZPs): Eligibility Conditions:

• Entity incorporated, established, or registered in a Free Zone. 
• Maintains adequate substance in the UAE. 
• Derives qualifying income and complies with transfer pricing rules. 
• Prepares audited financial statements. 

Adequate Substance: 

• Core Income-Generating Activities (CIGAs) undertaken in a Free Zone. 
• Maintains adequate assets, qualified employees, and operating expenditures. 
• Option to outsource CIGAs with adequate supervision. 

Qualifying Income: 

• Transactions with other Free Zone persons (except excluded activities). 
• Transactions with non-Free Zone persons in qualifying activities. 
• Other income, satisfying de minimis requirements. 

Excluded Activities: 

• Transactions with natural persons (exceptions apply). 
• Regulated banking, finance, leasing, and insurance activities. 
• Intellectual property asset ownership or exploitation. 
• Ownership or exploitation of immovable property, except for specific cases. 

Qualifying Activities: 

• Manufacturing or processing of goods. 
• Holding of shares and securities. 
• Shipping, aircraft ownership, and operation. 
• Regulated reinsurance, fund management, wealth, and investment management. 
• Headquarter, treasury, and financing services. 
• Financing and leasing of aircraft. 

• Logistics. 
• Distribution of goods in/from a Designated Zone. 

De Minimis Requirements: 

• Non-qualifying revenue does not exceed 5% of total revenue or AED 5 million (whichever is lower). 
• Certain revenues excluded from calculation. 

Domestic PE: 

• Introduction of domestic PE for a QFZP with a presence outside the Free Zone. 
• Income attributable to a domestic PE subject to 9% CT. 
• Does not affect the 0% CT rate on qualifying income or de minimis test. 

Corporate – Withholding Taxes in the UAE

1. Overview: With the aim of simplifying the UAE Corporate Tax (CT) regime and easing compliance, a Withholding Tax (WHT), currently set at 0%, is applicable to specific UAE-sourced income earned by non-residents, excluding income attributable to a Permanent Establishment (PE) of the non-resident.

• Registration and Filing: No registration or filing obligation is expected due to the current 0% WHT rate. 

2. WHT Credits:

• Availability: Taxable persons can claim a credit for WHT suffered, reducing CT payable. 
• Limitation: WHT credit is capped at the lower of WHT deducted under UAE CT Law and the CT due. 
• Refund: Excess WHT credit is refundable to the taxable person. 

3. Tax Treaty Network: UAE individuals and resident companies benefit from an extensive double tax treaty (DTT) network. There are different the withholding tax rates for dividends, interest, and royalties in various countries.

Note: The DTT includes a ‘favoured nation’ clause, allowing more favorable rates negotiated by the UAE with other countries to automatically apply. 

Corporate – Tax Administration in the UAE

1. Tax Authority Responsibilities: The Federal Tax Authority (FTA) is tasked with administering, collecting, and enforcing the UAE Corporate Tax (CT), while the Ministry of Finance (MoF) remains the competent authority for international tax agreements and information exchange.

2. Taxable Period: A taxable person’s tax period aligns with the financial year or a 12-month period for which financial statements are prepared. Changes to the tax period can be requested under specific conditions, including liquidation, alignment for tax grouping, financial reporting, or legal reasons.

3. CT Registration, Returns, and Payments:

• Registration: Every taxable entity must electronically register for CT with the FTA within a stipulated timeframe, obtaining a Tax Registration Number. 
• Returns: Only one electronic CT return per tax period is required, filed within nine months of the period’s end. 
• Payments: CT payable must be settled within the same timeline. 

Example: 

• Fiscal Year-End: December 2023
• First Reporting Period: January 2024 to December 2024 
• Registration Date: To be determined 
• Due Date of Filing First CT Return and Payment: 30 September 2025 
• Due Date for First Transfer Pricing Disclosure Form: 30 September 2025 

4. Tax Assessment: Taxable persons may undergo a CT assessment according to the Tax Procedures Law. Non-compliance could result in penalties and fines.

5. Financial Statements:

• Submission: Entities may need to submit financial statements used to determine taxable income within prescribed timelines. 
• Standards: Financial statements are prepared under International Financial Reporting Standards (IFRS). 
• Audit: Auditing is required if revenue exceeds AED 50 million or if the entity is a Qualifying Free Zone Person (QFZP). 

6. Record Keeping: Taxable persons must maintain relevant records:

• Real Estate: Seven years from the record creation date. 
• General: Five years, extended by one year after the fifth year for voluntary disclosures. 
• Ongoing Audit/Dispute: Additional four years. 

7. Clarifications: Entities can seek FTA clarification on UAE CT Law aspects or conclude an Advance Pricing Agreement (APA) for a transaction or arrangement.

8. General Anti-Abuse Rule (GAAR): The UAE CT Law includes a GAAR to counteract transactions with no valid commercial reasons but aimed at obtaining a tax advantage. The FTA, if the GAAR applies, can make determinations and compensating adjustments. Just and reasonable demonstration is required in GAAR-related proceedings.

Corporate – Other Issues in the UAE

1. Base Erosion and Profit Shifting (BEPS): The UAE is committed to implementing various BEPS minimum standards, joining the G20/OECD Inclusive Framework. Immediate to short-term commitments include countering harmful tax practices, tax treaty abuse, transfer pricing documentation, and improving dispute resolution mechanisms. The UAE has also committed to implementing other BEPS measures in the medium to long term.

2. CbC Reporting Regulations: The UAE issued CbC reporting regulations in 2019 (amended in 2020), aligned with OECD guidance. Applicable to ultimate parent entities with consolidated revenues exceeding AED 3.15 billion, CbC reporting is required within 12 months from the reporting year-end. Non-compliance may result in administrative penalties. 

3. BEPS Multilateral Instrument (MLI): The UAE has signed and ratified the MLI, incorporating measures such as anti-abuse provisions and improvements to dispute resolution mechanisms into its Double Tax Treaties (DTTs).

4. Economic Substance Regulations: Introduced on 30 April 2019 (amended in 2020), economic substance regulations apply to entities undertaking ‘relevant activities.’ Compliance requirements include notification and a substance report, filed annually through the MoF online portal. High-risk IP-related activities have additional requirements. Non-compliance may result in penalties, including license suspension or revocation.

• Scope and Compliance Requirements: Entities engaged in banking, insurance, investment fund management, lease-finance, headquarters, shipping, holding company, intellectual property (IP), and distribution/service center activities are subject to the regulations. Filing deadlines for notification and substance report are six and twelve months from the financial year-end, respectively. 
• Documentation Requirements: The UAE Licensee must provide evidence supporting core income-generating activities, directed and managed criteria, qualified full-time employees, operating expenditure, and physical assets. 
• Consequences of Non-Compliance: Non-compliance may lead to penalties, exchange of information with foreign authorities, and suspension or revocation of licenses. Administrative penalties range from AED 20,000 to AED 400,000, with additional penalties for inaccurate information. 

5. US Foreign Account Tax Compliance Act (FATCA): The UAE signed the Model 1B IGA with the US in 2015. The UAE FATCA Guidance Notes provide details on the implementation of FATCA, including definitions, due diligence procedures, and reporting obligations. The exchange of information occurs annually in September, and filing of nil reports is mandatory.

6. Common Reporting Standard (CRS): The UAE signed the MCAA on Automatic Exchange of Financial Account Information and the MAC in 2017. The UAE CRS Guidance Notes provide additional details. Reporting financial institutions must submit CRS returns by 30 June each year, and nil reports are required.

Conclusion: In conclusion, mastering the nuances of UAE Corporate Tax is vital for businesses operating in the region. From navigating residency rules to comprehending group taxation and transfer pricing, this guide equips entities with the knowledge needed for tax compliance. Stay informed about incentives, credits, and other critical aspects, ensuring your business thrives in the dynamic landscape of the UAE’s corporate taxation system.