How Corporate Tax applies to extractive businesses in UAE?

The government of UAE has issued the legislation of Federal decree law no. 47 on December 9, 2022, making the implementation of corporate tax next year a must. Corporate tax in UAE is a new type of tax that has not been there in UAE but is present in many other countries’ legislation for businesses and corporations. Here in UAE, it is an entirely new thing for businesses and most businesses still lack knowledge of this law. 

What is Corporate Tax?

Let’s begin by answering a simple question, what is a corporate tax in UAE? The term "corporate tax," sometimes known as "corporation tax" or "business tax," refers to a kind of direct tax imposed on the profits or assets of companies or other similar legal entities. These taxes are common in many nations, and they can also be levied at the state or local levels. The percentage deducted from the generated revenue of the company is different for different geographical locations. For example, the corporate tax rate in UAE is 9% if the net profit surpasses AED 375,000, below which no corporate tax is foisted.

What is extractive business?

Extractive business is referred to a business that is concerned with the extraction of unprocessed raw materials from Earth. It requires sophisticated machinery and complex processes for extracting, refining, and filtering natural resources. In this article, we will walk you through the process of application of corporation tax or company tax to extractive businesses. Extractive industries can form the backbone of a petroleum-rich country such as the UAE, so their taxation is carried out accordingly.

Read more: Permanent Establishment Under Corporate Tax UAE

Corporation tax is applied to:

Corporate tax in UAE cannot be pertained to:

• The person who holds a direct or indirect License approved by the Local Government
• The person who has come to an agreement with the Local Government in the form of a notification to the Ministry

Corporate tax law for Extractive Businesses:

Often, a government makes a different tax policy for other sectors. For example, corporate tax law for extractive businesses differs from that of non-extractive businesses. Mining businesses are further distinguished for special tax treatment because they generate different net profits. Corporate tax in UAE for extractive businesses is distinguished on the basis of given factors:

• Mineral being extracted

The tax rate is different for different groups of minerals. For instance, the corporate for gemstone mines will be more than for gravel mines since diamond mines have the potential to reach profit levels that may not be possible for a gravel mine.

Read more: Guide on Corporate Tax in UAE On Oil and Gas Industries

• Net amount investment

There are many different sizes of mines, some of which are industrial-scale, while others are small-scale or on a pre-industrial level. Usually, such small-scale mines are exempt from corporate tax but the downside of this advantage is that such industries cannot recover their value-added tax or VAT on the machinery they purchased. Large-scale extraction industries owned by political tycoons are offered a chance to work out a unique corporate tax law with the government. Mega mining projects which require a huge amount of investment may be spared from corporation tax for a specific period of time.

• Apparatus required for extraction

In UAE extractive equipment is immune from paying value-added tax or VAT when the mine development is in the initial stages. Therefore, corporate income tax in UAE is not imposed during this period of time. The government may make a payback policy that has the same effect as an exemption.

A person holding an extractive and a non-extractive business:

If a person gains a net profit from mining and a non-extractive business as well then the following conditions apply;

• The profit obtained from extractive business is taxed according to the legislation of UAE.
• Revenue generated from other businesses is subjected to the Decree-law of UAE.
• Transactions involving the Extractive Business and another business owned by the same person will be regarded as Related Party Transactions and will be governed by the guidelines in Article 34 of this Decree-Law.

Read more: How Does Corporate Tax UAE Apply to Non-Extractive Natural Resources

Exemption from Corporate Tax is not applied to:

The person who holds a contract, a sub-contract, or a person who does not hold the right of the extractive business is not exempt from the corporate tax. The exemption also does not apply to the person who does not meet the requirements of Article 8 from the Federal Decree law of UAE.

What are tax advisory services?

Unplanned tax management can result in higher taxes than you may need to pay. Proper tax management, strategic tax planning, and exploring the tax anatomy can reduce the imposed corporate tax by a considerable amount. Fortunately, you do not need to do all this by yourself. You can consult a corporate tax advisor in this regard, who can offer you suggestions on how to reduce taxes due while adhering to legal and regulatory requirements. Contact our tax experts right now.