In acknowledgment of the importance of communication with the business sector and other interested parties, the UAE Ministry of Finance announced on April 28, 2022, a public consultation on a proposed UAE Corporate Tax system. The deadline to provide comments and ideas on the regime is May 19, 2022. The context and essential concepts behind several elements of the proposed Corporate Tax system, which was unveiled at the end of January, are laid out in the public consultation paper. For fiscal years beginning on or after June 1, 2023, a 9% federal company tax will be in place.
The consultation document does not represent the government's final position and is not designed to cover all aspects of the proposed corporate tax system.
The following are some of the document's most important points:
Individuals who are subject to tax:
- Corporate Tax will be imposed on UAE-incorporated businesses and other legal entities, as well as international businesses with a Permanent Establishment (PE) in the UAE.
- Individuals will be exempt from Corporate Tax unless they conduct business or commercial activity in the UAE. They must obtain a commercial license or similar permit from the UAE's competent authority.
The following individuals are exempt from the Corporate Tax in UAE:
- Governments and authorities of the federal and emirate governments, as well as other public institutions;
- UAE enterprises that are 100% owned by the government carry out the sovereign or mandated activity and are listed in a cabinet resolution;
- Emirate-level taxes apply to businesses engaged in the extraction and utilization of UAE natural resources.
- Listed charities and other public benefit groups in a Cabinet Decision;
- Private social security and retirement pension plans, both public and regulated;
- Investment funds must fulfill specified criteria.
The person's residency status would determine the Corporate Tax in the UAE.
For the Corporate Tax, the following individuals are considered UAE residents:
- A legal entity registered in the United Arab Emirates;
- Natural individuals doing business or commercial activities in the UAE shall likewise be subject to corporate tax. Individual partners in an unincorporated partnership conducting business in the UAE are also included under this category.
- A foreign corporation managed and controlled successfully from the UAE.
- On their international income, tax residents would be responsible for UAE Corporate Tax. Any income obtained in a foreign jurisdiction on which taxes are paid in that jurisdiction can be used to offset the Corporate Tax.
- Non-residents will be liable to UAE CT on taxable income from their UAE Permanent Establishment and the income derived in the UAE.
The UAE CT regime's Permanent Establishment notion is based on the Model Tax Convention of the Organization for Economic Co-operation and Development (OECD).
Read more about: Guide on Corporate Tax in UAE on Oil and Gas Industries
Applicability of Corporate Tax in Free Zones
- While corporations and branches formed in Free Zones will be subject to UAE Corporate Tax and must file tax returns, they will be subject to a 0% Corporate Tax rate if they maintain appropriate substance and follow all regulatory criteria.
- A Free Zone person with a branch on the mainland of the UAE will be taxed at the usual Corporate Tax rate on mainland source revenue while enjoying the 0% Corporate Tax rate on all other income received by the Free Zone person.
- Companies in the Free zone will not be eligible for tax benefits if they receive any mainland-sourced revenue, except for "passive" income such as interest, royalties, dividends, capital gains on mainland UAE company shares, etc.
- The transaction between a Free Zone Person and their group firm on the mainland of the UAE will likewise be subject to a 0% CT. However, a mainland group company's payments to a Free Zone Person are not tax-deductible.
- A Free Zone Person who earns any income from the mainland other than the revenues mentioned above loses the advantage and is subject to UAE Corporate tax rates on the total income.
- An individual living in a Free Zone would have the unrestricted right to choose the standard CT regime.
If the UAE resident groups have a 95 percent common ownership with the parent firm, they can create a tax group. The loss adjustment between tax categories would be restricted to 75%. There may be a provision that allows losses to be transferred between group firms that do not form a tax group under specific situations.
The OECD principles for transfer pricing would be followed. Businesses would be obliged to have a master and local file for group company transactions.
The UAE is a member of the OECD Inclusive Framework for implementing Pillar Two suggestions, and the requirements are likely to be released soon. The adoption of CT will not affect the present country-by-country reporting obligations, and it has been established.
UAE Corporate Tax Framework Overview
The consultation document outlines several essential characteristics. The following are some of the most important:
- The UAE Corporate tax framework will contain rules for a fixed place of business and a permanent establishment for dependent agents (as per OECD principles).
- Dividend income and capital gains are exempt if the overseas subsidiary holds more than 5% of the stock and has paid at least 9% corporation tax (or equivalent).
- There may be a foreign branch exemption.
- The proposed UAE Corporate Tax regime will cap the amount of net interest expense that can be deducted to 30 percent of a business’s earnings before interest, tax, depreciation, and amortization (EBITDA)
- Transfer pricing legislation, the application of arm's length principles (as per OECD standards), and the requirement for transfer pricing paperwork (including disclosure of transactions with linked parties and associated people) are all included.
- If the firm's shareholders do not change, a business would be allowed to offset losses caused during one period towards taxable income in subsequent periods up to a maximum of 75 percent of taxable income, with no temporal limit on how long the losses might be carried forward.
- Within nine (9) months of the end of the relevant Tax Period, each corporate income tax return and accompanying schedules must be filed to the FTA.
- Except for free zone firms that claim a Corporate Tax exemption, there appears to be no statutory necessity for financial statement auditing.
How Corporate Tax in UAE Can Assist You in Corporate Tax Compliance
Not everyone is conscious of their efforts to retain their status as tax-paying people and enterprises, especially when it comes to the complicated problem of taxation. Obtaining the services of competent Corporate Tax Advisers is vital at this time, as it protects people and businesses from legal ramifications. Our Dubai corporate tax attorneys have a wealth of expertise in assisting firms in resolving their tax profiles through legal procedures and appropriate exemptions. They may also help firms align their tax regimes with the requirements. If you have any questions about UAE Corporate Tax, tax-related issues, or issues in general, don't hesitate to get in touch with us.
Abrar Ahmad holds a Master’s as well as an MPhil in Finance and has an extensive experience of 10+ years in managing all aspects of Taxation, VAT Consulting and Accounting. He also carries with him a working knowledge of corporate tax and has helped drive value and growth to the businesses of numerous clients.