Corporate Tax: A Comprehensive Guide to Applications and Elections for Taxable Persons 

Taxable Persons engaging in specific business activities must be well-versed in the applications and elections available under the Corporate Tax Law. This article explores the various facets of applications and elections such as small business relief, tax credit and exemption for permanent establishment by shedding light on their significance and the implications for businesses seeking to optimize their tax positions.

Election Criteria of Taxable Persons for Corporate Tax Treatment 

Elections play a pivotal role in shaping the corporate tax treatment for Taxable Persons in the UAE. Unlike applications, elections can be unilaterally applied by Taxable Persons, providing flexibility in decision-making without the need for explicit approval from the Federal Tax Authority (FTA). Once a decision is made, the Taxable Person only needs to inform the FTA to set the election into motion. This streamlined process enhances operational efficiency for businesses navigating the complexities of corporate tax regulations.

Taxable Persons can strategically choose from a range of elections as listed below: –

Benefiting from Small Business Relief:

Tailoring the tax position to align with the scale and nature of the business.

The election of Small Business Relief refers to a mechanism under the UAE Corporate Tax Law that allows eligible small businesses to elect not to be subject to corporate tax and to benefit from reduced compliance requirements. In the context of UAE corporate tax regulations, a small business is identified as a resident entity whose revenue falls below AED 3,000,000 in both the relevant and preceding tax periods. By opting for this relief, a small business can reduce its tax burden and administrative costs, and tailor its tax position to suit its scale and nature of operations.  

Exempting Foreign Permanent Establishment Income: Mitigating tax implications on income generated from overseas operations.

Income generated from Foreign Permanent Establishment of a resident person is exempted under the UAE Corporate Tax Law. A PE is a place of business or other form of presence outside the UAE that meets certain criteria. The aim of such exemption is to avoid double taxation by encouraging the cross-border investment and trade but business activities of natural resources, real estate and banking are not covered under this exemption. 

Realization Basis for Gains and Losses: Adopting a realization basis for accounting gains and losses.

Corporate Tax at the Standard Rate for Qualifying Free Zone Persons

This refers to a rule under the UAE Corporate Tax Law that allows certain entities operating within Free Zones to benefit from a 0% Corporate Tax rate on their income from qualifying activities and transactions, as long as they meet certain conditions such as compliance of transfer pricing provisions, not electing standard corporate tax and maintenance of adequate substance. A Free Zone Person that does not meet these conditions or has income from non-qualifying activities will be subject to a 9% Corporate Tax rate.  

Applications: Seeking Approval for Special Tax Treatment

Applications are another form of decision-making that can affect the corporate tax position of Taxable Persons in the UAE. Unlike elections, applications require the approval of the FTA before they can be implemented. This means that Taxable Persons need to submit a formal request to the FTA, providing relevant information and supporting documents, and wait for the FTA’s response. The FTA may grant, reject, or modify the application, depending on the circumstances and the criteria specified in the Corporate Tax Law.

Some of the applications that Taxable Persons can make include:

Applying for a Tax Credit:

This refers to a mechanism under the UAE Corporate Tax Law that allows resident persons to apply for a tax credit for foreign taxes paid on income that is also subject to corporate tax in the UAE. The purpose of this mechanism is to prevent double taxation and to promote international competitiveness of UAE businesses. To apply for a tax credit, the resident person must submit a tax return and provide evidence of the foreign tax paid.  

Applying for a Tax Exemption:

This refers to a provision under the UAE Corporate Tax Law that allows resident persons to apply for a tax exemption for income or transactions that meet certain conditions. The tax exemption is granted at the discretion of the FTA and may be subject to limitations or restrictions. The FTA may also revoke or amend the tax exemption if the conditions are no longer met or if there is a change in the law. Some of the income or transactions that may qualify for a tax exemption include:

• Income from charitable activities or donations. 
•  Income from mergers, acquisitions, or reorganizations that are carried out for bona fide commercial reasons and do not result in tax avoidance. 
• Income from certain government grants or subsidies. 

Applying for a Tax Ruling/Decision: 

This refers to a service offered by the FTA under the UAE Corporate Tax Law that allows resident persons to apply for a tax ruling on the interpretation or application of the law to a particular situation or transaction. A tax ruling is a written statement issued by the FTA that provides guidance and certainty on the tax consequences of the situation or transaction. The FTA may charge a fee for issuing a tax ruling and may impose conditions or limitations on its validity. A tax ruling is binding on the FTA and the applicant, unless there is a change in the law or the facts.  

Conclusion

Applications and elections are essential tools for Taxable Persons in the UAE to manage their corporate tax affairs and optimize their tax positions. By understanding the benefits and implications of each option, Taxable Persons can make informed and effective decisions that suit their business objectives and comply with the Corporate Tax Law. However, applications and elections also entail certain risks and challenges, such as uncertainty, complexity, and compliance costs. Therefore, Taxable Persons should seek professional advice and assistance before making any applications or elections, and ensure that they keep abreast of the latest developments and updates in the corporate tax landscape.

Sources:-

1. Small Business Relief – الهيئة الاتحادية للضرائب. https://tax.gov.ae/DataFolder/Files/Guides/CT/Small%20Business%20Relief%20Guide%20-%20EN%20-%2027%2008%202023.pdf.
2. Corporate Tax – Ministry of Finance – United Arab Emirates. https://mof.gov.ae/corporate-tax/
3. Corporate tax (CT) | The Official Portal of the UAE Government. https://u.ae/en/information-and-services/finance-and-investment/taxation/corporate-tax.