Corporate Tax Highlights
The Federal Decree-Law No. 47 of 2022 (the “UAE Corporate Tax Law”) was recently issued and has provided clarification on several key aspects of the new Corporate Tax (“CT”) regime in the United Arab Emirates.
Please note that we are still waiting for the related Executive Regulations and Cabinet Decisions, so the following highlights are subject to change and should be considered tentative as of the date of publication:
- When is the UAE CT Regime commencing?
The UAE CT regime is effective for financial years commencing on or after 1 June 2023.
As an example, if the business follows the calendar year end to 31 December, the first year that will be subject to CT will be for the year-ended 31 December 2024.
- What is the CT rate?
The CT regime is a Federal UAE tax that will be applied across the UAE Emirates.
The CT will be imposed on taxable income at the following rates:
a. 0% for taxable income up to and including AED 375,000; &
b. 9% for taxable income exceeding AED 375,000.
Note that the UAE is a member of the OECD BEPS Inclusive Framework and the introduction of the CT regime aims to provide the framework needed to adopt the Pillar Two rules. However, until such time that the Pillar Two rules are adopted by the UAE, multinationals will be subject to CT under the regular CT regime.
- Which type of persons are subject to the UAE CT?
A taxable person will be either a resident UAE persons or non-resident UAE persons.
A resident person is typically a UAE-registered corporate form that has a distinct legal personality from its owners.
A non-resident person is typically a non-UAE entity that conducts business in the UAE through a permanent establishment and is effectively managed and controlled in the UAE.
- How will businesses register for CT?
Taxable persons will need to register electronically at the Federal Tax Authority’s (“FTA’s”) secure website to obtain a Corporate Tax Registration Number.
Note there is no registration threshold for UAE CT.
- What is the filing and payment requirements?
The UAE CT returns will be filed electronically at the Federal Tax Authority’s (“FTA’s”) secure website and is due within 9 months following the end of the taxpayers tax period.
The related payment for CT will also be due within 9 months.
Note there is no requirement of businesses to make advance CT payments.
- How is taxable income determined?
The starting point for determining taxable income under the CT regime is the accounting net profit (or loss) of the taxable person. We envision International Financial Reporting Standards (“IFRS”) to be used for computing accounting net profit, as this is the standard most commonly applied and required in the UAE.
Adjustments will then be made to the accounting profit and will include items such as:
a. Unrealized gains or losses;
b. Exempt income such as qualifying dividends and capital gains;
c. Income arising on intra-group transfers;
d. Deductions which are not allowable for tax purposes;
e. Transactions with related parties and connected persons;
f. Transfers of tax losses within the group where relevant;
g. Incentives or tax reliefs; and
h. Any other adjustments as specified under the regulations.
Note that any tax losses that may occur when total deductions exceed total income may be offset against taxable income of future periods, up to a maximum of 75% of the taxable income in each of those future periods.
- Will individuals be subject to the UAE CT?
Individuals or “Natural Persons” are generally outside the scope of UAE CT. However, there may be cases in which individuals can fall within scope, such as individuals who engage in a business or business activity as defined and set by a Cabinet Decision in due course.
- Will there be Withholding Taxes introduced?
Yes, in connection with the UAE CT regime, there will also be a withholding tax in place; however, the rate will be 0%.
As such, the 0% rate practically means there will be no withholding tax due and there will be no withholding tax related registration and filing obligations for UAE businesses or foreign recipients of UAE sourced income.
Withholding tax does not apply to transactions between UAE resident persons.
- How are non-residents subject to UAE CT?
Non-resident UAE persons will only fall within scope of the UAE CT on their:
a. income from their Permanent Establishment in the UAE; or
b. income sourced in the UAE (subject to a 0% withholding tax).
- Transfer pricing and methodologies
For the first time in the UAE, all taxable persons in the UAE CT regime will be required to abide by transfer pricing rules, which aims to ensure that transactions between related parties are carried out on an arm’s length basis, as if the transaction was carried out between independent parties, including the use of market value.
This includes loans between related parties to ensure they are at arm’s length such as the interest rates and term.
Note that the transfer pricing rules will apply on transactions with related parties and connected persons regardless of their location, whether in the UAE mainland, free zone, or outside the UAE.
Generally, one or more of the following methodologies are used to determine the arm’s length values for transfer pricing purposes:
a. The comparable uncontrolled price method
b. The resale price method
c. The cost-plus method
d. The transactional net margin method
e. The transactional profit split method
Taxable person will be required to maintain documentation regarding their transactions with related parties and connected persons, and certain businesses will be required to submit this information along with their tax return.
- Any credit available for foreign tax paid on income subject to the UAE CT?
There are credits available for foreign tax paid on income that is also subject to UAE CT, such as withholding taxes paid to a foreign country, subject to an applicable agreement or treaty made between the UAE and the foreign country.
This credit can be deducted as a foreign tax credit from the UAE CT payable with the maximum credit as the lower of the foreign tax paid and the UAE CT payable. Any excess foreign tax credit cannot be carried forward or back to a different tax period.
- What are the applicable CT rates for a UAE Free Zone company?
Taxable person established in a UAE Free Zone that meet the conditions to benefit from the Free Zone CT regime (“Qualifying Free Zone Persons”) will be subject to UAE CT at the following rates:
a. 0% on “Qualifying Income”
b. 9% on Taxable Income that does not meet the Qualifying Income definition
To be treated as a “Qualifying Free Zone Person”, the Free Zone entity must:
a. Maintain adequate substance in the UAE;
b. Derive “Qualifying Income” as specified in a Cabinet Decision;
c. Comply with transfer pricing rules and maintain the relevant transfer pricing documentation; and
d. Not have made an election to be subject to CT in full.
Qualifying Free Zone entities that are part of a large multinational group are expected to be subject to a different CT rate once the Pillar Two rules are embedded into the UAE CT regime.
- Is it possible to form a tax group to simplify reporting?
Yes, UAE entities can apply to form a tax group in order to be treated as a single taxable person if the UAE parent company (directly or indirectly) holds at least 95% of the share capital and voting rights of each of the companies.
However, it should be noted that the 0% threshold of AED 375,000 (amount to be confirmed in a Cabinet Decision) will apply to the tax group as a single taxpayer, irrespective of the number of entities that form part of the tax group.
- Are consolidated financial statements for tax group filers?
Yes, in order to compute the taxable income of the tax group, consolidated financial statements including each subsidiary will be required that includes elimination of intra-group transactions of the tax group.
- What are the recordkeeping requirements?
Taxable persons are required to maintain all financial documents for the purposes of calculating their taxable income and should maintain all documents and records that support the information in the CT return or in any other filing made with the FTA.
We recommend that financial statements and accounting records to be prepared in United Arab Emirates Dirhams (“AED”) as the taxable person’s income, deductions, and credits should be measured in AED.
Records and documents should be kept for at least seven years following the end of the relevant Tax Period.
Note this varies from the FTA’s Value-Added Tax documentation requirement of five years, unless the documents relate to real estate, in which case the documents should then be retained for 15 years.
Disclaimer on Use
The information presented is intended for general information only and is not meant to be a substitute for professional advice or to be used for decision-making.
Professional advice relies on an assessment and understanding of the specific situation for each person and, therefore, the application of changing laws and regulations in the UAE, will vary widely from case to case.
The information contained herein is based on facts available from sources we believe to be credible at the time of publication and is subject to change.