Key Highlights - UAE Corporate Tax

On 9th December 2022, the UAE Ministry of Finance released the?Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (hereinafter referred to as ‘CT Law’)?and related FAQs.

Effective Date

The CT Law will be effective for financial years commencing on or after 1 June 2023. This means that businesses with a calendar year as the financial year (i.e. 1 Jan - 31 Dec), will have their first tax year from 1 January 2024 onwards. Tax will be due nine months after the end of the financial year.

Threshold of Taxable Income

The threshold of Taxable Income is likely to be AED 375,000 as provided under the FAQs but is yet to be confirmed by the Cabinet Decision.

Applicable Corporate Tax rates

Corporate tax will be charged on the annual taxable income of a business as follows:

• 0% - if the taxable income does not exceed the threshold (to be specified by the Cabinet);
• 9% - if the taxable income exceeds the threshold.
• 0% - CT rate on qualifying income of free zone entities;

While the Ministry of Finance had previously indicated that a higher rate may apply to large multinationals entities subject to Pillar Two, the CT Law is silent in this respect. Hence, such entities will need to wait for further guidance on how the UAE CT Law will interact with the global minimum tax framework to be published by the OECD.

Scope of Application

Corporate income tax will be applicable for "Taxable Persons":

• Resident Persons that are incorporated or managed and controlled in the UAE (including free zone companies).
• Non-Resident Persons that have a permanent establishment in the UAE, derive income from sources in the UAE, or that otherwise have a nexus in the UAE.
• Individuals who conduct business activities in the UAE; including, where applicable, through an unincorporated partnership.

Notably, Free Zone companies, branches of foreign companies, and unincorporated partnerships are included within the definition of Taxable Persons.

Exemptions

Under certain conditions, the following persons will be exempt from CT:

• Government and Government-controlled entities
• A person engaged in the Extractive and non-Extractive business
• Qualifying public benefit entities
• Charities and public benefit organizations
• Pension or social security funds
• Qualifying investment funds

The exemption may extend to an entity incorporated in the UAE that is wholly owned and controlled by an exempt person, if it:

• Undertakes part or whole of the activity of the exempt person
• Holds assets or invests funds for the benefit of the exempt person
• Carries on activities ancillary to those of the exempt person

Certain exemptions (including for qualify investment funds) will be subject to an application process to the Federal Tax Authority (FTA).

Corporate Tax in Free Zones

CT Law states that a Free Zone company should be viewed as a Qualifying Free Zone Person (that is eligible for the 0% tax rate) if it:

• Maintains adequate substance in the UAE
• Derives qualifying income (to be specified through a Ministerial Decision)
• Complies with Arm's Length Principles (relating to transactions between related and connected parties) and transfer pricing requirements
• Meets any other conditions to be prescribed through a Ministerial Decision

However, the definition of?qualifying Income?has not been set out in the Law and will be further elaborated by the UAE Cabinet.

Calculation of Taxable Income

Taxable income shall be the Accounting Net Profit (or Loss) as per Financial Statements prepared for the Financial reporting purposes in accordance with acceptable accounting standards subject to certain tax adjustments that will apply to the reported accounting income.

Tax loss relief

Any loss incurred after the effective date of CT Law will be eligible for relief indefinitely, subject to certain conditions. These losses can be used to offset up to 75% of the taxable income of future tax periods.

Tax grouping?

Another way to reduce the administrative burden of tax or and share losses can be formation of Tax groups between group entities, subject to certain conditions, include a 95% ownership requirement and neither the parent nor subsidiary can be an exempt person.

Additional clarity has been given in the CT Law with respect to rules governing the utilization of tax losses, where a subsidiary joins a Tax group or when a Tax group ceases to exist.

Transfer Pricing (TP)

In determining the Taxable Income, transactions between Related Parties and Connected Persons must meet the arm's length principle.

?The TP methods specified in the law are generally consistent with the OECD Transfer Pricing Guidelines.

The reporting requirement of TP shall be:

• Disclosure form along with the CT Return or,
• Submitting a Master File & a Local file, submitted upon request

Conditions and format of to be provided by the Authorities.

Transitional Provisions

Transitional provisions states that:

• Opening balance sheet shall be the closing balance sheet of previous period, prepared for financial reporting purposes, under applicable accounting standards in the UAE, subject to any conditions or adjustments ?that may be prescribed by the Minister. Furthermore, it shall be prepared considering the TP regulations
• The general-anti abuse rule shall apply to transactions or arrangement entered into on or after the date of the Decree-Law is published (i.e., 10 October 2022) in the Official Gazette.

To summarize, Transitional rules are already effective, so it is recommended to abide by the rules are regulations as all the transactions/ arrangement/ structural changes etc, shall be eligible to assessment with the Authorities.

Way Forward...

With the issuance of the CT Law, the taxable person must ensure that:

• The financial/ accounting records are accurate and managed accordingly (preferably in accordance with IFRS),
• The transactions with related parties are in line with the principles of TP and arm's length,
• Financial Audit is duly conducted,
• Operations are processes are in compliance with the CT Law.

Although there are certain clarifications required from the Authorities, meanwhile the Taxable person should begin to assess the implications of the CT Law on its operations and legal structure.

The content of this article is intended to provide a general guide on the key highlights of the CT Law, please reach out to our experts at [email protected] for specific advisory. Our team is already assisting businesses in Impact assessment, devising Transfer pricing strategies and ensuring compliances with the rules and regulations of the CT Law.