UAE has been steadfast in their commitment made under the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting and implementation of the global minimum effective tax rate concept proposed by Pillar II of the OECD (Organization for Economic Co-operation and Development) Base Erosion and Profit Shifting project.
UAE has taken a giant leap in this front when they announced Corporate Tax after the successful implementation of Value Added Tax.
Corporate tax is one of the most discussed topics ever since UAE released the Federal Decree Law No. (47) of 2022 on the Taxation of Corporations and Businesses.
CT is expected to exponentially influence our nation’s growth and in parallel it is expected to bag the accolade for getting aligned with international benchmarks of Tax transparency. This shall further elevate UAE as one of the most preferred international business and investment hubs.
The Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (hereinafter referred to as the “Corporate Tax Law”) was issued by the United Arab Emirates (UAE) on 9th December 2022.
UAE derives its CT framework from emulating international best practices and is much more straightforward from a compliance perspective.
Prior to we deep dive into features of Corporate Tax it is ideal to have an overview of the existing UAE Taxscape.
Taxation in UAE
To foster economic growth and to have a sustainable revenue for Government expenditure a well-crafted tax system will assist. UAE does not levy income tax on individuals. However, there are multiple categories of Taxes currently in force in UAE.
- Excise tax was introduced across the UAE in 2017. It is a form of indirect tax levied on specific goods which are typically harmful to human health or the environment like tobacco, energy drinks etc.
- Value Added Tax (VAT) was introduced in UAE on 1 January 2018. The rate of VAT is 5%. VAT is indirect tax imposed on the supply of most goods and services, Charged at each step of the supply chain. The end consumer ultimately bears the costs. VAT is levied on the supply of all goods and services, including food, commercial buildings and hotel services if no explicit provision is made to impose a zero rate or an exemption.
Corporate Tax
The latest on UAE’s Taxscape is Corporate Tax. Corporate Tax is the first and only form of direct tax introduced in the country, which is levied on the net income of corporations and other businesses.
The UAE imposes one of the least rates of corporate tax in the GCC region. Article 3 lays down Corporate Tax Rate. It is straightforward and it is charged as follows:
- 0% up to 375K and
- 9% for taxable income exceeding 375K.
Considering the dynamic legal structure in the country, the Corporate Tax Law have provided various benefits and exemptions to enable ease of doing business. Some of such measures include:
- Small business relief: Taxable persons who engage in business activities in UAE, if their revenue does not exceed three million (AED 3,000,000) a year, can apply for small business relief subject to complying with the requirements set forth in Ministerial Decision No. 73 of 2023.
- Free zone companies: 0% CT applicable on certain qualifying free zone entities on their qualifying income.
- Transfers within a qualifying group: No profit or loss will be accounted for in calculating the taxable income if either of the taxable people has a direct or indirect ownership interest of at least 75% or a third party has a direct or indirect ownership interest of at least 75%. This relief is available subject to compliance with the conditions mentioned under Article 26 of the Corporate Tax Law.
- Business Restructuring Relief: No profit or loss will be accounted for in calculating the taxable income on certain transactions undertaken as part of the restructuring or organisation of a Business, which is subject to compliance with the conditions mentioned under Article 27 of the Corporate Tax Law.
Some of the relevant provisions of Corporate Tax Law are as follows:
“Taxable Persons”: As per Article 11 of the Corporate Tax law following categories of person/entity qualifies as taxable person:
- UAE Companies and other juridical persons that are incorporated in UAE (including free zone) or effectively managed and controlled in the UAE.
- Natural persons (individuals) who conduct a Business or Business Activity in the UAE;
- Any other person as may be determined by Cabinet Decision to be issued in due course; and
- Non-resident juridical persons (foreign legal entities) that have (i) a Permanent Establishment in the UAE (as provided under Article 14 of the Corporate Tax Law); (ii) Deriving incomes qualifying as a state-sourced income as per Article 13 of the Corporate Tax Law; (iii) has a nexus with UAE as specified by a Cabinet decision to be issued.
As per Cabinet Decision No. 49 of 2023, resident or non-resident individuals who derive a combined turnover of less than AED 1,000,000 from their business or business activities shall not be subject to CT.
“Exempt Persons” – Article 4 of the Corporate Tax Law provides for the categories of persons exempt from CT.
- Government entities or entities controlled by the government (excluding income from business activity) as per Article 5 of the Corporate Tax Law.
- Persons engaged in an extractive business meeting the criteria mentioned under Article 7 of the Corporate Tax Law.
- A non-extractive natural resource business meeting the criteria mentioned under Article 8 of the Corporate Tax Law.
- Qualifying public benefit entities set up exclusively for various purposes as prescribed under Article 9 of the Corporate Tax law, which includes but is not limited to religious, charitable or scientific purposes. A schedule of such Qualifying Public Benefit Entities has been released by the Government vide Cabinet Decision No. 37 of 2023.
- Qualifying (regulated) investment funds traded widely or on the stock exchange as specified under Article 10 of the Corporate Tax Law.
- Pension and social security funds that are governed by the regulatory authority in UAE and meet the criteria as per Ministerial Decision No. 115 of 2023.
“Persons Exempted from Registration”-
In addition to the person exempted from CT, as per Ministerial Decision No. 43 of 2023, following categories of entities are exempted from registration under the Corporate Tax Law:
- Government entities or entities controlled by the government (excluding income from business activity) as per Article 5 of the Corporate Tax Law.
- Persons engaged in an extractive business meeting the criteria mentioned under Article 7 of the Corporate Tax Law.
- A non-extractive natural resource business meeting the criteria mentioned under Article 8 of the Corporate Tax Law.
- Non-resident persons that do not have a permanent Establishment in the UAE and who receives state sourced income as per Article 13 of the Corporate Tax Law.
As per Cabinet Decision No. 49 of 2023, resident or non-resident individuals who derive a combined turnover of less than AED 1,000,000 from their business or business activities are also exempted from the registration as per Corporate Tax Law.
“0% CT applicable on free zone entities”-
The much-awaited provision under the Corporate Tax law since the announcement of introduction of CT was in relation to relief measures accorded to the free zone companies considering ministry issued their commitment to honour the incentives of such free zones.
A Free Zone Person that is a Qualifying Free Zone Person can benefit from a preferential Corporate Tax rate of 0% on their “Qualifying Income” only.
UAE authorities have clarified what amounts to a Qualifying Income under the Ministerial Decision No. 139 of 2023 regarding Qualifying Activities and Excluded Activities and Cabinet Decision No. 55 of 2023 on Determining Qualifying Income for the Qualifying Free Zone Person for the Purposes of Federal Decree Law No. 47 of 2022 on the Taxation of Corporations and Businesses.
Qualifying Activities
Article 1 of Cabinet Decision No.55 of 2023 (“Cabinet Decision”) defines Qualifying Activities as any activities determined by a decision issued by the Minister and conducted by a Qualifying Free Zone Person from which Qualifying Income is derived. Such Qualifying Activities are detailed under Article 2 of the Ministerial Decision No. 139 of 2023 regarding Qualifying Activities and Excluded Activities.
Qualifying Income
Article 3 of Cabinet Decision No.55 of 2023 provides that for the purposes of the application of Article (18) of the Corporate Tax Law, the Qualifying Income of the Qualifying Free Zone Person shall include the below categories of income:
- Income derived from transactions with other Free Zone Persons wherein such Free Zone Persons are the beneficial recipient of the relevant services or goods, except for income derived from Excluded Activities.
- Income derived from transactions with a Non-Free Zone Person, but only in respect of Qualifying Activities that are not Excluded Activities. Excluded Activities are provided under Article 3 of Ministerial Decision No. 139 of 2023 regarding Qualifying Activities and Excluded Activities.
- Any other income provided that the Qualifying Free Zone Person satisfies the de minimis requirements under Article (4) of the Cabinet Decision
provided that (i) such income is not attributable to a Domestic Permanent Establishment or a Foreign Permanent Establishment in accordance with Article (5) of the Cabinet Decision or to the ownership or exploitation of immovable property in accordance with Article (6) of the Cabinet Decision.
- Thus, a Qualifying Free Zone Person earning income from ‘Excluded Activities’ or earning any other income that is not ‘Qualifying Income’ will disqualify such Free Zone Person from preferential Corporate Tax rate of 0%, subject to de minimis requirements. As per Article 4 of Ministerial Decision No. 139 of 2023 to satisfy the de minimis requirements, the non-qualifying revenue earned by a Qualifying Free Zone Person in a tax period must not exceed either 5% of their total revenue or AED 5,000,000, whichever is lower.
Where the Qualifying Free Zone person fails to meet the required conditions under Article 18(1) of the Corporate Tax Law, Cabinet Decision or Ministerial Decision No. 139 of 2023 or any such condition imposed by the Ministry during a tax period, then such Free Zone Person ceases to be a Qualifying Free Zone Person for the beginning of relevant tax period and 4 (four) subsequent tax periods. During this period, the Free Zone Person will be treated as an ordinary Taxable Person and be subject to Corporate Tax at the rate of 9% on their Taxable Income above AED 375,000.
“Withholding tax”
Non-resident persons that do not have a permanent Establishment in the UAE and who receives state sourced income as prescribed under the cabinet decision may be subject to Withholding Tax (at the rate of 0%). Government may add any other incomes on which such withholding taxes are applicable.
Withholding tax is a form of Corporate Tax collected at source by the payer on behalf of the recipient of the income.
“Anti-abuse rules”
In order to curb the practice of tax avoidance or obtaining the corporate tax advantage that is not in line with the intent or purpose of Corporate Tax Law, Article 50 of the Corporate Tax Law has empowered the authority to make a determination of such tax avoidance or unscrupulous tax advantage.
“Tax Registration” and “Tax Filing”
- A taxable person is required to register and receive a corporate tax registration number;
- Taxable person must file a tax return within nine months of the end of the relevant tax period. The same deadline would generally apply for the payment of any Corporate Tax due in respect of the Tax Period for which a return is filed.
- Tax periods are the 12-month period (or part) for which the financial statements have been prepared. Taxable persons can apply to change their tax period.
In short, the new Corporate Tax Law reaffirm UAE Government’s commitment to meet the international standards for tax transparency. This CT regime is a brilliant model of social contract between the nation and its tax payers that ensures a stronger economy that can lead to exponential progress and thereby greater infrastructure and public domain development.
Disclaimer
Technical text sourced from the website of Ministry of Finance. This summary is based on a review of the legislation, ministerial and cabinet decisions published by FTA.
This publication does not provide any legal advice and it is for information purposes only. You should not rely upon the material or information in this publication as a basis for making any business, legal or other decisions. Any reliance you place on such material is therefore strictly at your own risk.
