The long wait was finally over on 9 December 2022, when the UAE Federal Tax Authority (FTA) released the final version of the UAE Corporate Tax (CT) law (hereinafter referred to as the law) through Federal Decree-Law No. 47 of 2022. The law is largely based on the public consultation document issued earlier during the year 2022. However, it also contains certain new provisions which inter-alia include General Anti Abuse Rules, Small Business Relief, detailed definition of UAE-sourced income, etc. The CT regime would be effective for the financial year starting on or after 1 June 2023.

In this alert, we have summarized the UAE CT regime:

SCOPE AND APPLICABILITY

Taxable Persons

  • UAE CT shall be imposed on taxable persons - both residents and non-residents
  • A resident person means
    • Entities incorporated under the UAE laws, including Free Zone entities
    • Entities incorporated in a foreign jurisdiction that is effectively managed and controlled from the UAE
    • Individuals who conduct certain categories of business or business activity as determined by the Cabinet of Ministers
  • A non-resident would be liable to tax in cases where:
    • It has a Permanent Establishment (PE) in the UAE
    • It derives UAE-sourced income (which is widely defined)
    • It has a nexus in the UAE

Exempt Persons

The following persons are exempt from UAE CT:

  • Government and Government-controlled entities
  • Persons engaged in extractive business and nonextractive natural resource business that are subject to taxes under the relevant Emirate legislation
  • Qualifying public benefit entities and qualifying investment funds satisfying certain conditions
  • Public pensions or social security funds
  • Regulated private pensions or social security funds

Basis of Taxation

  • Resident entities would be subject to CT on global taxable income
  • A resident natural person is subject to CT on income that is derived from or outside the UAE to the extent that it relates to business (categories to be notified by the Cabinet of Ministers) conducted by such persons in the UAE
  • UAE non-residents would be liable to tax in the UAE on the following incomes:
    • Taxable income attributable to the Permanent Establishment (PE) of the non-resident in the UAE
    • UAE-sourced income that is not attributable to the PE of the non-resident in the UAE
    • Taxable income that is attributable to the nexus of the non-resident in the UAE
  • The following shall be considered UAE-sourced income:
    • Where it is derived from a resident of the UAE
    • Where it is derived from a non-resident in connection with their PE in the UAE
    • Where it is accrued or derived from activities performed, assets located, capital invested, rights used, or services performed in the UAE

An Illustrative list of items would include the sale of goods in UAE, income from activities in UAE, loan/insurance income in respect of UAE borrower/asset, disposal of shares/capital, etc.

  • The PE concept is similar to what is envisaged in the Organization for Economic Co-operation and Development (OECD) Model Tax Convention. The Cabinet of Ministers may further prescribe conditions under which a mere presence of natural persons in the UAE does not constitute a PE for a non-resident.

Corporate Tax Rates

  • CT shall be imposed at the rate of 0% on taxable income below a prescribed threshold limit* and at 9% on taxable income exceeding such limit
  • For a qualifying Free Zone person/entity, the CT rate is 0% on qualifying income and 9% on non-qualifying income.

*threshold amount to be approved by the Cabinet of Ministers (which is expected to be AED 375,000 as per the FAQs issued by the Ministry of Finance on the CT regime)

Calculation of Taxable Income for CT

  • The taxable income of taxable persons shall be generally determined based on the financial statements prepared in accordance with generally accepted accounting standards in the UAE. It is mentioned in the previously published FAQs that IFRS is generally accepted in the UAE
  • The accounting profit is to be adjusted for the following:
    • Unrealized gains or losses
    • Exempt income, reliefs, and deductions as specified in the law
    • Any transfer pricing adjustment in respect of transactions with related parties and connected persons
    • Tax losses
    • Special incentives and reliefs for a qualifying business activity as may be specified
    • Any other income or expenses that have not been taken into account as may be specified
  • The following income shall be treated as exempt income:
    • Dividends/profit distributions from resident persons (including dividend paid by a Free Zone person)
    • Dividends/profit distributions from participating interest in a foreign juridical person
    • Any other income from participating interest as specified in the law
    • Income from foreign PEs
    • Income of a non-resident from operating of aircrafts or ships in international traffic
    • Income of foreign PEs of resident persons

Deductible and Non-deductible Expenses

  • Expenses incurred wholly and exclusively for the purpose of business and not being capital in nature are allowed as a deduction in computing taxable income
  • Expenses incurred for deriving exempt income shall not be allowed as a deduction
  • Special provisions for the claim of interest expenses:
    • General Deduction Rule: Net interest expenses (interest income less interest expenses after considering carried forward interest expense) shall be restricted to 30% of EBITDA. However, a threshold would be provided. The balance interest expense shall be carried forward for 10 tax periods. Banks, insurance providers, and natural persons carrying out business activity are excluded from this rule
    • Specific Deduction Rule: Interest on loan from related parties in respect of specific transactions with related parties such as dividends, redemption or reduction of share capital, capital contribution, and acquisition of ownership interest shall not be allowed as a deduction
  • 50% of expenses incurred on the entertainment of customers, shareholders, suppliers, or other business partners shall be disallowed
  • Fines, penalties, bribes, donations to others than the qualifying public benefit entity, dividends paid, etc. shall be disallowed
  • Input Value Added Tax (VAT) incurred by a taxable person that is recoverable is considered a non-deductible expense

Participation Exemption.

  • The law has specified conditions subject to which income from participating interest shall be considered exempt. A participating interest would mean having 5% or more ownership interest in the shares or capital of a juridical person, and that meets the following conditions:
    • The participating interest is held or is intended to be held for at least 12 months
    • The participation is subject to CT or similar tax in the foreign jurisdiction at a rate that is not less than 9%
    • The participation entitles the person to receive at least 5% of distributable profits and liquidation proceeds
    • The assets held directly or indirectly by the participants should not contain more than 50% of such interests, which if held directly by the person, would not have qualified for exemption
  • If the participation exemption conditions are met, the following income shall be treated as exempt:
    • Dividends/profit distributions from foreign participants
    • Capital gains on sale or disposition of participating interest after the stipulated time period of 12 months
    • Foreign exchange and impairment gains or losses in relation to participation interest
  • The law also provides for situations where participation exemptions shall not be available

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