As we usher into 2023, the UAE has introduced the eagerly awaitednew tax law, the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (the "CT Law").
In this article, we summarize particular areas that taxpayers need to consider as well as guide them through this exciting transition period to the fully new order.
What Does the CT Law say?
The CT Law defines the legislative basis for introducing and implementing a Federal Corporate Tax ("Corporate Tax") in the UAE.
What Does Corporate Tax mean?
Corporate Taxis a scheme of direct tax which is levied on the net income or profit of corporations and other businesses. In other words, theCT Law will levy corporate tax on the net profit that UAEbusinesses make.
Who Will Pay CT?
Corporate will be applicable for certain people (the "Taxable Persons") which is determined in the Corporate Tax Law. The Taxable Persons could be resident or non-resident persons. Taxable Persons are the following:
1- UAE companies and other juridical persons which are incorporated and/or effectively governed and controlled in the UAE;
2- Individuals who conduct a business or business activity in the UAE and any other individuals as may be specified in a decision by the Cabinet;
3- Non-resident juridical persons that have a permanent establishment in the UAE.
UAE Free Zones are also included within the scope of the CT Law and a juridical person who is established or incorporated in UAE Free Zones (the "Free Zone Person") must comply with the requirements stipulated in the CT Law. However, should the Free Zone Person meetsthe conditions to be considered as a Qualifying Free Zone Person, then they can avail themselves of the 0% Corporate Tax Rate on their Qualifying Income determined in the CT Law.
In order to be considered a Qualifying Free Zone Person, the Free Zone Person must:
1- maintain adequate substance in the UAE;
2- derive 'Qualifying Income (to be defined in a Cabinet Decision);
3- not have made an election to be subject to CT at the standard rates; and
4- comply with the transfer pricing requirements under the CT Law.
What is the rate of Corporate Taxin the UAE?
According to the CT Law, thethreshold of taxable income is greater than AED 375,000.Therefore, the rate of the Corporate Tax is set at 0% for net profit up to AED 375,000. However, If the net profit is greater than AED 375,000, then the rate applied would be 9% of the net profit.
When is the effective date of the Corporate Tax regime in the UAE?
The CT regime will be effective for financial years starting on or after 1 June 2023 in the UAE.Therefore, Taxable Persons will have to file Corporate Tax returns and settle their tax liability within 9 months from the end of the relevant tax period, starting on or after June 1, 2023.
Who is exempt from CT?
Particular types of businesses or organizations are exempt from Corporate Taxas per CT Law, which isexplained as follows:
1- Government Entities;
2- Government Controlled Entities that are determined in a Cabinet Decision;
3- A Person engaged in an Extractive Business (Exempt if notified to the Ministry of Finance and contingent on meeting certain conditions);
4- Non-Extractive Natural Resource Businesses (Exempt if notified to the Ministry of Finance and contingent on meeting certain conditions);
5- Qualifying Public Benefit Entities (Exempt if listed in a Cabinet Decision);
6- Public or private pension and social security funds (Exempt if applied to and approved by the Federal Tax and contingent onmeeting certain conditions);
7- Qualifying Investment Funds (Exempt if applied to and approved by the Federal Tax Authority and contingent onmeeting certain conditions); and
Wholly owned and controlled UAE subsidiaries of a Government Entity, Government Controlled Entity, a Qualifying Investment Fund, or a public or private pension or social security fund(Exempt if applied to and approved by the Federal Tax Authority and contingent on meeting certain conditions).
What Income is exempt from Corporate Tax?
With the intention of keeping the UAE as a one of the best international business hubs in the world, CT Law exempts certain incomes from Corporate Tax including: Dividends and other profit distributions received from the resident person;
1- Dividends and other profit distributions from foreign juridical person in which a participating interest (the "Participating Interest")is held. A Participating interest meansan ownership interest of minimum 5% in the shares or capitalof a juridical person (the "Participation")where the below conditions are met;
a) The Taxable Person has a 12 month continuous holding period or the intention to hold for 12 months;
b) The Participation iscontingent upon tax in its country or territory of residence at a rate that is not lower than 9%;
c) The ownership interest of minimum 5% in the shares or capital of a juridical person that entitles a Taxable Person to receive minimum 5% of profits available for distribution and any liquidation proceeds;
d) Nomore than 50% of the assets whether directly or indirectly owned by the Participation may comprise ofan ownership interest or entitlements that would not qualify for the Participation exemption ifthese assets were held directly by the Taxable Person; and
e) Any conditions stipulated bythe Minister.
2- Certain other income which are including capital gains, foreign exchange gains / losses and impairment gains or losses from a Participating Interest;
3- Income from a foreign permanent establishment where an election is made to claim the foreign permanent esestablishment exemption and
4- Income derived by a non-resident person from operating aircraft or ships in international transportation if the income earned by a UAE residentperson that carries on these activities is exempt from CT in the jurisdiction of thenon-resident.
How do you calculate Corporate Tax?
All amounts must be quantified in UAE dirhams and any amount quantified in another currency must be converted at the applicableexchange rate determined by the Central Bank of the UAE, contingent upon any conditions that may bestipulated in a decision issued by the Ministry.
In an attempt tocalculate the Corporate Tax payable, available withholding tax credits, foreign tax credits, or other form of relief which are determined by a Cabinet Decision may be deducted fromthe calculated taxpayable in the certain order and to the extent available.
What are the Losses and Tax Grouprelief?
Businesses will be allowed to offset losses of one period as against taxable income of a future period. However, the maximum loss which can be set off will be capped to 75% of the taxable income.
Furthermore, group companies which are holding at least 75%will be allowed to transfer losses from one group company to another profitable group company subject to certain conditions.
UAE group companiesmay form a Tax Group provided the conditions below are met:
- The UAE parent entity holds whether directly or indirectly minimum 95% of the share capital, voting rights and entitlement to profits and net assets;
- Have the same financial year and prepares the financial statements using the same accounting standards; and
- Neither the parent company or the subsidiary is an Exempt Person nor a Qualifying Free Zone Person.
The reason to forming a Tax Group is mainly because of reducingadministration costs, offsetting tax losses and profits within the group and inter-company balances and transactions between group entities and optimizing overall compliance and tax cost.
The CT Law has ushered in a new era of corporate taxation on UAE Businesses. However, free zone companies are still exempt should they be deemed a qualifying person.
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.