UAE Corporate Tax Guide for Extractive and Non-Extractive Businesses

The UAE’s Federal Tax Authority (FTA) issued a Corporate Tax Guide for extractive and non-extractive businesses in December 2023. The guide is for entities involved in natural resources business activities i.e. processing or extraction such as Mineral, Oil, Gas. It further explains the conditions and requirements for these entities to be exempt from corporate income tax (CIT) under the UAE’s CIT Law.

What Are Natural Resources and Related Businesses?

The guide defines natural resources as non-renewable, non-living resources that are found in nature, such as water, oil, gas, and minerals. The guide distinguishes between two types of businesses that deal with natural resources:

• Extractive Businesses: These are businesses that directly extract natural resources from the ground or sea, such as oil and gas exploration and production, mining, and quarrying.
• Non-Extractive Natural Resource Businesses: These are businesses that process, refine, or distribute natural resources, such as oil and gas refining and distribution, petrochemicals, and cement manufacturing.

What Are the Exemption Criteria for Extractive and Non-Extractive Businesses?

The guide states that extractive and non-extractive businesses can be exempt from CIT if they meet the following criteria:

• They have the necessary rights or licenses to extract or process natural resources in the UAE, granted by the relevant authorities or entities.
• They are effectively subject to taxation at the Emirate level, meaning that they pay taxes or fees to the Emirate government or a government-owned entity in relation to their natural resource activities.
• They notify the Ministry of Finance of their exemption status and provide the relevant information and documents.

The guide clarifies that the exemption applies only to the income derived from extractive or non-extractive activities. Any other income from unrelated business activities is subject to corporate income tax, unless another specific exemption applies.

How Non-Exempt Business Activities Are Treated for Corporate Tax?

The guide also covers the taxation of income from business activities that are not exempt from CIT, such as trading, services, or investments. The guide outlines the steps for calculating the taxable income for these activities, which include:

• Nonexempt activities gross income is also determined  
• Deducting the allowable expenses that are incurred for the non-exempt activities;
• Applying the relevant adjustments and exclusions that are specific to extractive and non-extractive businesses, such as depreciation, depletion, amortization, and foreign tax credits;
• Applying the applicable tax rate, which is 20% for most businesses, or 55% for oil and gas companies.

Whether Exempt Persons Are Under Obligation to Prepare Financial Statements? 

The Corporate Tax Law mandates that Exempt Persons engaged in Extractive Business or Non-Extractive Natural Resource Business—while also conducting taxable other Business—maintain separate Financial Statements for the latter. 

• Exempt Persons: These are entities exempt from corporate tax due to specific conditions. If your business falls into this category, pay attention to the following:

• IFRS or IFRS for SMEs: Prepare your Financial Statements based on International Financial Reporting Standards (IFRS) or IFRS for Small and Medium-sized Enterprises (SMEs). The choice depends on your Revenue, which should not exceed AED 50 million.
• Taxable Business: For Corporate Tax in UAE , Exempt Persons must prepare Financial Statements based on IFRS or IFRS for SMEs specifically for their taxable business.

What Is the Requirement of Audited Financial Statements for Entities Engaged In Extractive Business and Non-Extractive Natural Resource Business?

Suppose your business conducts both exempt and taxable activities. In that case, you’ll need to focus on the taxable business when preparing and maintaining Financial Statements. Here’s what to consider:

• Extractive Business and Non-Extractive Natural Resource Business: If your business qualifies for exemption from Corporate Tax, concentrate solely on the taxable business when preparing Financial Statements.
• Qualifying Free Zone Persons: For Corporate Tax reasons, your Financial Statements must be audited if your Revenue above AED 50 million in the applicable Tax Period. Remember that only the Revenue from the taxable other business contributes to this threshold assessment.

Is It Mandatory to File Tax Return If Exempt Business Entities Is Engaged In Taxable Activities?

filing of Tax Returns for the entity engaged in extractive and non-extractive businesses is mandatory as provided in the guide that “A tax return must be filed with the Federal Tax Authority (FTA) if your business is exempt under Article 7 or Article 8 of the Corporate Tax Law but engages in taxable activities. After the appropriate Tax Period ends, submit on time—ideally within nine months.”

What Are the Tax Implications for Free Zone Entities?

The guide also explains the tax implications for entities that operate in Free Zones and are engaged in extractive or non-extractive activities. The guide states that these entities are not automatically exempt from CIT, and they must meet the same criteria as entities outside the Free Zones. The guide also provides guidance on how to allocate income and expenses between the Free Zone and non-Free Zone activities.

The FTA’s Corporate Tax Guide for extractive and non-extractive businesses is a valuable resource for entities that operate in the natural resource sectors in the UAE. The guide provides a comprehensive overview of the tax obligations and exemptions for these entities and helps them to comply with the UAE’s CIT Law. Entities in these sectors should carefully review the guide and ensure that they meet all the compliance requirements and understand their tax responsibilities.