Introduction

The United Arab Emirates Ministry of Finance (MoF) released a new Corporate Tax Law, Federal Decree-Law No. 47 of 2022, on December 9, 2022. The law includes a new corporate tax regime that will take effect for accounting periods starting on or after June 1, 2023. The MoF also released a document of 158 Frequently Asked Questions on the same day.

Businesses with a December year-end Financial Statement will have a 12-month period to prepare for the changes, but the law includes provisions for preventing tax avoidance and transitioning to the new rules that will take effect as soon as the law is published in the official Gazette.

Executive Summary

• The CIT Law will apply to businesses on tax periods commencing on or after 1 June 2023, with a 9% headline tax rate.
• It incorporates international best practices and offers exemptions for certain strategic industries.
• Free Zone persons taxed at 0% on Qualifying income and at 9% on taxable (non-qualifying) income.
• Basic exemption threshold to be announced via Cabinet Decision (likely AED 375,000 as stated in the FAQ published by MOF)

The law includes a General Anti-Abuse Rules (GAAR) and Specific Anti-Abuse Rules (for preventing tax avoidance and transitioning to the new rules.

In-depth discussion

In the following paragraphs, we have summarized the key elements of the Corporate Tax Law:

Taxable Person

CT will generally apply to all persons, whether they are residents or non-residents.

A resident person will include the following:

• A juridical person established in UAE (includes Free Zones)
• A juridical person who is not established in or recognized in the United Arab Emirates, but is effectively controlled and managed in the United Arab Emirates (Place of Effective Management).
• A legal person who conducts business activities in the United Arab Emirates.

Non-resident having a permanent establishment (PE) in the UAE, or deriving income from the UAE, or have a nexus in the UAE (the nexus rules will be specified in a Ministerial Decision), will be subject to UAE Corporate Tax.

Applicable tax rates

The UAE government has announced that the CT rate for UAE businesses will be 9%. However, there will be a 0% rate on taxable income that does not exceed a specified threshold (which is expected to be AED375,000 taxable profit based on the FAQs). The Ministry of Finance has previously indicated that a higher rate may apply to large multinational companies subject to Pillar Two, but the Corporate Tax Law does not provide any clarification in this regard.

While these rules will not be implemented immediately, the FAQs reiterate UAE’s commitment to introduce them in due course, and further developments can be expected in the near future.

Corporate Tax shall be imposed as well on a Qualifying Free Zone Person (QFZP) at 0% on Qualifying Income while Non Qualifying Income will be taxed at the standard rate of 9%. Clarifications are awaited around the definition of Qualifying Income by the Ministry of Finance.

Exemptions

Certain types of businesses or organizations are exempt from Corporate Tax given their importance and contribution to the social fabric and economy of the UAE. These are known as Exempt Persons and include:

Automatically exempt:

• Government Entities
• Government Controlled Entities that are specified in a Cabinet Decision

Exempt if notified to the Ministry of Finance (and subject to meeting certain conditions):

• Extractive Businesses
• Non-Extractive Natural Resource Businesses

Exempt if listed in a Cabinet Decision:

• Qualifying Public Benefit Entities

Exempt if applied to and approved by the Federal Tax Authority (and subject to meeting certain conditions):

• Public or private pension and social security funds
• Qualifying Investment Funds
• Wholly-owned and controlled UAE subsidiaries of a Government Entity, a Government Controlled Entity, a Qualifying Investment Fund, or a public or private pension or social security fund

An entity incorporated in the UAE that is wholly owned and controlled by an exempt individual is also exempt from the requirement if the following conditions are met:

• Participates in part or in all the activities of the Exempt Person
• Invests money on behalf of the Exempt Person
• Performs tasks that are auxiliary to the work performed by the Exempt Person

There might be a need for an application process to be submitted to the Federal Tax Authority (FTA) in order to qualify for some exemptions (including for investment funds).

Base

There will be a CT on the worldwide income of UAE businesses. Domestic dividend will be exempt (including dividends received from a person who is exempt or who is subject to 0% CT rate i.e. FZ person). Foreign dividend and  capital gains will be exempt from CT, if they meet the participation exemption requirements. There is also a provision in the Law that allows foreign branch profits to be exempt if they have been subject to 9% or higher taxes overseas.

For taxes paid on income that is not exempt from the UAE’s tax on capital gains, the foreign tax credit will be available to the taxpayer.

Any income derived by non-residents that is attributed to any Permanent Establishment or nexus in the UAE, as well as any income derived from sources in the UAE, will be subject to Corporate Tax.

Permanent Establishment (PE)

Non-resident with  a fixed place of business or a dependent agent in the UAE, will be considered to have a PE and then will be subject to UAE CT. In case of controversy double Tax Treaties (if any) prevail over the domestic law.

A Ministerial Decision is required in order to determine the existence of other forms of nexus in the UAE that could create a PE under the Corporate Tax Law.

Sourced Income of UAE

As outlined in the Corporate Tax Law, the following income will be considered as sourced from UAE and therefore subject to CT

• Income derived from UAE resident;
• Income derived from UAE Permanent establishment;
• Income derived from activities performed or assets located, capital invested, rights used or services performed or benefited from in the UAE.

Free Zones (Areas without taxes)

A company or branch registered in a free zone that has the following characteristics is considered to be a “Qualifying Free Zone Person” (QFZP) according to the Corporate Tax Law, which is broadly defined as a company or branch that:

• Provides sufficient material to the UAE
• Derived Income (to be specified by a ministerial decision)
• Transfer Pricing Requirements
• Is prescribed by a ministerial decision.

A QFZP is in scope for UAE CT and subject to tax registration and tax return filing requirements.

CT rates for Qualifying FZ person:

• 0% on qualifying income
• 9% on taxable income that is not a Qualifying Income

A QFZP is:

• Not allowed of Tax grouping
• Not allowed of transfer of losses benefits

A QFZP can make an election to be subject to regular CT rate.

Income subject to taxation

The taxable profit will be the accounting net profit/loss as per financial statements (FS). Accounting net profit/loss mast be adjusted for tax purpose. These adjustments will include:

• Unearned profits or losses which arise from capital investments.
• Exempt income
• Income from dividends and other profits from a person resident
• Income from dividends and gains on the sale of shares under the participation exemption
• Income derived from a non-resident from the operation or leasing of aircraft, ships, and containers.
• Reorganizations, transfers of assets and liabilities, and certain other transactions.
• Interest expense will be capped at 30% of earnings before interest and tax.
• 50% of entertainment-related costs can be deducted

As for the limitation on interest deductions, the Corporate Tax Law emphasizes that the amount of expenditure that is disallowed as a deduction can be carried forward for a period of 10 years. Related-party debts can also be subject to additional restrictions.

A number of certain expenses are also not deductible under the Corporate Tax Law, including:

• Donations, grants or gifts made to an entity that is not a Qualifying Public Benefit Entity.
• Fines and penalties other than compensation for damages
• Bribes or similar payments
• Dividends or profit distributed to the owner
• Drawings by the share holder
• Corporate Tax
• Recoverable Input Value Added Tax
• Tax imposed outside the State

Tax Loss

As part of CT, businesses will be able to carry forward their tax losses indefinitely, subject to certain conditions. Under CT, losses incurred before the effective date of CT will not be eligible for relief from taxation. Losses incurred before the CT will not be able to be carried forward, either.

Tax Group

A UAE resident group of companies can elect to form a tax group and can be treated as a single taxable person under the following conditions:

• The Resident Persons are juridical persons.
• The Parent Company owns at least 95% of the share capital and or voting rights of the Subsidiary directly or indirectly.
• The Parent Company is entitled to at least 95% of the Subsidiary’s profits and net assets, either directly or indirectly.
• Neither the Parent Company nor the Subsidiary is an Exempt person or a Qualifying Free Zone Person.
• The Parent Company and the Subsidiary have the same Financial Year and using the accounting standards.
• Tax group treated as single taxable person. Limit of AED 375K will apply irrespective of number of entities.
• Transactions between members of the same tax group are eliminated on consolidation. Accordingly, transactions between them will not be subject to TP rules.

The application to form a tax group should be submitted by the Parent and their subsidiaries as well.

Withholding Tax (WHT) in UAE

WHT on non-resident earnings derived from UAE income is applicable at 0% rate. This implies that foreign legal entities earning UAE-sourced income in UAE will not be impacted by the introduction of the WHT.. As part of the Law, any other rate may also apply, provided that a decision is issued by the Cabinet that specifies that rate.

Regulation

To operate in the UAE, businesses subject to CT must register and obtain a Tax Registration Number from the UAE Tax Authority (FTA). The registration application must be submitted to the FTA before the law comes into effect. Additional guidance will be provided in this regard in the near future.

It will become mandatory for UAE businesses, including QFZPs, for them to file their tax returns and pay any tax due by 9 months after the end of each financial year. The tax returns of companies that are part of a tax group must be filed by the parent company only.

A taxpayer may also be requested to maintain audited or certified financial statements by the FTA. It is also possible that UAE businesses will be required to submit financial statements to the FTA.

Transfer pricing (TP)

There is a requirement to comply with the arm’s-length principle when dealing with related parties or connected persons. Corporate Tax Law is generally similar to OECD standards when it comes to defining the arm’s-length principle and other aspects of the transfer of tax liability. Nevertheless, the definition of a related party and a connected person is quite broad, in comparison to international standards.

Depending on the circumstances, a related party or connected person relationship may be triggered when a kinship relationship is up to the fourth degree.

TP may impact large part of family business in UAE in relation to payments received by or made to a connected person.

A corporate tax law in the UAE stipulates that UAE businesses must maintain TP documentation (i.e., a master file and a local file), subject to certain conditions that will be determined by a ministerial decision. The TP documentation must be submitted to the Federal Tax Administration within 30 days of the request.

A Ministerial Decision is expected to be issued in the near future which will provide more information regarding how taxpayers will be required to submit TP disclosure forms along with the CT return.

There will also be the ability for businesses to apply for advanced pricing agreements, and further details will be provided in this regard in the near future.

General Anti Abuse Rules (GAAR)

According to the Corporate Tax Law, general anti-abuse rules are intended to disallow transactions or arrangements entered into in order to obtain a CT advantage, and these rules will apply to all transactions and arrangements entered into in order to obtain a CT advantage as of the day the Law has been published.

The Corporate Tax Law also indicates that the first balance sheet for the purpose of the Corporate Tax Law will be the closing accounting balance sheet for the financial year immediately preceding the first tax year, as part of its transitional rules.

Consequences

All businesses and natural persons undertaking business activities within the UAE will be affected by the new CT regime. It is imperative that businesses and natural persons begin to assess the implications of the new rules as soon as possible and take necessary actions. In particular they should evaluate

Existing business models

• Transactions and processes to understand the impact on financial
• Margins
• Pricing

Cash flows

• Operational
• Supply chains

Processes

• Transaction flows
• Legal
• Contracts

Part of the evaluation process should include the assessment of the procedures in place for an accurate corporate tax reporting and compliance.

It is imperative for businesses to monitor these developments closely as further details are released through a series of Ministerial Decisions over the next few months, so that they can prepare for the implementation date and be prepared to comply with the new legislation.

Conclusion

In conclusion, the UAE has a relatively low corporate tax rate compared to other countries, and there are several exemptions and incentives in place that can further reduce the effective tax rate for some companies. However, the lack of comprehensive double taxation agreements with other countries may result in a higher effective tax rate for foreign companies. It is important to consult with professional tax advisor to understand the tax implications of doing business in the UAE.