The UAE Government earlier this month issued the relevant legislation under Federal Decree Law No. 47 of 2022 on the Taxation of Corporations and Businesses (“CT Law”). The CT Law was much anticipated following the official announcements earlier this year from the UAE Government on its intention to levy taxation on corporations.
We summarise the key points under the CT Law as well as further legislation to be expected and the applicable timelines for the implementation of the tax regime under the CT Law.
Key Developments under the Decree
Application & Scope:
Corporation tax would be applicable on all the following individuals:
- A legal entity incorporated in the UAE whether in the onshore jurisdiction or an economic freezone in the UAE;
- A legal entity incorporated in a foreign jurisdiction that is effectively managed and controlled from the UAE;
- Any natural individual conducting business in the UAE;
- Any foreign entity or individual (non-residents) which have a permanent presence in the UAE or derive income from the UAE or have nexus to the UAE (as determined by the UAE Cabinet).
Exemption & Categories
Certain categories of legal entities and individuals will benefit from exemptions under the CT Law. Subject to conditions being met, government entities and quasi-government entities will be exempt from paying taxes under the CT Law. Similarly, businesses engaged in extraction of natural resources as well as non-extractive natural resources will be entitled to exemptions under the CT Law.
The CT Law also provides exemptions for qualifying public entities and qualifying investment funds which would be applied as per conditions issued under the CT Law and future decisions.
A standard rate of 9% is expected to be applied to taxable income above the threshold. A rate of 0% will be applied to taxable income below the threshold amount. While the CT Law does not specify the threshold amount and defers it to a UAE Cabinet decision, it is expected the threshold amount being proposed is AED 375,000.
Additional rates and details remain to be confirmed for large multinationals in accordance with OECD BEPS project recommendations.
Among other key developments of the CT Law, tax payers will be eligible to deduct losses, form a tax group, implement transfer pricing and take deductions due to credits and losses in foreign jurisdictions subject to conditions being met and limits being applied on such deductions.
The tax payments will be due within 9 months of the end of the relevant tax period for the taxable person and each taxable person will be required to maintain records for up to 7 years following the end of the applicable tax period. The CT Law further provides for penalties on violations however no specifics have been provided at this stage, there are expected to be issued in further decisions from the UAE Cabinet.
The above developments are a momentous change for UAE's taxation regime and understandably the legal framework for corporations operating in the UAE. The changes will have wide ranging impact on all businesses whether incorporated or unincorporated in the UAE and therefore it is imperative for all businesses to seek and fully understand the impact of the CT Law on their operations so as to be best prepared for the upcoming changes.
The CT Law regime goes into effect from 1 June 2023 and is applicable to any financial year ending on or after this date.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.