Corporate tax legislation in UAE 2023

Corporate Tax Rates in UAE

CT shall be imposed on the taxable income of businesses at the following rates:

• 0% on the portion of the taxable income not exceeding AED 375,000 (amount to be specified in a Cabinet Decision).
• 9% on the taxable income that exceeds AED 375,000.

CT shall be imposed on a Qualified Free Zone Person at the following rates:

• 0% on Qualifying Income.
• 9% on taxable income that is not Qualifying Income.

Taxable Person and Resident Base

A resident person is any of the following persons:

• A juridical person incorporated in the UAE, including a Free Zone person.
• A juridical person incorporated in a foreign jurisdiction that is effectively managed and controlled in the UAE.
•  A natural person who conducts a business (Business) or business activity (Business Activity) in the UAE (to be specified in a Cabinet Decision).

Non-resident person:

A non-resident person is a person who is not considered a resident person and that either.

• Has a permanent establishment (PE) in the UAE.
• Derives UAE sourced income.
• Has a nexus in the UAE (to be specified in a Cabinet Decision).

CT base Resident:

• A resident juridical person is subject to CT on their taxable income derived from the UAE and from outside the UAE.
• A resident natural person is subject to CT on the income derived from the UAE and outside the UAE as it relates to the Business or Business Activity that is conducted by the natural person in the UAE.

Non-resident:

A non-resident person is subject to CT on the following:

• The taxable income that is attributable to the PE of the non-resident person in the UAE.
• UAE sourced income that is not attributable to a PE of the non-resident in the UAE.
• The taxable income that is attributable to the nexus of the non-resident person in the UAE.

Permanent Establishment:

A non-resident person has a PE in the UAE in any of the following instances:

• Where it has a fixed or permanent place in the UAE through which the business of the non-resident person, or any part thereof, is conducted;
• Where a person has and habitually exercises an authority to conduct a Business or Business Activity the UAE on behalf of the non-resident person.

Reliefs:

Transfers within a qualifying group:

• Subject to meeting the relevant conditions, no gain or loss shall arise for the transfer of one or more assets or liabilities between two taxable persons that are members of the same qualifying group. Note that a holding period of a minimum two years post date of transfer is applicable.
• Otherwise the event of transfer shall be calculated at market value instead of net book value.

Business restructuring relief:

•  Subject to meeting the relevant conditions, no gain or loss shall arise in a qualifying business restructuring exercise between two taxable persons. Note that a holding period (whether in part or whole – shares or business) of a minimum two years post date of restructuring is applicable.

Otherwise, the event of restructuring shall be calculated at market value instead of net book value.

Free Zone entities in UAE :

One anticipated area of the CT law was the treatment of Free Zone Persons. The law suggests that a Qualifying Free Zone Person can have both Qualifying Income (taxed at the rate of 0%) and non-qualifying Taxable Income (taxed at 9%), a significant open question from the Consultation Document. However, some questions remain to be answered on this.

Corporate Tax Exempt persons in UAE

CT law has provided additional clarity with reference to Government entities and Government Controlled entities. Specifically, the CT law has defined that Government entities, would be considered as exempt persons unless conducting any business or business activity under a License issued by a Licensing Authority. Government controlled entities would be considered as exempt persons unless conducting a non-mandated activity.

For businesses in extractive industries, the CT law has specified that if the entity is earning income from both extractive and non-extractive business, then the extractive income is to be taxed under the relevant Emirate Legislation and the other business income shall be taxed as per the CT law.

Calculation of taxable income 

The CT law reinforced that taxable income will be determined on the basis of the net profit (or loss) in financial statements prepared for financial reporting purposes in accordance with acceptable accounting standards.

Tax grouping: 

Tax grouping is an important way taxpayers may reduce the administrative burden of tax and share losses to reduce tax. Additional clarity was provided in relation to rules governing the utilisation of tax losses where a subsidiary joins a Tax group and when a Tax group ceases to exist.

Transfer Pricing (TP):

The UAE CT law contains several articles relating to Transfer Pricing. The key points covered under the CT law are summarised below:

• Transactions with related parties and connected persons must meet the arm’s length principle.
• TP methods, broadly in line with the OECD TP Guidelines, are introduced.
• Definitions of ‘Related Parties’, ‘Control’ and ‘Connected Persons’ are covered.
• Concept of transfer pricing adjustments, including corresponding adjustments and potential mechanisms, is provided.

Taxpayers to prepare TP documentation (disclosure form, master file, local file). Conditions and format to be provided under separate ministerial decisions and tax authority guidance.

• FAQ’s provide commentary on additional TP considerations including, but not limited to, (i) domestic transactions – covered; (ii) transactions within a tax group – excluded; and (iii) Free Zone entities – covered.

• Further details expected via separate ministerial decisions and tax authority guidance.

Transitional provisions: 

The CT law restates the principle established in the Consultation Document that the opening balance sheet for tax purposes will be the prior period closing accounting balance sheet. This should simplify calculation of deferred tax, which needs to be evaluated by taxpayers going forwards. However, it also potentially establishes some additional uncertainty as this principle is “subject to any conditions or adjustments that may be prescribed by the Minister”. Taxpayers must therefore carefully consider their approach to tax accounting and provisions.

Participation exemptions:

The participation exemption exempts certain income (dividends, capital gains) from UAE CT. In addition to the previously mentioned criteria (5% ownership, and investee company to be subject to a 9% tax rate), a 12-month continuous holding period requirement has been added. The CT law also clarifies how the participation exemption may apply in cases where the immediate participation may not meet the conditions of the exemption.

Calculation of CT Payable:

Currency:

• All amounts must be in AED. Any non-AED amounts must be converted to AED following exchange rates set by the UAE Central Bank and subject to any decisions issued by the FTA.

Payment and Refund of CT:

• CT payable should be settled within 9 months from the end of the relevant tax period, or by the date stipulated by the FTA.
• A refund for CT can be claimed in certain circumstances.

Tax Returns and Clarifications Tax Returns:

• Tax returns should be submitted no later than 9 months from the end of the relevant tax period.
• The parent company must file a tax return with the FTA on behalf of the tax group.

Financial Statements:

• The FTA may request taxable persons to provide the financial statements that were used to determine their taxable income.
• The MoF may issue a decision requiring certain categories of taxable persons to maintain audited or certified financial statements.

Global minimum tax:

No further guidance was provided in the CT law in relation to Pillar Two. Based on the FAQs, multinationals will be subject to CT under the regular UAE CT regime, until such time as the Pillar Two rules are adopted by the UAE. Further information will be released in due course on the implementation of the Pillar Two rules in the UAE.