Corporation Tax Explained for UK & UAE
JAMSHAID MANZOOR
CPA, CMA, MBA, IFRS, UAE Taxation Certified, Advanced Accounting Certified KHDA, Financial Management Certified CPD London, Management Accounting Expert BCC London. Group Risk Management, Taxation & IFRS Manager - UAE
Corporate Tax in UK as Source of Revenue:
Corporation tax is the fourth biggest source of revenue for the UK Treasury and is forecast to raise around ￡40?billion in 2021–22.
It is levied on the profits of companies operating in the UK?(the profits of unincorporated businesses – sole traders and partnerships?–?are subject to income tax rather than corporation tax). Companies operating in more than one country are, broadly speaking, taxed on the profits that are deemed to have arisen from UK-based assets and production activities. Different rates of corporation tax have, at various times, been applied to banking, North Sea oil and gas production, companies with small profits, and profits earned from patented technologies. The evolution of these rates is shown in the chart below.?
Corporation tax rates over time
Taxable Profits:
In broad terms, profit is revenue minus costs.
Corporation tax is charged on income from trading (i.e., from the sale of goods and services) and investments, minus day-to-day expenses (known as ‘current’ or ‘revenue’ expenditure, which includes wages, raw materials and interest payments on borrowing) and various other deductions, notably allowances for investment costs. It is also charged on capital (‘chargeable’) gains, the profit from selling an asset for more than it cost. If a company makes a loss – its costs exceed its revenue – it can, subject to restrictions, set the loss against profits it makes in other years.
While ordinarily current expenditure is deductible, research and development (R&D) tax reliefs allow companies to deduct more than 100% of qualifying current expenditure on R&D. R&D tax reliefs are more generous for small and medium-sized companies than for large companies.?
Unlike current expenditure, investment (or capital) spending on things such as machinery and buildings is not automatically deductible when calculating taxable profits. Instead, capital allowances can be used by companies to deduct their capital expenditure from taxable profits over a number of years.?
If a company sells an asset, it is taxed on any capital gain (the rise in the value of the asset since it was acquired, i.e., the proceeds of sale minus the original purchase cost). If capital allowances have been claimed for the asset, a ‘balancing adjustment’ is made to ensure that the capital gain/loss, the capital allowances and the balancing adjustment together equal the overall change in the value of the asset. So, for example, if the purchase cost of an asset has already been fully deducted through capital allowances (under the AIA, for example) then the full proceeds of sale are taxed, not just the capital gain: the purchase cost is not deducted a second time when the asset is sold.
If a company makes a loss in a given year, it cannot claim a tax refund, but it can offset the loss against profits it makes in other years, subject to various restrictions. Losses can usually be carried back by only one year (temporarily extended to three years in the wake of COVID-19) or carried forward indefinitely.
Companies are generally taxed on the profits they make over the 12 months for which they draw up their company accounts (though it can differ in some cases, notably in the first and last years of business). Most companies choose to start their accounting years in April, matching the tax year. But if a company’s accounting year straddles two tax years (e.g., it produces its accounts on a calendar-year basis) and the tax rate changes, then its profits for the accounting year are in effect taxed at a weighted average of the two tax rates according to the number of days in the accounting period before and after the tax rate change. Large companies are required to pay corporation tax in four equal instalments on the basis of their anticipated liabilities for the accounting year. Small and medium-sized companies pay their total tax bill nine months after the end of the accounting year.
UK Corporation Tax Rates:
In 2021–22, the main corporation tax rate is 19%. A reduced rate of 10% applies to profits relating to patented technologies, a policy known as the ‘patent box’. Higher rates apply to banks and to North Sea oil and gas production; we discuss these in the following sections
Main Corporation Tax Rates Over Time:
The chart above shows that the main rate of corporation tax has fallen substantially over the last four decades, from 52% in the 1970s to 19% now. The March 2021 Budget announced that in April 2023 the main rate of corporation tax will rise to 25% – that would be the first rise in the main rate of corporation tax for half a century.?
This rate increase will not apply to all companies, however. For companies with profits below ￡50,000, the rate will stay at 19% and become the ‘small profits rate’. And for companies with profits between ￡50,000 and ￡250,000 a system of ‘marginal relief’ will operate, such that an effective?marginal tax rate?of 26.5% applies on profits in excess of ￡50,000. This acts to increase the?average tax rate?gradually until it reaches 25% (see chart and table below). Only companies with profits above ￡250,000 will face the 25% main rate of tax. Operating a small profits rate and a marginal relief system adds unnecessary complexity, creates unnecessary economic distortions (why have a stronger disincentive to increase profits between ￡50,000 and ￡250,000 than above or below that range?), and cannot be justified on distributional grounds: companies with low profits are not akin to people with low incomes.
Corporation tax had a small profits rate in the past, until it was abolished in April 2015 (see chart above). However, it applied up to a much higher profit threshold: for the twenty years prior to its abolition, the small profits rate applied to profits up to ￡300,000, with marginal relief between ￡300,000 and ￡1,500,000 (the thresholds were lower before 1994).
Legislation passed in 2015 put in place the legal apparatus to devolve corporation tax rate-setting powers to Northern Ireland. The UK government committed to provide the Northern Ireland Assembly with these rate-setting powers once its finances are on a ‘sustainable footing’. In November 2015, the Northern Ireland Executive stated an intention to reduce the rate to 12.5% for most trading profits from April 2018 (in line with the rate in the Republic of Ireland), but so far, the power to do so has not actually been devolved. The process was complicated by the collapse of the Northern Ireland Executive in 2017 and other political developments, but since the restoration of power-sharing in 2020 there seems to have been little impetus to implement the devolution of corporation tax.
Taxation of Banks:
Since April 2016, banks and building societies have been subject to an 8% surcharge levied on the same base of taxable profits as corporation tax. The first ￡25?million of a bank’s taxable profits are exempt from the surcharge.?
The March 2021 Budget announced that the bank surcharge will be reviewed so that, when the main rate of corporation tax increases from 19% to 25% in 2023, ‘the combined rate of tax on the United Kingdom banking sector doesn’t increase significantly from its current level’. This appears to imply a reduction in the bank surcharge; the government said it will set out its plans in the autumn.
In addition, since January 2011, banks are subject to the bank levy. Unlike corporation tax, the bank levy is not a tax on profits. It is an annual charge on certain balance-sheet liabilities and equity of banks and building societies, such as certain customer deposits.?
Taxation of North Sea Oil and Gas:
The tax regime applied to profits derived from North Sea oil and gas production differs in a number of ways from that applied to onshore profits. Overall rates are substantially higher (as shown in?the chart at the start of this article) and there is a more generous system of capital allowances.?
The charts below show the evolution of revenue derived from the taxation of North Sea oil and gas since the introduction of the, now defunct, petroleum royalty in 1968–69. Revenue derived from North Sea production peaked in 1984–85 at just over 3% of?GDP, comprising more than 10% of total tax revenue in that year. It then declined precipitously and, after rising somewhat during the 1990s and 2000s, declined again after 2011–12 and has been close to zero since 2015–16. Much of the variation reflects changes in oil prices, but the decline since the 1980s also reflects a combination of a reduction in tax rates, declining output and, since at least 2008–09, increased levels of tax-deductible expenditure.
Revenues from North Sea oil and gas as share of GDP over time
Taxation of Multinationals:?
Where companies operate in more than one country, it is necessary to determine what profits should be taxed in the UK. Broadly speaking, the international consensus is that profits should be taxed in the country where underlying value is created (this is known as a ‘source-based’ corporation tax). As such, companies are, broadly speaking, taxed on the profits that are deemed to arise from their UK-based assets and production activities. The returns to intangible assets, which do not have a physical location – e.g., patented technologies – tend to be taxed where the owner of the asset is located, which can be different from the location where the asset was originally created.?
One implication of the source-based way we choose to tax corporate profit is that UK taxable profit is distinct from, albeit often related to, profit arising from sales to UK customers, some of which will be attributable to assets and activities outside the UK.
Manipulating transfer prices is only one way in which multinationals may seek to locate their profits in low-tax countries under a source-based tax system: there are many others. In broad terms, they all involve allocating costs to (and therefore reducing taxable profits in) high-tax countries, while allocating revenues to low-tax countries. This could be achieved by, for example, locating intellectual property in a low-tax country (and making royalty payments for its use in a high-tax country) or making a loan from a subsidiary in a low-tax country (where the interest payments received will be taxable income) to one in a high-tax country (where interest payments made will be tax-deductible).?
Over the past decade, the?OECD?has been leading on international efforts to change international tax rules and treaties in ways that help to reduce ‘base erosion and profit shifting’. There is widespread agreement on the need for reform and some progress has been made, but talks are ongoing and reaching international agreement on the specifics is difficult.
In the UK, successive governments have implemented specific new measures aimed at reducing tax?avoidance?by multinational companies, including:?
Corporation Tax Revenue and Who Pays:?
The chart below shows corporation tax revenue over time. Revenue is volatile because profits vary strongly with the economic cycle. Despite the long-term downward trend in the main rate of corporation tax, corporation tax revenue has not declined as a share of?GDP?– it has remained broadly in the range of 2–3% of?GDP?for much of the last half-century. This is because the corporate tax base has grown faster than?GDP. This reflects partly an increase in corporate profitability and partly policy changes to broaden the definition of profits subject to tax.
Corporation tax revenue as a share of GDP over time?
Corporation tax revenues are highly skewed: most revenue is raised from a small number of companies making very large profits. In 2018–19, 55% of all corporation tax was paid by companies that made a tax payment of ￡1?million or more: a group of fewer than 5,000 companies, making up just 0.3% of the population of corporation-tax-paying businesses. This is shown in the chart below.?
Corporation tax revenue also relies heavily on certain industries. Financial services in particular play an outsized role in contributing corporation tax revenue: the industry accounts for around 7% of the UK’s economic output but around 22% of corporation tax revenue (see chart below).
Characterising the companies that pay corporation tax is relatively straightforward. Much less straightforward is translating this into a picture of the economic?incidence?of the tax: which individuals ultimately bear the burden, in the sense of having their living standards reduced by the tax.?
The direct effect of corporation tax is to reduce companies’ after-tax profits and therefore the return to company shareholders (e.g., through lower dividends). This will affect not only individuals with direct shareholdings but also those who hold shares indirectly via private pensions or investment funds. In so far as shareholders bear the burden of corporation tax, a significant portion of it will fall on individuals based overseas (just over half of all shares listed on the London Stock Exchange are owned outside the UK). (Conversely, people in the UK who own shares in foreign companies will bear some of the burden of other countries’ corporation taxes.)?
However, economic theory and evidence strongly suggest that the?incidence?of corporation tax is not exclusively on shareholders. In some cases, companies will set higher prices, or pay lower wages, than they would in the absence of corporation tax, such that part of the burden of the tax will be felt by customers or workers respectively. Evidence shows that corporation tax affects how much companies invest and where they locate their real activities. To the extent that companies respond to corporation tax by doing less investment in the UK, a lower capital stock and associated lower productivity will leave UK employees with lower average wages.?
UAE Corporate Tax:
Important Notice:
This document contains information on the proposed United Arab Emirates (UAE) Corporate Tax regime and is released for the purposes of obtaining input from interested parties. It does not reflect the final view of the UAE Government, and is not intended comprehensively address all possible aspects of the proposed UAE Corporate Tax regime. The public consultation document is released in advance of relevant legislation being finalised and promulgated, and is released on the basis that it is without prejudice to the final UAE Corporate Tax regime. As such, the consultation document should not be used or relied upon to make individual or business decisions as it does not represent the final legislation.
Corporate Tax as per Federal Tax Authority – UAE ?Explained:
Corporate tax is a form of direct tax levied on the net income or profit of corporations and other entities from their business.
Corporate tax is sometimes also referred to as “Corporate Income Tax” or “Business Profits Tax” in other jurisdictions
UAE Corporate Tax will apply to all UAE businesses, except for the extraction of natural resources, which will remain subject to Emirate level corporate taxation. Foreign entities and individuals will be subject to Corporate Tax only if they conduct a trade or business in the UAE in an ongoing or regular manner.
UAE Corporate Tax will apply equally to all categories of profits and other (net) income reported in the financial statements prepared in accordance with internationally acceptable accounting standards (IAAS).
Financial Statements:
For the UAE mainland registered entities which are subject to Federal Decree-Law No. 32/2021 on Commercial Companies, they can apply International Accounting Standards and Practices which include IFRS/U.S. GAAP. For the entities registered in various free zones, they will need to follow the respective regulations of the free zone authorities. For example, for the Dubai Multi Commodities Centre (DMCC) registered entities, IFRS should be applied mandatorily as per the DMCCA Company Regulations. Further, based on the FAQs released by the UAE MoF, internationally acceptable accounting standards are permitted for the preparation of the financial statements, including IFRS.
CT should be accounted for in accordance with the requirements of the Financial Reporting Standards followed for the preparation of the financial statements (e.g., if IFRS, then under IAS 12 (Income Taxes)). The scope of external auditors will include testing the recognition and measurement, as well as disclosures with respect to income taxes.
The UAE Commercial Companies law requires all LLCs, private joint stock entities, public joint stock companies and foreign branches to issue audited financial statements. In addition to this, free zones such as DMCC and JAFZA, require audited financial statements to be submitted to the free zone authority within a stipulated time after the year-end.
Definitions:
Natural Persons:
The UAE CT regime will be implemented without a parallel tax on the income of natural persons, namely individuals. In order to level the playing field between incorporated businesses and unincorporated businesses owned by individuals; UAE CT will also apply to natural persons engaged in a business or commercial activity in the UAE. This will include sole establishments or proprietorships and individual partners in an unincorporated partnership that conducts business in the UAE. Similar approaches are taken in other jurisdictions without parallel taxes on personal income from a business.
Whether an individual is engaged in a business that is subject to UAE CT would generally depend on whether the activity requires the individual to obtain a commercial licence or equivalent permit from the relevant competent authority (e.g., the relevant Department of Economic Development or registration authority of a Free Zone) in the UAE.
Employment income and other personal income earned by UAE and foreign individuals such as dividends, rental receipts from UAE real estate investments, and other investment income will not be within the scope of the proposed UAE CT regime. The same treatment is intended to apply where UAE real estate and other investments are held through a private or family trust on behalf of beneficiaries that are natural persons.
Legal Persons:
UAE CT will apply to UAE companies and other legal persons incorporated in the UAE, as
well as to foreign legal entities that have a permanent establishment in the UAE or that earn UAE sourced income.
Legal persons include Limited Liability Companies, Private Shareholding Companies, Public Joint Stock Companies, and other entities established under the laws of the UAE that have separate legal personality. For the application of UAE CT, legal persons incorporated in a foreign jurisdiction that are effectively managed and controlled in the UAE will be treated as if they were UAE incorporated entities.
Limited and general partnerships and other unincorporated joint ventures and associations of persons will be treated as ‘transparent’ for UAE CT purposes.
This means that they will not be taxpayers in their own right, but their income will instead ‘flow through’ and be taxed in the hands of the partners or members only. This flow-through treatment is widely recognised and accepted internationally, and also ensures tax neutrality for investors in collective investment funds that are often structured as limited partnerships.
Investing in and through unincorporated partnerships in a cross-border context can create difficulties and unintended tax consequences where one country treats the partnership as a transparent entity, and the other country taxes the partnership as if it were a company.
To align the tax treatment of partnerships in a cross-border context, the UAE CT treatment of foreign unincorporated partnerships would generally follow the tax treatment of the partnership in the respective foreign jurisdiction.
Limited liability partnerships, partnerships limited by shares and other types of partnerships, where none of the partners have unlimited liability for the partnership’s obligations or other partners’ actions will be subject to UAE CT in the same manner as a UAE company.
Exempt Persons:
The following persons will be exempt from UAE CT, either automatically or by way of
application:
1. The Federal and Emirate Governments and their departments, authorities and other
public institutions.
2. Wholly Government-owned UAE companies that carry out a sovereign or mandated
activity, and that are listed in a Cabinet Decision.
3. Businesses engaged in the extraction and exploitation of UAE natural resources that
are subject to Emirate-level taxation (see section 3.5);
4. Charities and other public benefit organisations that are listed in a Cabinet Decision
5. Public and regulated private social security and retirement pension funds;
6. Investment funds, subject to meeting the conditions.
Government and Government Owned Entities:
While the activities of the Government would typically be non-commercial in nature, the Government may conduct commercial activities either by themselves or in association with third parties. Any business activity carried out directly by the Government under a trade licence will be within the scope of the UAE CT regime.
Wholly Government-owned UAE companies that carry out a sovereign or mandated activity are essentially an extension of the Government, with the relevant activity segregated from those of the Government for management and accountability purposes. Accordingly, these companies will be outside the scope of UAE CT insofar of their sovereign or mandated activity. The UAE CT regime will allow UAE subsidiaries of these Government-owned companies that undertake part or whole of the sovereign or mandated activity or ancillary activities to apply for an exemption from UAE CT.
Natural Resources:
Oil, natural gas, water and deposits of sand and rocks are the primary natural resources in the UAE. The production and exploitation of these natural resources make up an important part of the UAE economy.
Under the Constitution of the UAE, the natural resources belong to the Emirate where the resources are found. Accordingly, any (share of) income from the extraction and exploitation of natural resources directly earned by the Government, or royalties and other fiscal levies raised by the Government from the extraction or production of natural resources by private sector companies will be outside the scope of the UAE CT regime.
The extraction and exploitation of natural resources is often done by companies that are wholly or partially privately owned under long-term concession agreements entered into with the respective Emirate Government. These contracts generally provide that the profits earned by such companies are subject to Emirate-level taxation.
Acknowledging the long-term nature of natural resource contracts and the often-significant capital commitments made by the concession holders, the UAE CT regime intends to exempt the income earned by companies engaged in the extraction and exploitation of natural resources that are subject to Emirate-level taxation. This exemption from UAE CT will not extend to any suppliers, contractors or subcontractors used by the concession holder.
Charities and Public Benefit Organisations:
The UAE actively promotes corporate social responsibility, volunteering activities and community service, and is the home of many philanthropic and public benefit organisations.
These organisations play an important role by taking a shared responsibility with the Government for the promotion of social or public welfare, or communal or group interests.
To support organisations formed for carrying out social, cultural, religious, charitable or other public benefit activities, they can apply to the Ministry of Finance to be exempt from UAE CT. If the application is approved, the organisation will be listed in a Cabinet Decision to be issued at the request of the Minister of Finance. Whether an organisation qualifies for a CT exemption is at the discretion of the Ministry of Finance. However, no exemption from UAE CT will be available to organisations that undertake commercial activities that are not directly related to their stated purpose, or whose income and donations are or may be used for the personal gain of persons associated with the organisation (e.g., the founders and fiduciaries). Approved charities and public benefit organisations will need to comply with periodic information reporting obligations throughout their existence.
Investment Funds:
The UAE has continued to achieve success and strengthen its position as a leading asset and wealth management hub, and the destination of choice in the region for the financial services sector. The sector is an important pillar of the UAE economy.
The UAE offers comprehensive investment fund regimes and fund vehicles that cater to a wide variety of fund manager and investor requirements. The introduction of CT presents an opportunity to further increase confidence from international investors and bolster the UAE’s position as the location of choice for investment funds, investment fund managers, and entities used by investment funds to hold their assets or invest their funds.
Investment funds are commonly organised as limited partnerships (as opposed to corporate entities) to ensure tax neutrality for their investors. This tax neutrality follows from the fact that most countries treat limited partnerships as transparent (‘flow through’) for domestic and international tax purposes, which puts investors in the fund in a similar tax position as if they had invested directly in the underlying assets of the fund; the UAE CT regime intends to treat UAE and foreign investment funds that are structured as unincorporated partnerships as fiscally transparent.
Further, regulated investment funds and Real Estate Investment Trusts can apply to the Federal Tax Authority (FTA) to be exempt from UAE CT subject to meeting certain requirements.
Main requirements for an Investment Fund to be exempt from UAE CT:
Free Zones:
1.????Free Zones are an important part of the UAE economy and have been central to achieving the country’s aim of encouraging foreign direct investment and enhancing the ease of doing business.
2.????Whilst companies and branches that are registered in a Free Zone (hereafter referred to as “Free Zone Persons”) will be within the scope of the UAE CT and subject to tax return filing requirements, the UAE CT regime will honour the tax incentives currently being offered to Free Zone Persons that maintain adequate substance and comply with all regulatory requirements.
3.????In line with the original intention and purpose of Free Zones, a Free Zone Person can benefit from a 0% CT rate on income earned from transactions with businesses located outside of the UAE, or from trading with businesses located in the same of any other Free Zone. The 0% CT rate may also apply to income from certain regulated financial services directed at foreign markets.
4.????A Free Zone Person that has a branch in mainland UAE will be taxed at the regular CT rate on its mainland sourced income, whilst continuing to benefit from the 0% CT rate on its other income.
5.????Where a Free Zone Person transacts with mainland UAE but does not have a mainland branch, the Free Zone Person can continue to benefit from the 0% CT rate if its income from mainland UAE is limited to ‘passive’ income. This would include interest and royalties, and dividends and capital gains from owning shares in mainland UAE companies.
6.????The UAE wishes to maintain its status as the leading regional hub and headquarter location and, therefore, the 0% CT regime will also apply to transactions between Free Zone Persons and their group companies located in mainland UAE. However, to ensure the CT neutrality of such transactions, payments made to the Free Zone Person by a mainland group company will not be a deductible expense.
7.????Finally, a Free Zone Person located in a Designated Zone for Value Added Tax (VAT) purposes can benefit from the 0% CT rate on income from the sale of goods to UAE mainland businesses that are the importer of record of those goods.
8.????To prevent Free Zone businesses from gaining an unfair competitive advantage compared to businesses established in mainland UAE, any other mainland sourced income will disqualify a Free Zone Person from the 0% CT regime in respect of all their income.
9.????A Free Zone Person will at any point in time be able to make an irrevocable election to be subject to the regular CT rate.
10.?Where a Free Zone Person benefits from the 0% CT regime in respect of mainland sourced income, such income will be within the scope of withholding tax (to be applied at 0%).
Who will be subject to UAE CT:
Basis of Taxation:
This section sets out the proposed basis of taxation under the UAE CT regime.
Residents:
1.????Residency is a key determinant of whether business profits will be subject to CT in the UAE.
2.????A legal person that is incorporated in the UAE will automatically be considered a ‘resident’ person for UAE CT purposes. Equally, any natural person who is engaged in a business or commercial activity in the UAE, either in their own name or through an unincorporated partnership, will also be considered a resident person for purposes of the UAE CT regime.
3.????A foreign company may be treated as a resident person if it is effectively managed and controlled in the UAE. Determining whether an entity is effectively managed and controlled in the UAE is a question of fact, but would typically look at where the directors or other decision makers of the company make the key management and commercial decisions.
4.????UAE resident persons will be taxable in the UAE on their worldwide income, which for a natural person will be limited to the income earned from their business activity carried out in the UAE. However, certain income earned from overseas will be exempt from CT, including income from foreign branches and qualifying foreign shareholdings. Further details of these exemptions are set out in section 5 of this document.
5.????Where income earned from abroad is not exempt, income taxes paid in the foreign jurisdiction can be taken as a credit against the CT payable in the UAE on the relevant income to prevent double taxation.
Non-Residents:
Non-residents will be subject to UAE CT on:
● Taxable income from their Permanent Establishment in the UAE; and
● Income which is sourced in the UAE.
Permanent Establishment (PE):
1.????The concept of PE is an important principle of international tax law used in CT regimes across the world.
2.????The main purpose of the PE concept is to determine if and when a company has established sufficient presence in a foreign country to warrant the direct taxation of the business profits of the company in that country. Generally, a country only has the right to tax the business profits of a foreign company if that company has a PE in that country.
3.????The PE concept under the proposed UAE CT regime has been designed on the basis of the OECD Model Tax Convention. Article 5 of the OECD Model Tax Convention sets out internationally recognised principles for determining what constitutes a PE, which will form the basis for determining a PE under the UAE CT regime.
4.????This approach allows foreign companies to use the extensive OECD Commentary on Article 5 when assessing whether they have a PE in the UAE, and the outcome of this assessment should typically be aligned with the position where there is a double tax treaty in place between the country of the foreign company and the UAE (as the UAE’s double tax treaties are generally based on the OECD Model Tax Convention).
5.????The activity threshold that will trigger a PE for a foreign company in the UAE will be determined by the following two main tests:
● Fixed place of business test
● Dependent agent test
Fixed Place of Business Test:
1.????A foreign company will have a PE in the UAE if it has a “fixed place” in the UAE through which the business of the foreign company is wholly or partly carried on.
2.????A fixed place of business will include a place of management, a branch, an office (including a temporary field office or an employee’s home office), a factory, a workshop, real property, and a building site where activities are carried on for over 6 (six) months. Installations and structures used in the exploration of natural resources, as well as mines, oil or gas wells, quarries and other places of extraction of natural resources will also be considered PEs.
3.????No PE may arise if the activities carried out through the “fixed place” in the UAE are preparatory or auxiliary in nature. Generally, preparatory or auxiliary activities are those performed in preparation or in support of more substantive business activities of the foreign company. Examples of preparatory and auxiliary activities include limited marketing and promotional activities, performing market research and attending seminars or conventions.
4.????A fixed or permanent place in the UAE may also not be considered a PE if it is used only to store, display or deliver the foreign company’s goods or keeping a stock of goods with the sole purpose of making them available to another person for processing.
Dependent Agent Test:
1.????In the absence of a “fixed place of business” in the UAE, the activities of a so-called "dependent agent" in the UAE could still create a PE for a foreign company in the UAE.
2.????The “dependent agent test” may be met where business travellers or UAE based persons act on behalf of the foreign company in the UAE and have, and habitually exercise, the authority to conclude contracts in the name of foreign company. This includes situations, where the person negotiates or concludes contracts in the UAE on behalf of the foreign company without material intervention from the non-resident company.
3.????A PE would not arise where a person carries on the foreign company’s business in the UAE in the ordinary course of their own business. This so-called independent agent exclusion would only apply where the person does not work exclusively for the foreign company and is truly legally and economically independent from the foreign company.
4.????The same PE rules and principles will apply to determine whether a Free Zone Person has a PE in mainland UAE.
Investment Manager Exemption:
1.????Considering the UAE’s position as a leading investment and wealth management centre, the UAE CT regime will allow regulated UAE investment managers to provide discretionary investment management services to foreign customers without triggering a UAE PE for the foreign investor or the foreign investment fund. This exemption will be subject to conditions that are comparable to similar regimes in leading financial centres.
UAE Sourced Income:
1.????UAE sourced income earned by a foreign person that does not have a PE in the UAE will be subject to withholding tax at a rate of 0% (zero percent).
2.????The UAE CT regime will have specific rules and guidance to determine whether income has a source in the UAE . However, income will generally be considered UAE sourced if the income is earned from a UAE resident person, if the payment is attributed to a PE in the UAE of a foreign company, or if the income is derived from activities or contracts performed in the UAE, assets located in the UAE, or rights used for economic purposes in the UAE.
3.????The same principles will be applied to determine if a Free Zone Person earns income from a source in mainland UAE.
Calculation of Taxable Income:
1.????This section sets out the proposed approach to determining the amount of income that will be subject to tax under the UAE CT regime.
2.????Basis of calculating taxable income.
3.????To reduce complexity and compliance costs, the UAE CT regime proposes to use the accounting net profit (or loss) as stated in the financial statements of a business as the starting point for determining their taxable income.
4.????Using accounting standards provides for a common definition of income, which reduces compliance costs and provides a base which follows international standards. Aligning the calculation of taxable income to accounting profits (where possible and appropriate) limits book-tax differences and prevents businesses from having to maintain two sets of records: one for financial reporting purposes and the other for CT purposes.
5.????The financial statements should be prepared using accounting standards and principles that are acceptable in the UAE, and businesses will use their financial accounting period as their (annual) tax period. Where a business does not have a financial accounting period, their default tax period will be the Gregorian calendar year.
6.????Although International Financial Reporting Standards are commonly used in the UAE, consideration is being given to allowing alternative financial reporting standards and mechanisms for determining taxable income to accommodate and reduce the compliance costs for certain taxpayers (e.g., start-ups and small businesses).
7.????Treatment of unrealised gains and losses.
8.????Unrealised gains or losses arise in instances where an asset or liability held by a business has changed in value but no transaction to generate a gain or loss has yet taken place. For example, when a business property increases in value, but the property is not sold, the gain would be unrealised. These gains or losses may be recorded for accounting purposes even though they are not yet realised.
9.????The UAE CT will have specific rules to determine whether an unrealised gain or loss should be taken into account when calculating taxable income. These relate to whether the gain or loss is related to capital items or revenue items.
10.?Capital items are items that have a long-term impact on a business. They include assets, such as machinery, and long-term liabilities, such as loans to buy property. Unrealised gains or losses on capital items are not taken into account when calculating taxable income.
11.?Revenue items are items that have a short-term impact on a business. Revenue assets are items other than capital items, and can include items such as the goods a business sells. Unrealised gains or losses on revenue items will need to be taken into account when calculating taxable income.
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Exempt Income:
1.????UAE resident companies will be subject to UAE CT on their worldwide income, including capital gains.
2.????However, to avoid instances of double taxation, and recognising the UAE’s position as an international business hub and leading holding company location, the UAE CT regime will exempt certain forms of income from taxation.
3.????The main exemptions from UAE CT relate to income earned by UAE companies from investments in other companies, and from operations conducted outside the UAE through foreign subsidiaries or foreign branches.
Exemption for Dividends and Capital Gains:
1.????In line with many other countries and leading international financial centres, a UAE corporate shareholder will generally be exempt from CT on dividends received, and capital gains earned from the sale of shares of a subsidiary company. The purpose of this so[1]called participation exemption is to avoid double taxation of corporate profits, first when they are earned by the subsidiary company and second when the profits are distributed to, or the shares in the subsidiary company are sold by, the UAE shareholder company.
2.????The proposed UAE CT regime will exempt all domestic dividends earned from UAE companies, including dividends paid by a Free Zone Person those benefits from the 0% CT regime.
3.????Dividends paid by foreign companies, and capital gains from the sale of shares in both UAE and foreign companies will also be exempt from CT, provided certain conditions are met.
4.????The main condition to benefit from the participation exemption is that the UAE shareholder company must own at least 5% of the shares of the subsidiary company. Further, to prevent income from being shifted to a subsidiary in a no- or low-tax country, the participation exemption will only be available if the foreign subsidiary is subject to CT (or an equivalent tax) at a rate of at least 9%.
5.????Despite benefitting from a 0% CT rate, capital gains on the disposal of shares in a Free Zone Person will be exempt from CT where the Free Zone Person is a holding company and substantially all of its income is derived from shareholdings in subsidiary companies that meet the participation exemption conditions discussed above.
Foreign Branch Profit Exemption:
1.????UAE businesses may structure their foreign operations either through a foreign subsidiary or through a foreign branch. A foreign branch would typically constitute a PE in the foreign country and be subject to CT (or an equivalent tax) on its profits in that foreign country.
2.????The main difference between operating abroad through a foreign subsidiary or a foreign branch is that a subsidiary is a separate legal entity, with its own books and records, and transactions between the UAE parent company and its foreign subsidiary would generally be clearly documented and recorded.
3.????A branch, on the other hand, is not a separate legal entity but an extension of its parent company. No separate financial statements may need to be prepared and many of the transactions of the branch would be transactions of the parent company with itself, which complicates determining the ‘stand-alone’ financial results of the foreign branch.
4.????Recognising the potential complexities associated with attributing income and expenses to foreign branches, UAE companies can either (i) claim a foreign tax credit for taxes paid in the foreign branch country, or (ii) elect to claim an exemption for their foreign branch profits.
5.????The election to claim a branch profit exemption is proposed to apply to all foreign branches of the UAE company, and will be irrevocable. An exemption for foreign branch profits may not be available where the foreign branch is not subject to a sufficient level of tax in the foreign jurisdiction in which it is located.
Other Exempt Income:
1.????As a major logistics centre and international travel hub, the UAE CT regime will exempt income earned by a non-resident from operating or leasing aircraft or ships (and associated equipment) used in international transportation, provided the same tax treatment is granted to a UAE business in the relevant foreign jurisdiction under the reciprocity principle.
Expense Deduction Limitations:
The calculation of taxable income will largely follow accounting rules, but the UAE CT regime will disallow or restrict the deduction of certain specific expenses. This is to ensure that relief can only be obtained for expenses incurred for the purpose of generating taxable income, and to address possible situations of abuse or excessive deductions.
Interest Capping Rules:
1.????While some minimum level of share capital or equity reserves may be required under UAE company regulations, business owners will generally have flexibility as to how they finance their business.
2.????Interest and other similar financing costs are considered a cost of doing business and will accordingly be deductible for UAE CT purposes. However, the deductibility of interest and other similar financing costs could give rise to opportunities to erode the UAE CT base and arbitrage the UAE CT regime unless appropriate measures are in place (see below). An obvious example of tax arbitrage would include the reduction of taxable profits through the use of deductible interest payments, where the recipient of the interest income is not taxed (e.g., an individual shareholder or a Free Zone Person).
3.????To prevent the different tax treatment of equity and debt being exploited through the use of excessive levels of debt, the proposed UAE CT regime will cap the amount of net interest expense that can be deducted to 30% of a business’ earnings before interest, tax, depreciation, and amortisation (EBITDA), as adjusted for CT purposes. This is in line with the interest limitation rules proposed by Action 4 of the OECD's Base Erosion and Profit Shifting project which have been implemented by countries around the world.
4.????To reduce the administrative burden, businesses may be allowed to deduct up to a certain amount of net interest expenditure (safe harbour or de minimis amount) irrespective of the interest deductibility limit based on the EBITDA rule.
5.????Recognising that different industries have different capital needs and risk profiles, the interest capping rules will not apply to banks, insurance businesses, and certain other regulated financial services entities. Additionally, the interest capping rules will also not apply to businesses carried on by natural persons.
6.????Consideration is being given to allowing businesses that are a part of a consolidated group to apply a different interest capping threshold by reference to the group’s overall position.
7.????In addition to requiring interest paid on related party borrowings to be at arm’s length, where such borrowings are used for certain specific intra-group transactions (e.g., to pay a dividend or capitalise a group company), related party interest will only be deductible if there is a valid commercial reason for obtaining the loan. A valid commercial reason will be considered to exist if the related party lender is subject to CT (or an equivalent tax) of at least 9% on the interest income earned.
Non-Deductible Expenses:
1.????Related party payments made to a Free Zone Person that is taxed at 0% on receipt of the income will not be deductible for CT purposes. However, the related party will be allowed to claim a deduction if the payment is attributed to a mainland branch of the Free Zone Person.
2.????Businesses will be allowed to deduct up to 50% of expenditure incurred to entertain customers, shareholders, suppliers and other business partners, to acknowledge that these types of expenses often also have non-business or personal element.
3.????No deduction will be allowed for certain specific other expenses such as administrative penalties, recoverable VAT, and donations paid to an organisation that is not an approved charity or public benefit organisation.
Losses:
1.????Businesses typically have variations in profit levels over time, and it is not uncommon for a business to incur losses during the start-up phase or because of market circumstances.
2.????A fundamental principle behind the UAE CT regime is that CT is meant to be paid on the total profit of a business over its entire life cycle, as opposed to a single financial period.
3.????Accordingly, and in line with international best practices, a business will be able to offset a loss incurred in one period against the taxable income of future periods, up to a maximum of 75% of the taxable income in each of those future periods.
4.????Tax losses can be carried forward indefinitely provided the same shareholder(s) hold at least 50% of the share capital from the start of the period a loss is incurred to the end of the period in which a loss is offset against taxable income. If there is a change in ownership of more than 50%, tax losses may still be carried forward provided the same or similar business is carried on by the new owners.
5.????The continuity of shareholder or business requirements do not apply to businesses that are listed on a recognised stock exchange.
No Tax Loss Relief will be available for the following Losses:
● Losses incurred before the effective date of CT;
● Losses incurred before a person becomes a taxpayer for UAE CT purposes;
● Losses incurred from activities or assets which generate income that is exempt from
UAE CT; or
● Losses incurred by a Free Zone Person that are not attributable to a PE in the
mainland.
Groups:
1.????Large businesses often conduct their operations through a group of companies, which has a parent company and a number of subsidiaries. These group structures are generally formed to limit or ring fence liabilities associated with certain activities, and facilitate the reporting and management of different business lines.
2.????Operating through a group of companies can increase the overall tax compliance cost where each entity needs to report their taxable income on a stand-alone basis, and can result in a higher effective tax rate for the group where some companies are profit making and others make losses.
3.????To address the above concerns, the UAE CT regime will allow full consolidation for tax purposes (tax grouping) for essentially wholly-owned groups of companies, and the transfer of losses between group companies that are 75% or more commonly owned.
Tax Groups:
1.????A UAE resident group of companies can elect to form a tax group and be treated as a single taxable person if the parent company holds at least 95% of the share capital and voting rights of its subsidiaries. To form a tax group, neither the parent company nor any of the subsidiaries can be an exempt person or a Free Zone Person those benefits from the 0% CT rate, and all group members must use the same financial year.
2.????A subsidiary can also be part of the tax group if it is owned indirectly by the parent company and other subsidiaries own at least 95% of its shares, or if it is a UAE branch of the parent company or one of its subsidiaries.
3.????To form a tax group, a notice signed by the parent company and all subsidiaries will need to be submitted to the FTA. Additional subsidiaries can join an existing tax group by following the same process.
4.????Once formed, the tax group is treated as a single taxable person, with the parent company responsible for the administration and payment of CT on behalf of the tax group. To determine the taxable income of the tax group, the parent company will have to consolidate the financial accounts of each subsidiary for the relevant tax period, and eliminate transactions between the parent company and each subsidiary group member (and amongst the subsidiary group members).
5.????For the period during which the entities are members of the tax group, the parent company and each subsidiary will be jointly and severally liable for the group’s CT. This joint and several liability can be limited to one or more named members of the tax group, with approval from the FTA.
Transfer of Losses:
1.????For groups of companies that do not meet the minimum 95% common ownership requirement or that do not want to form a tax group, the UAE CT regime can allow a transfer of tax losses from one group company to another group company with profits, provided certain conditions are met.
2.????As the transfer of losses would result in a transfer of value from the loss company to the profitable company, one of the main conditions for availing group loss relief will be that the UAE group companies are at least 75% commonly owned, and no loss transfers will be allowed from companies that are exempt or that benefit from the 0% Free Zone CT regime.
3.????The total tax loss offset will not be able to exceed 75% of the taxable income of the company receiving the transferred losses in the relevant period.
Group Relief:
1.????Businesses organise and reorganise their affairs to improve operational efficiencies, adapt to economic changes or achieve other business objectives.
2.????In the absence of targeted tax rules, undertaking restructuring or reorganisation within a group could result in a tax liability arising on the realisation of gains on assets or liabilities being transferred. This is considered undesirable given there is no change in the ultimate ownership of the business or assets being transferred.
3.????Recognising the importance of allowing businesses to reorganise themselves without triggering an unnecessary tax charge, the proposed UAE CT regime will allow for an exemption or deferral of CT in respect of the transfer of assets or liabilities between members of a group. In addition, the CT regime will allow certain corporate reorganisation transactions (e.g., mergers) to be undertaken on a tax neutral basis, such that no taxable gain or loss arises.
Intra-Group Transfer of Assets and Liabilities:
1.????Intra-group transfer relief will be available for transfers of assets and liabilities between UAE resident companies that are at least 75% commonly owned, provided the assets and/or liabilities being transferred remain within the same group for a minimum of three years.
2.????Where intra-group relief is claimed, the relevant assets and liabilities will be treated as being transferred at their tax net book value, so that neither a gain nor a loss needs to be taken into account when calculating the taxable income of the transferor and the transferee company.
3.????Where the relevant conditions for intra-group relief do not continue to be met, any gain or loss that would have arisen upon the initial transfer will need to be calculated and included in the transferor’s tax return in the tax period in which the conditions ceased to be met.
Restructuring Relief:
1.????To facilitate mergers, spin-offs and other corporate restructuring transactions, the UAE CT regime will exempt or allow for a deferral of taxation where a whole business, or independent parts of a business, are transferred in exchange for shares or other ownership interests.
2.????An example of a qualifying restructuring transaction is where a natural person who undertakes a business contributes his business to a newly established company in exchange for shares in the company. The natural person will get an exemption from CT in respect of any gain on the transfer, and the acquiring company will continue with the transferor’s existing tax basis in the transferred assets and liabilities.
3.????Similar to intra-group relief, assets and liabilities being transferred as part of a qualifying restructuring will be treated as being transferred at their tax net book value, so that neither a gain nor a loss needs to be taken into account when calculating taxable income.
4.????Any restructuring relief will be ‘clawed back’ if within three years of the restructuring, there is a subsequent transfer of the business to a third party . In this situation, any gain or loss that would have arisen upon the initial transfer would need to be calculated and included in the tax return for the tax period of the third-party disposal.
Transfer Pricing:
1.????This section sets out the proposed treatment under the UAE CT regime of transactions between related parties.
2.????The UAE CT regime will have transfer pricing rules to ensure that the price of a transaction is not influenced by the relationship between the parties involved. In order to achieve this outcome, the UAE will apply the internationally recognised “arm’s length” principle to transactions and arrangements between related parties and with connected persons.
Related Parties:
1.????A related party is an individual or entity who has a pre-existing relationship with a business that is within the scope of the UAE CT regime through ownership, control or kinship (in the case of natural persons).
2.????There are different rules for determining whether parties involved in a transaction are considered “Related Parties” for UAE CT purposes. These are summarised below.
Connected Persons:
1.????The absence of a personal income taxation in the UAE can generate incentives for individual owners of taxable businesses to erode the UAE CT base by making excessive payments to themselves or persons connected with them.
2.????Accordingly, payments or benefits provided by a business to its “Connected Persons” will be deductible only if the business can demonstrate that the payment or benefit:
● corresponds with the market value of the service provided; and
● is incurred wholly and exclusively for the purposes of the taxpayer’s business.
3.????Connected Persons are different from Related Parties. A person will be considered as connected’ to a business that is within the scope of the UAE CT regime if he or she is:
Arm’s Length Principle:
1.????All Related Party transactions and transactions with Connected Persons will need to comply with transfer pricing rules and the arm’s length principle as set out in the OECD Transfer
Pricing Guidelines:
2.????In order for a transaction or arrangement between Related Parties or with a Connected Person to meet the arm’s length standard, the results of the transaction or arrangement must be consistent with what the results would have been if they had been between parties that are not related to each other.
3.????The arm’s length price will need to be determined using one of a set number of internationally recognised transfer pricing methods, or a different method where the business can demonstrate that the specified methods cannot be reasonably applied to determine an arm’s length result.
Transfer Pricing Documentation Requirements:
4.????Where relevant, the business will be required to submit a disclosure containing information regarding their transactions with Related Parties and Connected Persons.
5.????A business will also need to maintain a master and local file (with format and content consistent with the requirements prescribed under OECD BEPS Action 13) where the arm’s length value of their Related Party transactions exceeds a certain threshold in the relevant tax period.
Calculation of CT Liability:
1.????This section sets out the proposed approach to calculating the CT payable by a business, and how such CT liability may be satisfied.
2.????Applicable CT rates
CT will be charged on the annual taxable income of a business as follows:
● 0%, for taxable income not exceeding AED 375,000; and
● 9%, for taxable income exceeding AED 375,000; or
Small Business Relief:
1.????A certain level of complexity is unavoidable in a CT regime for a diversified and innovative economy such as the UAE, but the Ministry of Finance intends to keep the UAE CT regime as simple as possible to minimise the compliance cost for business.
2.????While larger businesses would generally incur a higher absolute cost in complying with their UAE CT obligations, in many tax systems around the world, the relative burden of tax compliance is disproportionately higher for small and medium-sized businesses. In fact, in many countries, the majority of the overall tax compliance cost is incurred by small (including micro) businesses.
3.????In order to support start-ups and small businesses in the UAE, and to manage the compliance burden on these taxpayers, the UAE CT regime intends to provide relief for small businesses in the form of simplified financial and tax reporting obligations.
Withholding Tax:
1.????Given the position of the UAE as a global financial centre and an international business hub, a 0% (zero percent) withholding tax will apply on domestic and cross-border payments made by UAE businesses.
2.????The following income shall be subject to 0% withholding tax:
● UAE sourced income earned by a foreign company that is not attributable to a PE in
the UAE of that foreign company;
● Mainland UAE sourced income earned by a Free Zone Person those benefits from the 0% CT regime, unless the income is attributable to a mainland branch of that Free Zone Person; and
● Dividends and other profit distributions made by a Free Zone Person those benefits from the 0% CT regime to a mainland UAE shareholder in the Free Zone Person.
3.????Given the rate of withholding tax is proposed to be at 0%, UAE businesses will not be
required to make any deductions from payments made, nor will there be an obligation to file withholding tax returns.
Calculation of CT Payable:
1.????The amount of CT payable will be based on the taxable income for the relevant financial period (tax period).
2.????The table below highlights the key components of how the UAE CT payable will be Determined:
Tax Credits:
1.????As discussed in section 4.1, UAE resident companies will be subject to UAE CT on their worldwide income, which includes foreign sourced income that may have been subject to tax of a similar nature to CT by another country.
2.????To avoid double taxation, the UAE CT regime will allow a credit for the tax paid in a foreign jurisdiction against the UAE CT liability on the foreign sourced income that has not been otherwise exempted. This is known as “Foreign Tax Credit”.
3.????The maximum Foreign Tax Credit available will be the lower of:
● The amount of tax that paid in the foreign jurisdiction; or
● The UAE CT payable on the foreign sourced income.
4.????Any unutilised Foreign Tax Credit will not be able to be carried forward or back to other tax periods, nor will the FTA refund any unutilised Foreign Tax Credit.
International Tax Developments:
1.????This section sets out the proposed approach by the UAE to respond to international tax developments.
Background:
1.????After announcing the 15 actions that came out of the original Base Erosion and Profits Shifting (BEPS) project in 2015 to address instances of profit shifting and tax avoidance, the OECD and the G20 Inclusive Framework (Inclusive Framework) have continued their efforts to address the remaining BEPS issues and the tax challenges arising from the digitalisation of the economy. This initiative is commonly referred to as BEPS 2.0.
2.????BEPS 2.0 has two parts or pillars, namely, Pillar One and Pillar Two. Pillar One is focused on the reallocation of (a portion of) the consolidated profit of a multinational enterprise to jurisdictions where sales arise as well as the standardisation of the remuneration of routine marketing and distribution activities. Pillar Two, on the other hand, introduces a global minimum effective tax rate of 15%.
3.????In October 2021, the UAE and over 130 other countries reached an agreement on BEPS 2.0.
4.????The introduction of a CT regime in the UAE will provide a basis for the UAE to execute its support of the global minimum effective tax rate as proposed under Pillar Two, and more broadly its commitment to enhancing tax transparency and preventing harmful tax practices.
How the UAE would reflect its commitment to Pillar Two in its domestic CT regime?
The UAE is working with other members of the Inclusive Framework to implement the Pillar
Two Proposals:
1.????As the work is ongoing at the Inclusive Framework level, further announcements on how the Pillar Two rules will be embedded into the UAE CT regime will be made in due course.
2.????Other international reporting obligations
3.????One of the actions coming out of the original BEPS project requires all large multinational enterprises to prepare a country-by-country (CbC) report with data on the global allocation of income, profit, taxes paid and economic activity among tax jurisdictions in which it operates.
4.????In the UAE, CbC reporting requirements were introduced effective from the financial year starting on or after 1 January 2019. The introduction of the UAE CT regime will not impact the existing CbC reporting requirements and relevant regulations.
Administration:
This section sets out the proposed compliance requirements under the UAE CT regime.
1.??????????????Registration and deregistration
2.??????????????A business subject to CT will need to register with the FTA and obtain a Tax Registration Number within a prescribed period. The FTA can also automatically register a business for CT purposes if the person does not voluntarily do so.
3.??????????????Where a business ceases to be subject to the CT (e.g., due to cessation or liquidation of the business), it will need to apply to the FTA to be deregistered for CT purposes within three (3) months from the date of cessation.
4.??????????????The FTA will only deregister a person where the FTA is satisfied that the person has filed CT returns and settled all CT liabilities and penalties (if any) due for all periods up to and including the date of cessation.
5.??????????????Where a person does not apply for deregistration within the time limits or comply with the payment and filing obligations, the FTA may deregister the person based on available information.
6.??????????????Filing, payment and refund
7.??????????????In order to keep the administrative burden on taxpayers to a minimum, a business will only need to prepare and file one tax return and other related supporting schedules with the FTA for each tax period. There will be no requirement for a business to file a provisional CT return and make advance payments of CT.
8.??????????????Each tax return and related supporting schedules will need to be submitted to the FTA within nine (9) months of the end of the relevant Tax Period. For additional documentary support that may need to be provided to the FTA.
9.??????????????Payments to settle a taxpayer’s CT liability for a Tax Period will need to be made within nine (9) months of the end of the relevant Tax Period. Where a taxpayer can demonstrate that a CT refund may be due, the taxpayer can apply to the FTA to request a refund.
10.???????????The table below illustrates the CT filing and payment deadlines for businesses with financial year ends of 31 March, 30 June and 31 December:
Assessment:
1.????The UAE CT regime will be based on a self-assessment principle. This means that a business is responsible for ensuring that the tax return and any supporting schedules submitted to the FTA are correct, complete and comply with the UAE CT law.
2.????To ensure the integrity of the CT regime, the FTA may review a CT return filed and may issue an assessment within the timeframe prescribed in the Tax Procedures Law.
3.????A taxpayer may challenge an amended assessment issued by the FTA via the processes and procedures outlined in the Tax Procedures Law.
Clarifications:
1.????Clarity around how to comply with CT is essential for a well-functioning CT regime. Therefore, where there is uncertainty in relation to a proposed or entered into arrangement or transaction, a business may apply to the FTA for a clarification with regards to the correct or intended CT treatment.
2.????Provided the facts and circumstances outlined in a clarification continue to apply, a clarification would be binding on the FTA.
Documentation Requirements:
1.????A business will be required to maintain financial and other records that explain the information contained within the CT return and other documents submitted to the FTA. Certain exempted persons will also be required to maintain records to allow the FTA to ascertain the person’s exempt status.
2.????Whether the financial statements of a business are required to be audited by an accredited audit firm is and will continue to be determined by applicable company laws and regulations. However, the UAE CT regime will require a Free Zone Person to have audited financial statements if it wants to benefit from the 0% CT regime.
Transitional Rules:
1.????The UAE CT regime is not intending to require businesses to restate their balance sheet upon entering into the CT regime. Instead, a taxable person's opening balance sheet for CT purposes would generally be their closing balance sheet for financial reporting purposes for the period that ends immediately before their first tax period begins.
Note:
It will be reviewed or added after complete mechanism will become from FTA, UAE.
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