Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses was released by the Ministry of Finance (MoF) of the United Arab Emirates (UAE) on 9 December 2022, to establish a new corporate tax system in the UAE. The new corporate tax system will come into effect for financial periods commencing on or after 1 June 2023.
Who is considered to be taxable person?
Corporate Tax typically applies to all entities, regardless of their residency status. However, a resident person is classified as one of the following:
- A legal entity established or recognized in the UAE, including free zones.
- A legal entity established or recognized outside of the UAE but effectively managed and controlled within the UAE.
- A natural person who engages in business activity within the UAE.
Corporate Tax may apply to a non-resident person if they meet any of the following conditions:
- They have a permanent establishment in the UAE.
- They earn income from sources within the UAE.
- They have a nexus in the UAE, although specific rules for this have yet to be determined.
Applicable Corporate Tax rates
In general, businesses operating within the UAE will be liable to pay corporate tax rate of 9%. However, income falling below a certain threshold – AED375,000 – will be subject to a rate of 0%. Notably, the Corporate Tax Law does not specify any increased rate that may be imposed on large multinationals subject to Pillar Two, despite previous indications from the Ministry of Finance.
Exemptions
Under certain conditions, the following persons will be exempt from Corporate Tax:
- A person engaged in the exploitation of UAE natural resources (both extractive and non-extractive).
- Government and Government-controlled entities.
- Qualifying public benefit entities.
- Charities and public benefit organizations.
- Pension or social security funds.
- Qualifying investment funds.
- The exemption may extend to an entity incorporated in the UAE that is wholly owned and controlled by an exempt person, if it:
- Undertakes part or whole of the activity of the exempt person.
- Holds assets or invests funds for the benefit of the exempt person.
- Carries on activities ancillary to those of the exempt person.
Some exemptions, such as those for qualifying investment funds, will require an application to be submitted to the Federal Tax Authority (FTA).
Tax base
Under the Corporate Tax Law, UAE-based businesses will be required to pay Corporate Tax on their income earned worldwide. However, dividend income and capital gains will be exempt, provided that the conditions of the participation exemption are met. The legislation also includes a provision for a foreign branch profits exemption, applicable if such profits have already been subjected to a foreign tax rate of at least 9%. If income is not exempt from UAE Corporate Tax, foreign tax credit can be claimed for taxes already paid overseas.
Permanent Establishment
Non-residents will be considered to have a permanent establishment in the UAE if they have a fixed place of business or a dependent agent in the country. The applicable law is largely consistent with the Organisation for Economic Co-operation and Development (OECD) standards. Furthermore, the Corporate Tax Law specifies that any additional types of nexus for permanent establishment will be determined through a Ministerial Decision.
Free zones
The Corporate Tax Law introduces the concept of a “Qualifying Free Zone Person” (QFZP), which is broadly defined as a company or branch registered in a free zone that:
- Maintains adequate substance in the UAE.
- Derives qualifying income (to be specified through a Ministerial Decision).
- Satisfies transfer pricing requirements.
- Meets any other conditions to be prescribed through a Ministerial Decision.
A Qualifying Free Zone Person will still be subject to corporate tax but may benefit from a 0% rate on its qualifying income. A Qualifying Free Zone Person can elect to forego this preferential regime and be subject to the standard corporate tax rate.
Taxable income
The accounting income as reported in the standalone financial statements will be the basis to determine the taxable income. This will be subject to adjustments, which include:
- Unrealized gains or losses which arise in connection to capital items.
- Income and associated expenses derived by an exempt person with respect to its exempt activity.
- Dividend income and other profit distributions from a resident person.
- Dividend income and capital gains under the participation exemption.
- Income from a PE not located in the UAE that has been subject to corporate tax at a rate of at least 9%.
- Income derived by a non-resident from the operation or leasing of aircrafts and ships in international transportation.
- Gains or losses from reorganizations or intragroup transfer of assets and/or liabilities subject to certain conditions.
- Net interest expenditure will be capped at 30% of the EBITDA (earnings before interest, taxes, depreciation, and amortization).
- Entertainment-related expenses will be deductible up to 50% of the amount incurred.
Tax loss relief
Subject to specific requirements, enterprises will have the opportunity to indefinitely carry forward tax losses. These losses may be applied to balance up to 75% of future taxable income. However, losses that were incurred prior to the implementation of corporate tax will not be qualified for relief.
Withholding tax
Unless the income is linked to a branch or a Permanent Establishment within the UAE, payments made by UAE businesses to non-residents earning UAE-sourced income will be subject to a withholding tax rate of 0%. The Corporate Tax Law also provides that the Cabinet may issue a decision specifying an alternative rate to be applied.
Administration
UAE businesses subject to corporate tax are required to register and obtain a Tax Registration Number. Generally, the registration application must be submitted to the Federal Tax Authority before the Law becomes effective.
UAE businesses subject to corporate tax, including Qualifying Free Zone Person’s, will be required to file a tax return and pay any tax due no later than nine months after the end of the financial year. The parent companies of tax groups need to submit only one tax return.
Additionally, UAE business may be requested to submit financial statements to the Federal Tax Authority. Taxpayers may also be requested to maintain audited or certified financial statements.
How can Altus Citadel assist?
Altus Citadel is happy to provide hands-on assistance in running your company in UAE every step of the way. We provide incorporation and directorship services, and help big and small businesses with coordination of annual company license renewal, coordination of annual general meeting (AGM), VAT registration & submission, etc. Our services include, but no limited to:
- Corporate & Personal Bank account opening
- Visa Application (Golden, Working visa, etc)
- Book Keeping Services
- AML Compliance & Consultancy
- VAT registration and VAT reporting
- Tax Compliance Services
- Directorship Services
- Bank Signatory Secretary Services
- Economic Substance Reporting
- Annual Compliance Services
- Audit Services
You have a question? Get In Touch
Tel: +971 509616354 or +971 58 559 3508
E-mail: info@altuscitadelservices.com
