“UAE Corporate Tax Guide: Navigating the New Tax Landscape – Essential insights on the implementation, rates, exemptions, and compliance under UAE’s Corporate Tax regime effective June 2023.”
The Government of UAE announced on 31st January 2022 that UAE would be promulgating legislation for levying federal Corporate Tax (C T) on business profits and the same shall be effective for the tax period commencing on or after 1st June, 2023.
For years UAE has been considered as a tax free regime but in order to align itself with the recommendations of implementing global minimum effective tax rate under the OECD Pillar Two of the Base Erosion and Profit Shifting (BEPS) Project, the UAE announced levying of Corporate Tax on Business Profits @ 9%.
Federal Tax Authority (FTA) under the Ministry of Finance of the Government of UAE will be the nodal authority responsible for administering and implementing Corporate Tax.
As a part of the implementation process of the C T, the UAE Government initially released Public Consultation Document on 28th April, 2022 and thereafter promulgated the Corporate Tax law vide Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses issued on 9th December,2022.
As per the Rationale stated in the Consultation Document, proposed federal C T shall enshrine best practices globally and incorporate principles that are internationally known and accepted. This would ensure that the Corporates are well aware of such principles and will not be required to evaluate any new concept.
IMPOSITION OF CORPORATE TAX: As per the Decree Law, the UAE CT shall be imposed on Taxable Income which shall be at the rate of 0% for taxable income up to AED 375000 and 9% for taxable income exceeding AED 375000 in a Tax Period. As regards Free Zone establishments which qualify as Qualified Free Zone Persons, the UAE CT shall be 0% for Qualifying Income and 9% on Taxable Income which is not qualifying Income.
TAX PERIOD: For the purpose of imposition of the UAE CT, financial year of a Taxable Person shall be the Georgian calendar year or twelve months period for which the taxable person prepares financial statements.
TAXABLE PERSONS: The UAE C T has been levied on Taxable Persons categorized as Resident Person and Non-Resident Person. The category of Resident and Non-Resident Person liable to Corporate Tax is briefly stated under:
Resident Person:
1. A juridical person that is incorporated or otherwise established or recognized under the applicable legislation in the UAE, including a Free Zone Person;
2. A juridical person that is incorporated or otherwise established or recognized under the applicable legislation in the foreign jurisdiction that is effectively managed and controlled in the UAE;
3. A natural person that conducts Business or Business Activity in the UAE;
4. Any other person as may be determined by the Cabinet.
Non-Resident Person: A Non-Resident Person shall be taxable to UAE CT which either:
1. Has a Permanent establishment in the UAE;
2. Derives State Sourced Income;
3. Has a nexus in the UAE.
EXEMPT PERSONS: The UAE CT has exempted following persons from Corporate Tax:
1. Government Entity: Government Entity have been defined to mean The Federal Government, Local Governments, ministries, Government departments and agencies, authorities and public institutions of the Federal or Local Governments. While recognising that the Government usually carries out sovereign activities and are therefore outside the purview of the UAE C T but any commercial activity carried out by the Government under a Trade License, the same shall be subject to the UAE C T.
2. Government Controlled Entity: Government Controlled Entity have been defined to any juridical person, directly or indirectly wholly owned and controlled by a Government Entity, as may be specified by the decision of the Cabinet. Government Controlled Entity have been kept out of the purview of the UAE CT as long as it conducts business or business activity as per its Mandated Activity.
3. Extractive Business: A person carrying out Extractive Business under a Licence, right or concessions issued by Local Government shall be exempt from the UAE CT provided the same is subject to Emirate level taxation and the person has made a notification to the Ministry with the Local Government. However, any income derived from any other business which is not ancillary or incidental to the Extractive business and if it exceeds 5% of the Total revenue, the income of the Other business shall be charged with the UAE CT.
4. Non-Extractive Natural Resources Business: A person carrying out Non-Extractive Natural Resources Business under a Licence, right or concessions issued by Local Government shall be exempt from the UAE CT provided the same is subject to Emirate level taxation and the person has made a notification to the Ministry with the Local Government. However, any income derived from any other business which is not ancillary or incidental to the Non-Extractive Natural Resources Business and if it exceeds 5% of the Total revenue, the income of the Other business shall be charged with the UAE CT.
5. Qualifying Public Benefit Entity: The UAE C T exempts Qualifying Public Benefit Entity only if such Entity is operates exclusively for religious, charitable, scientific, artistic, cultural, athletic, educational, healthcare, environmental, humanitarian, animal protection or other similar purposes or operates as chamber of commerce or exclusively for the promotion of social welfare or public benefits and are so listed in the Cabinet decision against the application made by such Entity.
6. Qualifying Investment Fund: An Investment Fund, where the fund or the fund’s manager is subject to the regulatory oversight in the UAE or outside the UAE may apply to the Authority for exemption under the UAE CT fulfilling certain conditions.
BASIS OF TAXATION: As per the UAE C T, a Resident Person, which is a juridical person, shall be subject to corporate Tax on its Taxable Income derived from the UAE or from outside the UAE. In case of Resident natural person, Corporate Tax shall be levied on the Taxable Income derived from the UAE or from outside the UAE insofar it relates to the business or business activity conducted by the natural person in the UAE as may be determined by the Cabinet decision. The basis and tax treatment to be meted out to the Residents, Non-Residents, Partners in an Unincorporated Partnership, Family Foundation and Free Zone Persons is set out as under:
RESIDENTS:
Juridical Person: Juridical Persons established, recognized or incorporated in the UAE shall be automatically considered to be resident in the UAE and shall be taxable for the worldwide income but however, income earned by overseas branches and from qualifying shareholding shall be exempt from the UAE C T subject to certain conditions.
Natural Person: All individuals that carry out business or commercial activities in the UAE, whether as sole proprietor or through unincorporated partnership, shall be considered resident of the UAE and shall be taxable for the income from business activities in the UAE.
Foreign Entity: Foreign Entities shall be considered as resident of the UAE if its effective control and management lies in the UAE and thus become taxable in the UAE.
NON-RESIDENTS: Non-Residents will be subject to the UAE C T only if they have UAE Sourced Income or if the Taxable Income can be attributed to the Permanent Establishment (PE) in the UAE or if the Taxable Income is attributed to the nexus of the Non-Resident in the UAE. Briefly the same are described as under:
UAE Sourced Income: Income received from a UAE resident will be treated as a UAE Sourced Income and shall be subject to zero rate withholding tax for Non-Resident if it does not have PE in the UAE. Income derived from Non-resident which is attributable to PE in the UAE or Income derived from activities or contracts performed in the UAE or rights used for economic purposes in the UAE or from assets located in the UAE or services performed or benefitted from in the UAE shall be considered to be UAE sourced Income. The Law provides certain instances of income which will be considered as UAE sourced Income such as Interest Income shall be considered as UAE sourced if derived on loan secured by movable or immovable property located in the UAE or if borrower is a UAE Resident or if borrower is a UAE Government Entity.
Permanent Establishment (PE): Non-residents will be taxed on the income of the Permanent Establishment in the UAE. A Non-Resident will be considered to be having PE in the UAE if it has a Fixed or Permanent place in the UAE through which the business of the Non-resident or any part thereof is conducted. Also agency base criteria whereby if a Person in UAE has authority to negotiate or conclude contracts on behalf of the Non-resident shall give rise to existence of PE in the UAE. Also presence of any other form of nexus in the UAE, as may be specified by the Cabinet, may give rise to existence of PE in the UAE.
However, specific exemption is provided for foreign investors and investment funds dealing through regulated Investment Managers acting in an independent capacity and fulfilling certain conditions as prescribed under the law will not trigger existence of PE for the foreign investors and the investment funds.
PARTNERS IN AN UNINCORPORATED PARTNERSHIPS: The UAE CT regime shall treat entities that are structured as unincorporated partnerships as fiscal transparent status meaning that the Unincorporated Partnership shall not be considered as a Taxable Person in its own right, and Partners conducting a business as an unincorporated Partnership shall be treated as individual Taxable Persons. The Income, Expenditure, the Assets and the Liabilities of the Unincorporated Partnership shall be allocated to the Partner in proportion to his distributive share in the Unincorporated Partnership. Also foreign Partnership shall be treated as Unincorporated Partnership if the same is not similarly considered as taxable person in the foreign jurisdiction and instead each partner is individually subject to tax.
However, the partners in an unincorporated Partnership may make an application to the Authority for treating unincorporated Partnership as a Taxable Person, which the Authority may consider and approve subject to certain conditions.
FAMILY FOUNDATION: Family Foundation established in UAE may make an application to the Authority to be treated as an unincorporated Partnership, which the Authority may grant subject to the Foundation fulfilling certain conditions.
QUALIFYING FREE ZONE PERSONS: Companies, Branches and other Person registered in Free Zones (referred to as “Free Zone Persons” or “FZP”) shall fall within the ambit of the UAE C T and shall be liable to be taxable at Zero rate provided it continues to meet all the conditions prescribed for Free Zone Persons as under:
1. Maintains adequate substance in the UAE;
2. Derives Qualifying Income as specified by the Cabinet;
3. Complies with Arm’s Length Principle and Transfer Pricing Documentation as specified under the Law;
4. Meets any other condition as may be prescribed;
Further, it is provided that in case the FZP fails to comply with either of the above conditions at any point of time during a Tax Period then it shall cease to be so regarded as Qualifying Free Zone Person and shall be subject to UAE CT from the beginning of the Tax Period.
However, FZP may elect irrevocably at any point of time to be subject to regular C T rate.
TAXABLE INCOME: The taxable Income of each Taxable person shall be determined on the basis of the standalone financial statements of a business prepared for financial reporting purposes in accordance with the accounting standards accepted in the UAE. The businesses will be allowed to follow their own accounting period. The Profit or Loss as per the Financial Statements shall be adjusted for certain items that have been specifically exempted or allowed or disallowed or for relief provided under the UAE C T to arrive at the Taxable Income. Further, adjustments shall also be made in relation to transactions with Related Parties and Connected Persons as provided under the law to arrive at the Taxable Income. The Taxable Income shall be set off with the brought forward losses as prescribed under the law. Further, for the purpose of calculating the Taxable Income for the relevant Tax period, a Taxable Person may elect to take into account gains and losses on a realisation (cash) basis instead of accrual basis and make adjustments for the unrealised gain or loss in relation to all the assets and liabilities held on revenue account.
EXEMPT INCOME: Certain Income have been exempted from the UAE C T such as Income from dividends or other profit distribution received, Income from operations carried outside the UAE through foreign Permanent Establishments, and Income derived by a Non-resident Person from operating aircrafts or ships in International transportation and accordingly such exempt income and related expenditure shall not be taken into account in determining Taxable Income. Such exempt Income and certain conditions attached for claiming such Income as Exempt are as under:
1. Income from Dividends and Gains on sale of Shares: Dividends and other profit distributions paid by the UAE Resident juridical Companies including FZP enjoying zero rate C T shall be exempt from the UAE CT. Further dividends from foreign Companies and capital gains on sale of the shares of UAE and foreign companies shall be exempt from the UAE CT subject to the fulfilling of the participation condition which requires that the Taxable Person ownership interest in shares or capital of foreign company must be at least 5% and the participation interest is held for uninterrupted period of at least 12 months. Further, the foreign Company must be subject to Corporate Tax or equivalent tax at a rate of at least 9%. Also holding company shall not be required to meet condition of being subject to minimum 9% tax if the principal objective of the company is to acquire and hold shares in other entities which otherwise complies with the Participation conditions as stipulated above and the holding company derives substantially whole of its income from such holdings. Also, a participation in qualifying Free Zone Person or an Exempt Person is not required to meet the condition of being subject to 9% tax and therefore gains on sale of shares of qualifying FZP shall be exempt provided other participation conditions are met.
2. Foreign Permanent Establishment (PE) Exemption: A Resident Person can elect to be exempt on the profits of the foreign Permanent Establishments subject to the condition that the foreign PE is subject to minimum 9% tax in the overseas jurisdiction. If such election is made then losses, profit or associated expenditure in any of the PE shall not be considered for determining Taxable Income of the Resident Person and also cannot claim credit for taxes paid in the foreign PE country.
3. Non-Resident operating Aircrafts or ships: The UAE CT regime exempts income earned by a non-resident from operating or leasing aircraft or ships (and associated equipment) used in international transportation, provided the same tax treatment is granted to a UAE business in the relevant foreign jurisdiction under the reciprocity principle.
RELIEFS: UAE CT provides for certain relief in relation to certain transactions such as under:
1. Transfer within a Qualifying Group: No gain or loss shall be taken into account for determining the Taxable Income in relation to transfer of assets or liabilities between two taxable persons that are members of the same Qualifying Group. To be treated as members of the same Qualifying Group, certain conditions have been laid out such as that minimum shareholding held in each other or through a common shareholder must be at least 75%, none of the Persons are either exempt or qualifying FZP, all the taxable persons must follow same financial year and same accounting standards, the transfer of assets or the liability must be at book value, the asset or liability so transferred cannot be subsequently, within two years, transferred outside the qualifying group or the taxable person should not cease to be a member of the qualifying group.
2. Business Restructuring Relief: No gain or loss shall be taken into account for determining the Taxable Income in relation to transfer of assets or liabilities occurring on account of merger or amalgamation between the two or more taxable persons. This relief is however, subject to meeting various conditions prescribed under the law such as the merger or amalgamation is in accordance with the applicable state legislation, the taxable persons are Resident Persons or Non Resident Persons having PE in the UAE, none of the Persons are either exempt or qualifying FZP, all the taxable persons must follow same financial year and same accounting standards, the value of the shares received shall not exceed net book value of assets or the liability, the shares or the business cannot be subsequently, within two years, transferred outside the qualifying group.
DEDUCTIONS: The UAE CT provides for deductible expenditure incurred wholly and exclusively for the purpose of the Taxable Person’s business and which is not capital in nature, or which is not in relation to exempt income. The law has prescribed certain limits in relation to certain expenditures as under:
1. Interest Expenditure: The UAE CT limits the deduction of the net interest expense to 30% of the Earnings Before Interest, Tax, Depreciation & Amortisation (EBITDA). However, businesses may be allowed to deduct up to a certain amount of net interest expenditure as may be specified by the Cabinet. Further, this limit will not apply to businesses carried on by individuals and also to certain types of businesses like banks or insurance. Further, the disallowed portion of the interest expenditure can be carried forward and deducted in the subsequent 10 Tax Periods. Further, the UAE CT law does not allow deduction on account of interest expenditure incurred in relation to loan obtained from a Related Party for undertaking certain specified transactions.
2. Entertainment Expenditure: The UAE CT allows only 50% of the expense incurred on entertainment, amusement or recreation of the customer, supplier, shareholder or other business partners.
3. Non- deductible expenditure: The UAE CT does not allow any deduction for penalties paid, bribes or illicit payments, UAE CT or tax imposed on income outside UAE, UAE VAT recoverable or donations paid to unapproved charities.
RELATED PARTIES AND CONNECTED PERSONS: The UAE CT Act requires that all transactions and arrangements between Related Parties must meet the arm’s length standard and payments made to Connected Persons must correspond with the market value of the service, benefit or otherwise provided by the Connected person. If it is found that the transaction or the payments do not meet the arm’s length standard or the market value, then adjustment will be required to be made to the Taxable Income. In relation to transaction with Related Party and Connected Persons, the Act provides as under:
Related Party: Related Party have been defined to mean whereby 50% or more of the ownership or control of the UAE taxable entity lies with the transacting person either alone or along with related party and whether directly or indirectly. As between two or more individuals will be considered Related Party, if related within the fourth degree of kinship or affiliation, including by birth, marriage, adoption or guardianship. Also PE, partners in unincorporated Partnership and a person who is a trustee, settlor or beneficiary of a trust or foundation and its Related Party shall fall within the ambit of Related Party definition.
Connected Persons: Connected Persons in relation to the UAE entity have been defined to mean as under:
1. An individual who directly or indirectly has an ownership interest in, or controls, the taxable person;
2. A director or officer of the taxable person;
3. An individual related to the owner, director or officer of the taxable person to the fourth degree of kinship or affiliation, including by birth, marriage, adoption or guardianship;
4. Where the taxable person is a partner in an unincorporated partnership, any other partner in the same partnership;
5. A Related Party of any of the above.
Transfer Pricing: The Law requires that in order to determine arm’s length result of a transaction or arrangement between Related party and Connected persons must be determined by applying one or a combination of various stipulated transfer pricing methods. The taxable person may adopt some other method and is required to demonstrate that the transactions or arrangements with Related Party or Connected Persons are at arm’s length and have been incurred wholly and exclusively for the business purposes.
LOSS RELIEF: The UAE CT allows carry forward of losses incurred by the business to indefinite period and allow set off against the profits in the ensuing periods subject to maximum set off of 75% of the Taxable Income during a tax period. The losses can be carried forward subject to the condition that 50% of the shareholder continue to be shareholder during the period when loss was incurred and when the loss is being set off against the profits. However, even if there is change in the shareholding for more than 50%, the losses can still be carried forward if there is continuity of the same nature of the business. Losses for the prior period of UAE CT becoming effective will not be allowed to be carried forward nor losses pertaining to exempt income will be allowed to be carried forward. UAE CT further allows to transfer loss from one Taxable Person to another Taxable Person falling within the same qualifying Income Group and fulfilling stipulated conditions.
TAX GROUP: UAE Group Companies may elect to form a tax group and be treated as a single taxable person if the parent company holds at least 95% of the share capital and voting rights of its subsidiaries. To form a tax group, neither the parent company nor any of the subsidiaries can be an exempt person or a Free Zone Person that benefits from the Zero CT rate, and all group members must use the same financial year and follow same accounting standard. The Parent Company and each subsidiary Company shall be jointly and severally liable for CT payable. The Parent Company shall be required to prepare a consolidated financial statement of all the members in the group for the purpose of determining Taxable Income.
CALCULATION OF C T LIABILITY: Under the UAE CT law, CT shall be levied on annual taxable income calculated after adjustments for deductions, reliefs, losses and other adjustments. The tax shall be levied as under:
- 0% on taxable income not exceeding AED 375,000, and
- 9% on taxable income exceeding AED 375,000.
WITHHOLDING TAX: As pet the UAE CT law, although withholding tax is applicable on UAE sourced Income derived by a Non-resident Person on such categories of income as may be prescribed by the Cabinet, but the rate prescribed is Zero rate. Withholding tax may also be applicable on any other income as may be specified by the cabinet. If a Person in relation to whom withholding tax has been applied becomes taxable, then the person can claim withholding tax credit against the tax payable for that tax period and any excess withholding tax credit can be claimed as tax refund from the Authorities.
FOREIGN TAX CREDIT: The UAE CT allows foreign tax credit wherever income from overseas operations is being clubbed for the UAE CT purpose and UAE CT is being levied on the same. Foreign Tax Credit will be limited to the amount of tax payable under the UAE CT on such relevant income from foreign operations.
CORPORATE TAX PAYMENT AND REFUND: The UAE CT must be settled within 9 months from the end of the relevant tax period. A Taxable Person may claim refund from the Authority where the Taxable Person has paid CT in excess of the tax due or where the withholding tax credit available for a relevant tax period is in excess of the CT payable. There will be no requirement of provisional advance tax payment.
REGISTRATION AND FILING OF TAX RETURNS: Every Taxable Person is required to be registered with the Authority and obtain Tax Registration Number within the prescribed period. Further, tax return is required to be filed within nine months of the end of the tax period along with the payment of the tax due thereon.
FINANCIAL STATEMENTS: The Authority may require taxable person to submit financial statement on the basis of which Taxable Income has been determined in the form and manner and within the timeline as may be prescribed by the Authority. Further, the Authority may require certain categories of Taxable Person to maintain audited financial statements.
TRANSFER PRICING DOCUMENTATION: The Authority may require a Taxable Person to file together with the Tax return a disclosure containing information regarding transactions and arrangements with the Related Party and Connected Persons in the form as may be prescribed by the Authority. Further, the taxable person must maintain a master file and a local file in the form prescribed by the Authority and the same must be submitted to the Authority within 30 days of the requisition made by the Authority.
CLARIFICATION: The UAE CT law has provision for a Person to make an application to the Authority seeking clarification on a transaction or in respect of advance pricing agreement which is proposed to be entered by the Person and the applicability of the UAE CT on such transactions.
ASSESSMENTS: The UAE CT provides that a Person may be subject to a Corporate Tax Assessment in accordance with the Tax Procedure Law and guidelines issued in this regard. The Tax Procedure Law shall determine the relevant penalties and fines.
ANTI ABUSE RULES: UAE CT Legislation provides for General Anti Abuse Rules and the same have been made effective immediately upon publication of the Decree Law in the Official Gazette. The Anti Abuse Rules apply to such transaction or arrangement which is not carried out for a valid commercial or other non-fiscal reason which reflects economic reality and the main purpose is to obtain a Corporate tax advantage. While applying the Anti Abuse rules, the Authority may determine various factors such as manner, the form and substance, timings of the transaction, result of the transaction in relation to the CT provisions, or if it result or is reasonably expected to result in any change in the financial position or obligation or rights of the taxable person or another person. The Authority has the power to make determination of countering or adjusting such Corporate tax advantage by way of issuing an assessment and allowing or disallowing any deduction, relief, exemption or disregarding the effect of the transaction leading to Corporate tax advantage.
OTHER PROVISIONS: The UAE CT law provides that in case of Double Tax Avoidance Agreement (DTAA), the provisions under DTAA shall have over-riding effect. A Person is required to maintain records for a period of seven years following the Taxable Period. Provision which is contrary or inconsistent with the provision under UAE CT law shall be abrogated. UAE CT law applies to Tax Period commencing on or after 1st June,2023.
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