An Introduction to the New Corporate Tax Regime in the United Arab Emirates
Mohamed Nour and Ezgi Fedai, senior associate and associate in the corporate team at Hamdan AlShamsi Lawyers & Legal Consultants, introduce the UAE’s new corporate tax regime with a particular focus on how it will affect Free Zone companies.
Introduction
The UAE has introduced its eagerly awaited new tax law, the Federal Decree-Law No 47 of 2022 on the Taxation of Corporations and Businesses (the “CT Law”).
This article will summarise particular areas that taxpayers need to consider as well as guide them through this exciting transition period to the new regime.
What Does the CT Law Say?
The CT Law defines the legislative basis for introducing and implementing a federal corporate tax in the UAE.
What Does Corporate Tax Mean?
Corporate tax is a scheme of direct tax which is levied on the net income or profit of corporations and other businesses. In other words, the CT Law will levy corporate tax on the net profit that UAE businesses make.
Who Will Pay Corporate Tax?
Corporate status will be applicable to certain people (“taxable persons”) which is determined in the CT Law. The taxable persons could be resident or non-resident persons. Taxable persons are the following:
- UAE companies and other juridical persons which are incorporated and/or effectively governed and controlled in the UAE;
- individuals who conduct a business or business activity in the UAE and any other individuals as may be specified in a decision by the Cabinet; and
- non-resident juridical persons that have a permanent establishment in the UAE.
UAE Free Zones are also included within the scope of the CT Law and a juridical person established or incorporated in UAE Free Zones (“Free Zone persons”) must comply with the requirements stipulated in the CT Law. However, should the Free Zone person meets the conditions to be considered as a “qualifying Free Zone person”, then they can avail themselves of the 0% corporate tax rate on their qualifying income determined in the CT Law.
In order to be considered a qualifying Free Zone person, the Free Zone person must:
- maintain adequate substance in the UAE;
- derive “qualifying income” (to be defined in a Cabinet decision);
- not have made an election to be subject to corporate tax at the standard rates; and
- comply with the transfer pricing requirements under the CT Law.
What Is the Rate of Corporate Tax in the UAE?
According to the CT Law, the threshold for income becoming taxable is AED375,000. Therefore, the rate of corporate tax is set at 0% for net profit up to AED375,000. However, for net profit over AED375,000 the rate applied would be 9%.
When Is the Effective Date of the Corporate Tax Regime in the UAE?
The CT regime will be effective for financial years starting on or after 1 June 2023 in the UAE. Therefore, taxable persons will have to file corporate tax returns and settle their tax liability within nine months from the end of the relevant tax period, starting on or after 1 June 2023.
Who Is Exempt From Corporate Tax?
Particular types of businesses or organisations are exempt from corporate tax as per the CT Law, as follows:
- government entities;
- government-controlled entities that are determined in a Cabinet decision;
- a person engaged in an extractive business (exempt if notified to the Ministry of Finance and contingent on meeting certain conditions);
- non-extractive natural resource businesses (exempt if notified to the Ministry of Finance and contingent on meeting certain conditions);
- qualifying public benefit entities (exempt if listed in a Cabinet decision);
- public or private pension and social security funds (exempt if an application is made to and approved by the Federal Tax Authority, and contingent on meeting certain conditions);
- qualifying investment funds (exempt if an application is made to and approved by the Federal Tax Authority, and contingent on meeting certain conditions); and
- wholly owned and controlled UAE subsidiaries of a government entity, government-controlled entity, a qualifying investment fund, or a public or private pension or social security fund (exempt if an application is made to and approved by the Federal Tax Authority, and contingent on meeting certain conditions).
What Income Is Exempt From Corporate Tax?
With the intention of keeping the UAE as a one of the best international business hubs in the world, the CT Law exempts certain income streams from corporate tax including the following.
- Dividends and other profit distributions received from the resident person.
- Dividends and other profit distributions from foreign juridical persons in which a “participating interest” is held; this being an ownership interest of at least 5% in the shares or capital of a juridical person (the “participation”) where the below conditions are met:
- the taxable person has a 12-month continuous holding period or the intention to hold for 12 months;
- the participation is contingent upon tax in its country or territory of residence at a rate that is not lower than 9%;
- the ownership interest of at least 5% in the shares or capital of a juridical person that entitles a taxable person to receive at least 5% of the profits available for distribution and any liquidation proceeds;
- no more than 50% of the assets, whether directly or indirectly owned by the participation, may comprise of an ownership interest or entitlements that would not qualify for the participation exemption if these assets were held directly by the taxable person; and
- any further conditions stipulated by the Minister.
- Certain other income, which includes capital gains, foreign exchange gains/losses and impairment gains or losses from a participating interest.
- Income from a foreign permanent establishment where an election is made to claim the foreign permanent establishment exemption.
- Income derived by a non-resident person from operating aircraft or ships in international transportation if the income earned by a UAE resident person that carries on these activities is exempt from corporate tax in the jurisdiction of the non-resident.
How Is Corporate Tax Calculated?
All amounts must be quantified in UAE dirhams and any amount quantified in another currency must be converted at the applicable exchange rate determined by the Central Bank of the UAE, contingent upon any conditions that may be stipulated in a decision issued by the Ministry.
In an attempt to calculate the corporate tax payable, available withholding tax credits, foreign tax credits, or other forms of relief which are determined by a Cabinet decision may be deducted from the calculated tax payable in the prescribed order and to the extent available.
What Are the Losses and Tax Group Relief?
Businesses will be allowed to offset losses of one period against taxable income of a future period. However, the maximum loss which can be set off will be capped at 75% of the taxable income.
Furthermore, group companies which are holding at least 75% will be allowed to transfer losses from one group company to another profitable group company subject to certain conditions.
UAE group companies may form a “tax group” provided the conditions below are met:
- the UAE parent entity holds, whether directly or indirectly, at least 95% of the share capital, voting rights and entitlement to profits and net assets;
- the group companies have the same financial year and prepare their financial statements using the same accounting standards; and
- neither the parent company or the subsidiary is an exempt person nor a qualifying Free Zone person.
The advantages of forming a tax group are mainly reduced administration costs, offsetting tax losses and profits within the group and inter-company balances and transactions between group entities, and optimising overall compliance and tax costs.
Updates and Amendments to the Corporate Tax Law – Summary of Ministerial and Cabinet Decisions
Ministerial Decision No 83 of 2023 on the Determination of the Conditions under which the Presence of a Natural Person in the State would not Create a Permanent Establishment for a Non-Resident Person for the Purposes of Federal Decree-Law No 47 of 2022 on the Taxation of Corporations and Businesses
For the purpose of Article 14(7)(a) of the CT Law, the presence of a natural person shall be considered a “consequence of a temporary and exceptional situation” where all the conditions outlined below are satisfied:
- their presence is a consequence of exceptional circumstances of a public or private nature;
- the exceptional circumstances cannot be reasonably predicted by the natural person/non-resident person;
- the natural person did not express any intention to remain in the state when the exceptional circumstances end;
- the non-resident person did not have a permanent establishment (PE) in the UAE before the occurrence of the exceptional circumstances; and
- the non-resident person did not consider that the natural person was creating a PE or deriving income in the UAE as per the tax legislation of the other jurisdiction.
Exceptional circumstances mean the imposition of any public health measures by the relevant authorities, travel restrictions, legal sanctions, acts of war, natural disasters, emergency healthy conditions.
Ministerial Decision No 82 of 2023 on the Determination of Categories of Taxable Persons Required to Prepare and Maintain Audited Financial Statements for the Purposes of Federal Decree-Law No 47 of 2022 on the Taxation of Corporations and Businesses
The following categories of person shall prepare and maintain audited financial statements:
- taxable persons deriving AED50 million during the relevant tax period; and
- a qualifying Free Zone Person.
Cabinet Decision No 37 of 2023 Regarding the Qualifying Public Benefit Entities (QPBE) for the Purposes of Federal Decree-Law No 47 of 2022 on the Taxation of Corporations and Businesses
Article 9 of the CT Law identifies a QPBE as an exempt person for UAE CT purposes subject to meeting certain conditions.
QPBEs that are listed in this Cabinet Decision will be exempt from UAE CT, subject to meeting those conditions listed in Article 9 of the CT Law. To ensure that a QPBE meets the conditions prescribed under Article 9 of the CT Law, the tax authority may request relevant information to monitor their continued compliance. Therefore, the entity should provide all documentation needed to support eligibility for the QPBE status.
On another note, taxpayers making donations, grants or gifts to a QPBE will be able to deduct such expenses for UAE CT purposes under Article 33 of the CT Law.
Ministerial Decision No 27 of 2023 on Implementation of Certain Provisions of Cabinet Decision No 85 of 2022 on Determination of Tax Residency
According to Cabinet Resolution No 85, effective 1 March 2023, individuals can be considered tax residents in the UAE if they meet any one of the following conditions:
- their principal place of residence and the centre of their financial and personal interests are in the UAE;
- the individual has been physically present in the UAE for 90 days or more over a consecutive 12-month period and is a UAE citizen, UAE resident, or Gulf Cooperation Council (GCC) national who either has a permanent place of residence in the UAE or performs a job or business in the UAE; and
- the individual has been physically present in the UAE for 183 days or more in a consecutive 12-month period.
To meet the principal place of residence and centre of financial interest condition, all of the following requirements must be met:
- The UAE must be the place where the individual habitually resides or normally resides. This is the jurisdiction where they spend most of their time when compared to any other jurisdiction as part of their settled routine in a way that is more than transient.
- The UAE shall be the state where the personal and economic interests are the closest or of the greatest significance to the individual. Occupation, familial and social relations, cultural or other activities, place of business, place from which the property of the individual is administered, and any other relevant facts and circumstances should be considered.
However, any day that was spent in the UAE due to exceptional circumstances may be disregarded by the authorities. An exceptional circumstance is an event beyond the individual's control occurring while they are already in the UAE, which they could not have predicted, and which prevents them from leaving the UAE as initially planned.
Ministerial Decision No 43 of 2023 Concerning Exception from Tax Registration for the Purpose of Federal Decree-Law No 47 of 2022 on the Taxation of Corporations and Businesses
Article 51 of the CT Law states that any taxable person shall register for CT with the Federal Tax Authority (‘FTA’). It further states that in the context of exempt persons and unincorporated partnerships, the FTA may require certain persons to still register for corporate tax purposes.
The released Ministerial Decision clarifies the exception to Article 51 of the CT Law.
The Ministerial Decision released provides that the following persons are not required to register with the FTA for UAE CT purposes:
- government entities;
- government-controlled entities;
- persons engaged in extractive business that meets the conditions of Article 7 of the CT Law;
- persons engaged in a non-extractive natural resource business that meets the conditions of Article 8 of the CT Law; and
- non-resident persons that derive only UAE-sourced income as per Article 13 of the CT Law and that do not have a PE in the UAE.
The above will not apply to the extent that government entities, government-controlled entities, persons engaged in extractive business and non-extractive natural resource business become taxable person pursuant to the provisions of the CT Law.
Given the above, it is safe to say that at the moment the following persons will still require to be registered for corporate tax with the FTA as per Article 51 of the CT Law:
- a qualifying public benefit entity;
- a qualifying investment fund;
- a public pension or social security fund;
- a juridical person incorporated in the UAE that is wholly owned and controlled by an exempt person and that undertakes part or whole of the activity of the exempt person, is engaged exclusively in holding assets or investing funds for the benefit of the exempt person or carries out activities that are ancillary to those carried out by the exempt person; and
- unincorporated partnerships.
Ministerial Decision No 68 of 2023 on the Treatment of all Businesses and Business Activities Conducted by a Government Entity as a Single Taxable Person
A federal and local government entity are defined to be part of the government itself, its ministries, agencies, departments, authorities, and public institutions.
To be treated as a single taxable person, an application shall be made by a representative entity of the federal or local government. The application shall include all businesses and business activities conducted under a licence issued by a licensing authority.
The representative entity shall be responsible for complying with all the obligations set out in the CT Law.
A representative entity can be replaced without discontinuing the treatment as a single taxable person. Any new or discontinued businesses or business activities can be added or removed within 20 business days of the occurrence of such event.
The start and end date will be from the beginning of the tax period specified in the application, or from any other tax period as determined by the FTA.
For computing taxable income, the representative entity shall consolidate financial results, assets, and liabilities of all businesses or business activities and eliminate intragroup transactions of the single taxable person.
Ministerial Decision No 73 of 2023 on Small Business Relief for the Purposes of Federal Decree-Law No 47 of 2022 on the Taxation of Corporations and Businesses
A taxable UAE resident person (as defined under the CT Law) will be eligible to claim small business relief to the event that its revenue for the relevant and previous tax periods does not exceed an AED3 million threshold during each relevant tax year.
In the event the aforementioned threshold is exceeded, then the taxable person will be subject to UAE CT at the relevant rates of 0%/9% (for revenue exceeding AED375,000) as provided under the CT Law.
A resident person that elects to apply the small business relief must not be either of the following:
- a constituent company of a multinational enterprises group as defined in Cabinet Decision No 44 of 2020; or
- a qualifying Free Zone person.
Carry forward tax losses and any disallowed net interest expenditure will only be allowed in tax periods where the small business relief is not elected.
According to the Ministerial Decision, the applicability of the revenue threshold will start on or after 1 June 2023. However, it will only apply to subsequent tax periods that end before or on 31 December 2026.
When applying for small business relief, taxable persons should keep the General Anti-abuse Rule (GAAR) in consideration, as mentioned in the CT Law. As such, in the event a taxable person intentionally separates its business solely to meet the threshold of AED3 million and hence elects not to be subject to UAE CT, the Federal Tax Authority can make compensating adjustments to the UAE CT liability of the relevant taxable person.
Conclusion
The CT Law has ushered in a new era of corporate taxation for UAE businesses. However, Free Zone companies are still exempt should they be deemed a qualifying person.
