Frequently asked questions

Who is subject to tax and any exempted sectors?

Is UAE CT applicable to entities registered in a UAE free zone?

Yes, entities across all free zones will be subject to UAE CT. Please refer to free zone section below for more details on how UAE CT applies to free zone entities.

Is UAE CT applicable to branches of foreign and UAE companies?

Yes, all branches registered in the UAE will be subject to UAE CT.

Is UAE CT applicable to dormant companies?

Yes, we would expect dormant companies to register and file a tax return.

Does the UAE CT apply to partnerships such as Limited Liability Partnerships?

With some exceptions, most countries treat unincorporated partnerships as fiscally transparent. This means that partnerships are not treated as separate taxable entities, but the income of the partnership instead flows through and is taxed in the hands of the partners only. Given the UAE CT regime incorporates international best practices, we would expect partnerships to be treated as transparent for UAE CT purposes.

Do we know which sectors will be exempt or granted tax incentives, for example financial services sector, insurance companies, private schools, etc?

No sector specific exemptions or incentives are expected. UAE CT will be applicable across all Emirates and will apply to all business and commercial activities alike, except for the extraction of natural resources, which will continue to be subject to Emirate level taxation.

Will the companies owned by UAE nationals be also subject to the new corporate tax?

Yes, all companies irrespective of ownership (local or foreign) will be subject to UAE CT.

Will companies owned by the UAE government be exempt from taxation?

There are no details at this stage on exemptions for government owned entities. That said if such entities carry our commercial activities (e.g. trading) we would expect such entities to be subject to UAE CT.

How will UAE CT be implemented on individuals who run their business personally having their own trade licence?

Business income earned by individuals who hold (or are required to have) a commercial licence or permit in the UAE will be subject to UAE CT.

How UAE CT will apply to pure holding entities?

We expect holding companies to be subject to UAE CT, with an exemption from taxation for dividends and capital gains from qualifying shareholdings.

Would a UAE branch of a foreign company be subject to CT in the UAE and required to register and file CT returns?

As per the public consultation, UAE CT will apply to foreign legal entities that have a permanent establishment (PE) in the UAE. A branch (similar to best practice tax regimes) should be considered a PE of the head office in the UAE, If there exists a "fixed place of business or a permanent representative" on UAE soil and if this is the case hence will need to register, file and pay CT in the UAE.

What is the impact of UAE CT on a free zone company?

Is a free zone company subject to tax?

Yes, all free zone businesses (regardless of the free zone) will be within the scope of UAE CT, but will continue to benefit from CT holidays / 0% taxation if they comply with all regulatory requirements and do not conduct business with mainland UAE.

How long will the tax holidays be available for free zone companies?

It is not known how long the free zone tax regime will be grandfathered, which may mean that the existing free zone tax holiday periods (which range between 5 and 50 years) will be respected.

What are the 'regulatory requirements' that free zone companies have to comply with in order to secure free zone holidays?

This is unclear at this stage. We assume 'regulatory requirements' refers to the regulatory requirements of the respective free zone and relevant mainland laws and regulations where the free zone business operates in onshore UAE. This will need to be looked at once additional guidance is published.

What would constitute 'conducting business with mainland UAE'?

It is not clear what will constitute 'conducting business with mainland' and hence this will need to be looked at once additional guidance is published. Conducting business with mainland UAE (as opposed to "in") may mean that simply earning income from a UAE mainland source could impact the free zone tax holiday / 0% CT rate.

How UAE CT will apply if a free zone company conducts business with a free zone and with mainland UAE?

Where business is conducted with mainland UAE, it is not clear whether all the income of the free zone entity would be taxable or only the portion related to mainland activities would be taxed. This will need to be assesed once additional guidance is published.

Is a free zone company required to register and file tax return?

Yes, a free zone company would be required to register and file a CT return.

Is there different CT treatment for companies in fenced (e.g. JAFZA) and unfenced free zones (e.g. TECOM/ DIFC)?

There is no differentiation as yet. The recommendation is to review the details around what is construed as "business conducted with mainland UAE" (once more details are available) and review the operating model to ensure the free zone holiday is available. A review of transfer pricing between onshore and free zone group entities will be required.

Is there any specific documentation needed for free zone entities for CT purposes?

there are no details are available at this stage. However, given that free zone entities are subject to UAE CT the documentation requirements are expected to be similar to any other entities operating in the UAE, in addition to documentation evidencing that a free zone entity is eligible for the free zone tax holiday, i.e. meeting all necessary requirements.

Will a newly established free zone entity (i.e. just before 1 June 2023 and post 1 June 2023) be eligible for tax holidays?

We expect that both existing and new free zone entities will be able to benefit from CT holidays / 0% taxation.

Can free zone companies of UAE enjoy treaty benefits?

The ability to access treaty benefits will depend on the tax residency criteria under the double tax treaty, and how the other treaty countries will view the UAE CT regime that will apply to free zone companies. We expect more clarity on the treaty position of free zone companies (and their ability to obtain a UAE tax residence certificate) once the UAE CT legislation is published.

If a Free Zone entity is providing services to other Free Zones and mainland entities, will the whole income of the Free Zone be tainted? and can this be avoided by creating a UAE mainland entity that interacts with UAE mainland clients?

As per the public consultation, where a Free Zone entity earns any mainland sourced income that is not passive in nature (i.e interest, royalties, dividends, capital gains, etc), all of its income will be disqualified from the 0% CT regime. Having a separate UAE mainland entity to interact and generate revenues from mainland clients will indeed be a way out.

Where a Free Zone entity and a mainland entity are part of the same VAT tax group, will this have any impact on the CT position of the Free Zone entity?

VAT grouping should have no impact on the CT position of the Free Zone or CT grouping rules in the UAE.

Can a Free Zone entity make procurement from a mainland entity (without generating any revenues) and still avail a 0% beneficial tax rate?

Yes this should be the case, as long as no revenues are being generated from mainland UAE. Position need to be confirmed once more details are publihed.

MNCs/ Pillar 2

What is the tax rate for multinational companies (MNCs)?

The UAE CT regime will have a different tax rate for large multinational companies that meet specific criteria set with reference to 'Pillar 2' of the OECD BEPS project. We assume this means that the UAE will adopt a minimum 15% CT rate or a Qualified Domestic Minimum Top Up Tax for entities that are part of a multinational company with annual global consolidated revenues above €750m.

Is the "different rate" applied to MNCs that meet the Pillar 2 criteria regardless of whether the 15% effective tax rate (ETR) is met in the UAE?

It is unclear whether the different rate will apply regardless of whether a 15% ETR is met.

Will the 15% minimum tax rate also be applicable for UAE companies or branches located in free trade zones?

There are no details as yet on how the UAE will adopt the GloBE rules. Our expectation is that the tax rate applicable to entities that are within the scope of the GloBE rules would also apply entities located in a free trade zone.

What is the effective date of the 15% minimum tax rate?

The effective date of the 15% minimum tax rate is expected to be the same as the regular CT regime (i.e. apply to financial years starting on or after 1 June 2023).

Does the 'different tax rate' only apply to MNEs headquartered in the UAE, not to subsidiaries of MNEs headquartered elsewhere, eg. the US?

The different tax rate (expected to be 15%) should apply to UAE entities that are within an MNE group, regardless of whether that group is headquartered in the UAE or outside.

Tax filings

When is the deadline for the CT submission?

The announcement and FAQs mention that there will be only one filing per tax period, and this filing will need to be done electronically. The timeline for filing is not yet known, but we would expect this to be between 6 to 12 months after the financial year end.

Tax group

What are the requirements to form a tax group?

The press release does not specify the requirements to form a tax group. Internationally, the ability to form a tax group (fiscal unity) for CT purposes is generally subject to minimum (common) ownership requirements that range from 95% to 100%. We expect the UAE CT regime to impose similar (common) ownership requirements. More details around this are expected by mid 2022.

Do entities that form a tax group need to prepare audited consolidated financial statements?

There is currently no guidance on this. Tax laws typically do not impose a requirement for financial statements to be audited; this is generally dealt with in company law.

Accounting

What will be the reporting currency of the financial statements for CT purposes?

There is no guidance on this. In general, IFRS provides specific guidance for determination of the functional currency (IAS 21 Foreign Currencies). An entity’s functional currency is the currency of the primary economic environment in which the entity operates. The primary economic environment is normally the economic environment in which the entity primarily generates and expends cash. In the event the reporting currency for CT purposes is different than the functional currency, exchange differences will need to be taken into account when determining taxable profits.

Depreciation calculations will be based on accounting rules or an alternative method?

The announcement and FAQ specifically mention that UAE CT payable will be based on the accounting net profit, with minimal book-tax adjustments. This implies that there will be no separate tax depreciation rules, but this needs to be confirmed when further details become available.

Will audited FS be mandatory to be submitted along with CT filing?

As per the public consultation, only the Free Zone persons will be required to have audited financial statements if they want to benefit from the 0% CT regime. For other businesses this will continue to be determined by the applicable company laws and regulations.

Transfer pricing

Are taxpayers required to comply with the transfer pricing regulations?

As per the announced FAQs transfer pricing regulations and documentation requirements will be in line with the OECD Guidelines and taxpayers will be required to comply with the respective transfer pricing regulations. Further guidance to be released by mid 2022.

Upon introduction of transfer pricing rules and regulations, do taxpayers need to consider applying an interest rate on intercompany loans given by a taxpayer to its related parties?

It is announced that transfer pricing rules will be in line with the OECD Guidelines and therefore transactions should be conducted on an arm's length basis. If the characteristics of the intercompany arrangements qualify as debt under the transfer pricing and tax rules, it is expected that an arm's length interest rate will have to be applied as third parties would not have agreed on interest free loans. An arm's length interest rate will need to be determined by performing an appropriate debt pricing analysis.

What will be the transfer pricing compliance rules in the UAE?

We expect the UAE to introduce compliance rules that will be based on OECD's 3 tiered approach, introducing Master File and Local File requirements in the UAE (adding on to the existing CbCR rules).

Will transfer pricing rules be applicable to cross border as well as domestic intercompany transactions?

Transfer pricing rules are likely to apply to both domestic as cross border related party transactions. Therefore, it is important to also assess the transfer pricing policies between to related party entities located in the UAE.

From which financial year will transfer pricing rules and regulations be applicable.

We expect that transfer pricing compliance rules will be applicable from the date that corporate income tax will be introduced. Therefore, the first year of transfer pricing compliance obligations would be for financial years starting on or after 1 June 2023.

Tax credits/deductions

Can foreign WHT tax paid by a company on certain income received (e.g. WHT on management fee) be taken as a foreign tax credit?

The FAQ notes that a credit will be available for foreign taxes suffered (on income such as management fees, interest etc that would be subject to UAE CT, unless protected by a free zone tax holiday).

What are the requirements to claim the tax credit?

There are currently no details as to the methodology and documentary requirements for claiming such credit, but sufficient evidence will likely need to be maintained in case of questions or an audit by the FTA. Typically, the foreign tax credit would be limited to the CT payable on the relevant income earned.

General

Would payments made to local investors (e.g. in 49%/51% structures) be deductible under the UAE CT regime?

There are no details on this in the public consultation document. In general, expenses that are business related should be in principle deductible. It needs to be looked at the nature of these payments to determine if they can be treated as "business related". Other countries in the region may disallow such payments or provide a cap. This needs to be confirmed once the details are published.

If a foreign entity is deemed to be resident in the UAE due to the 'effective control and management' criteria, will the entity be taxed in the UAE on its worldwide income?

Yes, as per the public consultation document, UAE resident persons (i.e. corporate entities) will be taxable in the UAE on their worldwide income subject to certain exemptions (income from foreign branches and qualifying foreign shareholdings).

Will participation exemption apply if the immediate subsidiary is located in a no tax jurisdiction (e.g. Cayman)?

Dividends and capital gains received from subsidiaries located in tax havens, where there is either no corporate tax at all or where the corporate tax rate is lower than 9%, will not be exempt under the participation exemption.

Is there any expectation whether Economic substance requirement would be removed for taxable entities (e.g. non-exempt & non-free zone entities)?

It is currently unclear what impact the proposed UAE CT regime will have on the requirement for UAE businesses that carry out “Relevant Activities” to maintain and demonstrate an adequate ‘economic presence’ in the UAE and to comply with annual notification and reporting obligations. With a statutory CT rate of 9%, there is a possibility that UAE businesses may no longer be required to comply with Economic Substance Requirements, with the exception of Free Zone Businesses that continue to benefit from Free Zone tax holidays / 0% taxation.

How UAE CT will apply to the banking sector?

Will UAE banks be subject to UAE CT?

All UAE banks going forward are expected to be subject to UAE CT.

Will UAE branches of foreign banks be subject to UAE CT?

Branches of foreign banks operating in the UAE will be within the scope of UAE CT and required to register and file a CT return.

A branch of a foreign bank is currently taxed at the rate of 20%. Will the federal UAE CT apply as an additional tax (i.e. on top of the 20%)?

UAE CT will apply at 9% on taxable income exceeding AED 375,000, or the higher rate for large multinationals. The current Emirate level taxation (i.e. 20% tax) is expected to cease / be repealed.

Will branches of foreign banks operating in free zones be subject to UAE CT?

Similar to any other free zone entities, branches of foreign banks operating in free zones (for example Dubai International Financial Centre and Abu Dhabi Global Market) will be within the scope of UAE CT and required to register and file a CT return, but will continue to benefit from CT holidays / 0% taxation if they comply with all regulatory requirements and do not conduct business with mainland UAE. For further details on the applicability of the UAE CT to free zone entities please refer to section "What is the impact of UAE CT on a free zone company?"

_{Disclaimer: Our answers are based on the information currently made available by the UAE Ministry Of Finance and Federal Tax Authority of the UAE. They do not constitute professional advice. You should not act upon the information contained herein without obtaining specific professional advice based on the Corporate Income Tax Law and related guidance, which are yet to be published. If you rely on this information for any actions or inactions, you would be doing so at your own risk and we do not accept or assume any responsibility in this respect.}