The year of 2023 is going to witness a sweep of legislative reforms in the UAE. A significant number of laws are coming into force with the new year, which will strengthen the socio-economic and political structure of the UAE and keep it at pace with the rest of the world.
What is the tax regime put forward by the UAE for 2023?
UAE is a focal point of international business and finance. Over the years, the strategic implementation of laws in the country has attracted a huge number of investors who now have long-standing businesses in the region. In order to make the country more business-friendly, the UAE is set to implement a new corporate tax regime from June 2023.
The new tax regime is based on globally accepted practices, along with the principles of fairness and equity, which will boost investment further and allow competitiveness on the international forefront.
What is corporate tax?
Corporate tax is a direct tax levied on incomes of entities who identify themselves as corporations or businesses. Businesses which are subject to corporate tax of a country are usually either incorporated within the country or run on the income generated from that country.
What is the scope of application of the new tax law?
The new tax law in the UAE, namely, Federal Decree Law No. 47 of 2022 on the Taxation of Corporations and Businesses, under Article 11, mentions the categories of people who are subject to corporate tax.
Persons taxable under the law are divided into two categories: residents and non-residents.
A resident is subject to tax under the law if:
- He is a juridical person incorporated, established, or recognized by a legislation, of the country or a Free Zone
- He is a juridical person incorporated, established, or recognized by a legislation of a foreign jurisdiction managed by the country
- He is a natural person conducting business in the country
- He is a person as determined in a Cabinet decision
A non-resident, on the other hand, is subject to tax under the new law if:
- He has a permanent establishment in the country, as under Article 14 of the law
- He derives income from the country, under Article 13 of the law
- He has a nexus within the country as determined in a Cabinet decision
How will corporate tax be levied in the UAE from June 1, 2023 onwards?
The provisions of Federal Decree Law No. 47 of 2022 are to be implemented from June 1, 2023 onwards. Businesses covered by the law will be liable to pay taxes from their financial year commencing on or after the said date.
Although not specified in the law itself, the threshold has been kept at an amount of AED 375,000, meaning that:
- Businesses having an income of up to AED 375,000 or below have a 0% tax rate.
- Businesses having an income of more than AED 375,000 are subject to 9% tax rate.
A tax rate is yet to be specified for large multinationals meeting specific criteria under "Pillar 2" of the OECD Base Erosion and Profit Shifting Project.
The Federal tax Authority (FTA) will be responsible for administrating the corporate tax regime.
Are there any exemptions under the regime?
Article 4 of the new law states the persons exempted from the tax regime:
- A government entity or an entity controlled by the government
- A person engaged in Extractive or Non-Extractive Business, as specified under the law
- Qualifying public benefit entities and qualifying investment funds
- Public pensions and social security funds
It is to be noted that exemptions can only be applied if the conditions specified in the law are fulfilled. Where a person or entity fails to comply with the required conditions, he will cease to be an exempt person, as per Article 4(5) of the Law.
Moreover, the following incomes are not taxable under the corporate tax regime:
- Dividends and profits earned by a juridical person, who is a resident
- Dividends and profits received from a participating interest in a foreign juridical person or as specified under Article 23 of the Law
- Income from a foreign public establishment
- Income of a foreign person from operating aircrafts and ships in international transportation
What are some of the key features introduced in the law?
Taxable persons are required to adhere to the "arm's length principle" when engaging in transactions and arrangements with related parties, as specified under Article 34 of the Law, and will also report on how the principle is applied.
Article 40 of the law provides for the formation of tax groups, provided they adhere to the conditions mentioned therein. The taxable incomes and losses of these groups will be determined according to the relevant provisions. Deductions of particular expenditure and reliefs are also accorded while calculating taxable income.
The new CT law also lays down the provisions regarding no gain and no loss transfers, applications for registration and deregistration, calculation and filing of tax returns, and refunds.
Will the tax be applicable in the Free Zones?
Companies operating in the Free Zones are required to be viewed as Qualifying Free Zone Persons. Accordingly, if businesses comply with the requirements of a Qualifying Free Zone Person under Article 18(1) of the Law, they will enjoy 0% corporate tax regime.
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.