Tax Accountants Answer the Common Questions on UAE Corporate Tax

The Ministry of Finance of the United Arab Emirates made the announcement on the 31st of January 2022 that the UAE would implement a Corporate Tax (CT) and it will be applied to the revenues of businesses beginning with the financial year beginning on or after the 1st of June 2023. Following the announcement of Corporate Tax in UAE, work has been conducted on the completion of the country’s CT regime to establish the integration of best practices worldwide and minimize the regulatory burden of registered businesses. 

All businesses are advised to consult with corporate tax advisors in UAE to learn how to register for UAE corporation tax.

What’s the basis of taxation for UAE corporation tax? 

The application of UAE corporation tax would be determined by a person’s residency status in the country. 

The following are to be deemed residents of the UAE for the purposes of UAE corporation tax: 

  • A legally recognized entity that has been established in the UAE;
  • Any natural person engaging in commercial activity within UAE, whether in the individual’s name or via an unincorporated company;
  • A foreign corporation provided that its operations are controlled and managed within the UAE.

Tax residents in the UAE would be subject to taxation on their overseas income. Income earned from any foreign jurisdiction that was subject to taxes in that jurisdiction is eligible for a credit on UAE corporation tax provided applicable taxes were paid. 

The UAE corporation tax will apply to non-residents’ taxable income from a permanent establishment in the UAE as well as any income that is generated within the UAE. 

The Permanent Establishment (PE) concept that is used in the UAE’s Corporation Tax system was modeled after the Model Tax Convention that is used by the Organization for Economic Cooperation & Development or OECD. 

How to Calculate Your Corporation Tax Bill in UAE

How is taxable income calculated under UAE CT law? 

For purposes of calculating taxable income, the accounting net profit, as shown in the financial accounts, is typically used as the starting point.  

In the United Arab Emirates, the preparation of financial statements often involves applying the applicable Int’l Financial Reporting Standards. On the other hand, the possibility of adopting alternative financial reporting standards in order to prepare company financial statements is being considered. 

When calculating taxable income, unrealized earnings and losses on capital investments are allowed to be not included. 

The government won’t impose Corporation Tax on the following types of income: 

  • The capital gain or dividend income received by a UAE company from a foreign company, is subject to certain conditions such as the UAE shareholder company having to own at least 5 percent of the total number of shares, as well as the foreign company being subject to Corporation Tax or any equivalent income tax at a standard rate of 9 percent in the home country. 
  • All income from domestic dividends is produced by a UAE company. This includes dividends paid by a legal/taxable person in a Free Zone.
  • When it comes to taxing the revenue of foreign branches, UAE companies will have these two options: they can claim the foreign tax credit on taxes paid in a foreign jurisdiction where the parent company is registered, or they can choose to claim a Corporation Tax exemption for foreign branch profits. When a foreign branch isn’t subject to an adequate level of tax from a foreign jurisdiction where its parent company is located, a foreign branch cannot be eligible for an exemption for its profits.
  • Revenue earned by any non-resident from leasing and/or operating aircraft or marine vessels (and all associated equipment) for international transportation, given similar treatment is accorded to a UAE business within a relevant foreign jurisdiction.

Read More: Corporate Tax Compliance Requirements in UAE

Can losses be set off between companies in a tax group? 

As long as the parent company owns at least 95 percent of the voting power or shares capital in the subsidiary, it can elect to establish a tax group for Corporation Tax and be considered as one taxpaying entity. Neither the main firm nor any of its subsidiaries may be an exempt entity or an entity in a Free Zone that claims exemption in order for a tax group to exist. 

If 75 percent of the shares from both businesses are owned by the same group, losses can be transferred or set off from one group company to the other. In addition, no losses could be transferred from any corporation exempt from UAE corporation tax or that enjoys a 0 percent Free Zone corporation tax system. the overall tax offset for the firm receiving transferred losses cannot exceed 75 percent of the company’s taxable income for the relevant period. 

Under the UAE Corporation Tax scheme, group reorganization will not be taxed if specific conditions are met. 

Is Transfer Pricing legal in the UAE? 

Transactions between domestic and international-related parties must be priced at arm’s length under UAE transfer pricing regulations. 

These guidelines are based on those set by Organization for Economic Cooperation & Development. 

Documentation of Transfer Pricing shall include: 

  • Disclosure consists of information regarding each transaction with the connected persons or associated parties;
  • When transactions with a related party’s arm’s length value exceed a specific threshold, local and master files (with the format and content required under the OECD Base Erosion & Profit Shifting Action Plan 13) must be maintained.

It is advised that businesses consult with their corporation tax accountants in UAE to ensure full compliance with the UAE Corporation Tax Law. The Ministry of Finance will provide further clarification on how to file a corporation tax return. For updates and expert advice, contact the tax experts of Corporate Tax UAE today!