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On 9 December 2022, the UAE released the Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses (hereinafter referred to as the ‘CT Law’). The CT Law will apply to Taxable Persons for financial years commencing on or after 1 June 2023.
The CT law is materially aligned with the public consultation document that was released by the Ministry of Finance (‘MoF’) on 28 April 2022 and expands on many of the key provisions. As was promised, the UAE CT regime is predominantly based on international best practice with a minimal compliance burden placed on businesses relative to other regimes internationally.
There are still certain aspects which are expected to be fully clarified in subsequent Cabinet and Ministerial decisions, for example those related to certain Exempt Persons and what will be regarded as Qualifying Income.
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A Taxable Person as defined in the CT Law, is an individual and/or entity that is subject to UAE CT. For the purposes of the CT Law, a distinction is made between a Resident Person and a Non-Resident Person and the applicable Tax base will depend on the nature of the Taxable person. The following table sets out the aspects to consider when determining the nature of a Taxable person (i.e. Resident vs. Non-resident) as well as the applicable Tax base:
|Resident Person||Tax base|
|An entity that is incorporated in the UAE (including a Free Zone entity)||Worldwide income|
|A foreign entity that is effectively managed and controlled in the UAE||Worldwide income|
|A natural Person / individual who conducts a Business or Business Activity in the UAE||Worldwide income|
|Non-resident Person||Tax base|
|Has a permanent establishment (‘PE’) in the UAE||Taxable income attributable to the PE|
|Derives UAE Sourced Income||The UAE sourced income not attributable to the PE|
|Has a Nexus in the UAE||Taxable income attributable to the Nexus|
The CT Law introduced specific rules to determine when income will be regarded as UAE sourced income. Generally speaking, income will be regarded as UAE sourced income when the income is (1) derived from a UAE Resident Person (e.g. the payor is a resident Person), (2) derived from a non-resident Person and is attributable to a PE of that Person in the UAE of that non-resident Person (e.g. the UAE PE is the payor), or (3) derived from activities performed, assets located, capital invested, rights issued, or services performed or benefitted from in the UAE.
Companies and branches registered in a Free Zone are considered Taxable Persons under the CT Law and are required to meet normal compliance obligations, including transfer pricing requirements. However, provided a Free Zone entity meets the conditions to be considered a Qualifying Free Zone Person (‘QFZP’), it should be eligible for a 0% UAE CT rate on its Qualifying Income. The income of a QFZP which is not Qualifying Income will be taxed at the standard 9% CT rate.
In order to qualify for the 0% CT rate, a QFZP must meet all of the following conditions:
The CT law has not defined the meaning of ‘Qualifying Income’ and it is expected to be clarified through Cabinet Decision.
Dividends and other profit distributions as well as foreign exchange, impairment and capital gains and losses relating to ownership interests (referred to as a ‘Participating Interest’) in an entity (referred to as ‘Participation’) will be exempt from tax if (1) the ownership interest is at least 5%; (2) a 12 month uninterrupted holding period (or the intention to hold for 12 months) is in place, and (3) the Participation is subject to tax in its country or territory of residence at a rate that is not lower than 9%.
The CT Law provides that a Business can offset tax losses against the Taxable Income of subsequent tax periods when computing the Taxable Income for that period. The set-off during any tax period cannot exceed 75% of the Taxable Income for the tax period (except in circumstances that may be prescribed in a Cabinet Decision). Any tax loss remainder can be carried forward to a further subsequent tax period.
A Taxable Person cannot claim tax loss relief for losses incurred before the date of commencement of the UAE CT regime, losses incurred before it became a Taxable Person under the CT Law and losses incurred from an asset or activity the income of which is exempt, or otherwise not taken into account under the CT Law.
UAE CT allows transfer of tax losses between group entities where there is 75% or more common ownership and where other certain conditions are met such as having the same financial year and using the same accounting standards.
However, the transfer of tax losses will not be allowed between group entities that are either Exempt Persons or Qualifying Free Zone Persons.
UAE group entities may elect to form a Tax Group provided all the following conditions are met:
Despite the Exempt Person exclusion above, one or more subsidiaries in which a Government Entity directly or indirectly holds at least 95% of the share of capital, voting rights and entitlement to profits and net assets can form a Tax Group, subject to certain conditions.
When a Tax Group is formed, the parent entity will be responsible for the administration such as submission of one single tax return and settlement of the tax liability for the Tax Group. The joint and several liability can be limited to one or more members of the Tax Group, with an approval from the Authority.
To reduce complexity and compliance costs, the UAE CT regime uses the accounting net profit (or loss) as stated in the financial statements of a Business as the starting point for determining its Taxable Income. For this purpose, the financial statements should be prepared in accordance with accounting standards accepted in the UAE. The UAE does not have specific Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) are commonly used by businesses in the UAE.
In order to arrive at Taxable Income, expenditure incurred wholly and exclusively for the purposes of the Taxable Person’s Business that is not capital in nature may be deductible in the Tax Period in which it is incurred. However, the CT Law disallows / restricts the deduction of certain expenses.
The UAE has not introduced personal income tax. In other words, UAE CT is not applicable to individuals and their personal income (e.g., salary, dividends, capital gains, income from investment in UAE property in their personal capacity, etc.), with the exception of business income earned by individuals who hold (or are required to have) a commercial license or permit.
Recognising the UAE’s position as an international Business hub and leading holding company location, the UAE CT regime exempts dividends and other profit distributions received by a Taxable Person from a UAE tax resident entity (i.e. local dividends).
Every Taxable Person will be required to register electronically for UAE CT with the Authority within a prescribed timeline and obtain a Tax Registration Number. The registration would need to be undertaken even if the Taxable Person has already been registered for Value Added Tax purposes. In order to keep the administrative burden on taxpayers to a minimum, the CT Law requires a Taxable Person to file only one tax return for each tax period. Please see examples of filing, payment and Transfer pricing disclosure timelines in the table below:
|Fiscal Year End||First Reporting Period||Registration date||Due Date of filing first CT Return and payment||Due Date for first TP disclosure form|
|December 2022||January 2024 to December 2024||To be determined||30 September 2025||30 September 2025|
|June 2023||July 2023 to June 2024||To be determined||31 March 2025||31 March 2025|
The filing will need to be done electronically no later than nine months from the end of the relevant tax period. Any UAE CT payable will also need to be settled within these timelines. While further guidance on the form of the UAE CT return will be provided by the Authority, the CT Law prescribes certain specific details, which inter alia includes the tax period to which the UEA CT return relates, the accounting basis used in the financial statements, the Taxable Income for the tax period, the amount of tax loss relief claimed, the available tax credits claimed and the UAE CT payable for the tax period.
The CT Law introduces transfer pricing (‘TP’) rules and regulations. The transfer pricing regulations take immediate effect coinciding with the effective date of the other tax Provisions. Both cross border and domestic transactions and arrangements between Related Parties (including transactions undertaken by Free Zone entities) need to adhere to the arm’s length standard i.e., transactions must be undertaken as if they are carried out between independent parties under similar circumstances. Furthermore, payments and benefits provided to Connected Persons should be at Market Value, which should be determined by applying the arm’s length standard.
As a member of the OECD Inclusive Framework on BEPS, the UAE should adopt and implement Pillar Two (referred to as the “GloBE” rules). The GloBE rules impose an additional ‘top-up’ tax on the profits earned in each jurisdiction that large multinational groups operate in where the effective tax rate in these jurisdictions is lower than 15%. The GloBE rules provide for two mechanisms for the collection of the additional top-up tax, namely the Income Inclusion Rule (‘IIR’), the Undertaxed Payments Rule (‘UTPR’). The IIR imposes a top-up tax on an Ultimate Parent Entity in its jurisdiction of tax residence with respect to a low-taxed foreign subsidiary, while the UTPR imposes a top-up tax through a denial of deductions or other adjustment. The CT Law does not currently make reference to Pillar Two or a potential higher tax rate for large multinational groups. Until such time as the Pillar Two rules are adopted by the UAE, UAE entities that are part of multinational group will be subject to CT under the regular UAE CT regime.