Transformative Impact of Corporate Tax on Legal Entities in the UAE

A legal person has distinct legal responsibilities and rights. These encompass the ability to engage in contracts, own assets, initiate legal actions, face legal proceedings, and fulfill tax obligations.  The UAE government has recently introduced a new corporate tax law that will change the way legal persons are taxed in the country. UAE Corporate tax has a wide impact on business activities due to its attractive business environment, with low taxes, free zones, and a strategic location. 

Legal Persons Under UAE Corporate Tax

Having a specific distinct characteristic the legal persons are business entities, the following Business entities are included 

  • PJSCs (Public Joint Stock Companies),
  • (Limited Liability Companies (LLCs), 
  • Private Shareholding Companies (PSCs), 

Public Joint Stock Companies (Pjscs): -

Public Joint Stock Companies in the UAE operate with shares traded on the public stock exchange. The corporate entities are formed to ensure the protection of the shareholders’ interests with transparency. A key feature is the presence of a board of directors overseeing company affairs, and shareholders actively participate in decision-making through general assemblies. PJSCs play a pivotal role in the national economy, often representing larger-scale enterprises with diverse ownership.

Limited Liability Companies (LLCs):

Limited Liability Companies are widely chosen in the UAE for their flexibility and reduced liability for shareholders. Typically requiring a minimum of two shareholders, LLCs can have a diverse ownership structure. The governance is commonly managed by appointed managers or a board of directors. LLCs are crucial for small to medium-sized businesses seeking a balance between operational flexibility and the advantages of limited liability, making them a popular choice across various industries.

Private Shareholding Companies (Pscs):

Private Shareholding Companies in the UAE have a distinct closed ownership structure, limiting shares to a specific group of individuals or entities. Regulated to adhere to corporate governance standards, PSCs feature a governance structure with a board of directors overseeing company affairs. This form of company is often selected by businesses aiming to maintain a closely held ownership model while benefiting from the advantages of a corporate structure. PSCs offer a strategic choice for those seeking to retain control over decision-making within a more exclusive ownership circle.

Scope Of Corporate Tax Applicability on Legal Persons

As outlined in the new corporate tax legislation, the tax will apply to legal persons meeting either of the following criteria:

  • Incorporated in the UAE
  • Companies from foreign jurisdictions having a Permanent Establishment within the UAE or gaining income from UAE-based activities.
  • his means that if your business is registered in the UAE, or if you have a branch, office, or other fixed place of business in the UAE, or if you earn income from activities or assets in the UAE, you will be liable for corporate tax.

Inclusion Of Entities Managed from the UAE

  • Moreover, legal persons who are incorporated outside the UAE but are effectively managed and controlled from the UAE will be considered UAE-incorporated entities and will be liable for corporate tax.

Impact On Businesses Registered Abroad

  • In case your business is registered in another country, but you make the key decisions and exercise the main control from the UAE, you will be treated as a UAE entity for tax purposes.

Who Will Be Exempt from Corporate Tax?

Some legal persons will be regarded as “transparent” for UAE corporate tax purposes. This means that they will not be taxed as separate entities, but rather their income will be allocated and taxed to their partners or members. This applies to limited and general partnerships, as well as other unincorporated joint ventures and associations of persons.

The latest corporate tax law in the UAE introduces exemptions for certain entities and transactions from corporate tax (CT) as stated below:

  • Businesses involved in natural resource extraction, although subject to Emirate-level corporate taxation, are exempt from corporate tax (CT).
  • UAE businesses earning dividends and capital gains from qualifying shareholdings are eligible for exemption from corporate tax (CT).
  • Transactions Of Qualifying intra-group subject to satisfaction of necessary conditions.
  • No applicability of corporate tax UAE on the following:
    • Individuals' salary and employment income, irrespective of the sector.
    • Interest and other income are generated from bank deposits or saving schemes.
    • Income derived from: -
  • dividends, 
  • capital gains, 
  • interest, 
  • Royalties,
  • other investment returns for foreign investors.
  • Individual Personal real estate investments.
  • personal capacity securities or shares i.e. Dividends, capital gains, and other income 

This approach is widely used and accepted globally, and it ensures tax neutrality for investors in collective investment funds, which are often structured as limited partnerships. This means that if you invest in a fund set up as a partnership, you will not pay any corporate tax at the fund level, but only at your level, according to your share of the income.

Challenges In Cross-Border Investments

  • However, there may be some challenges and complications when dealing with cross-border investments through unincorporated partnerships.
  • Different countries may have different tax treatments for partnerships, depending on whether they view them as transparent or as corporations.

Harmonizing Tax Treatment Under UAE Corporate Tax Law

  • The main objective of UAE corporate tax is to harmonize tax treatment to reduce double taxation for partnerships in the relevant foreign jurisdiction.
  • If you invest in a partnership registered in another country, you will follow that country's tax rules for your share of the income.

Taxation Of Partnerships with Unlimited Liability

  • If none of the partners of any type of partnership has unlimited liability for the debts or actions of the partnership or the other partners, then the partnership will be taxed as a UAE corporation.
  • If you invest in a partnership with limited liability for all its partners, you will pay corporate tax at the partnership level, and then personal tax at your level, resulting in double taxation

Impact of UAE Corporate Tax on Businesses?

Corporate tax legislation carries significant implications for businesses, contingent upon its entity type, structure, as well as the origin and characteristics of your income streams. It's imperative to evaluate how the corporate tax will affect your tax obligations, compliance protocols, and reporting duties. Additionally, exploring the potential advantages and disadvantages of restructuring your entity or altering your jurisdiction, where feasible, is prudent.

Navigating through these changes in the corporate tax landscape necessitates professional guidance. Consulting with a seasoned tax advisor is essential to tailor strategies aligned with your specific circumstances. corporate tax uae offers specialized expertise in corporate tax matters, dedicated to optimizing your tax position in line with your business objectives. Reach out to us to discover how our team of experts can assist you in achieving your desired outcomes.

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