With effect from June 2023, the UAE is planning to implement a corporation tax structure with a projected standard rate of 9%. A taxable person is a company that is incorporated in the UAE, a foreign legal entity that has a permanent establishment there or is tax resident there, a branch of a foreign or UAE company, or a taxable natural person who conducts business in the UAE through a sole establishment or as an individual partner in an unincorporated partnership.
The CT rate is set at 0% for taxable income between AED 0 and AED 375,000, and 9% for taxable income above AED 375,000. UAE entities within a large multinational group that is subject to BEPS pillar two (i.e., those with consolidated global revenues of more than €750m, or approximately AED 3.15bn) will have a different rate likely to be 15%. The following rates will apply to the annual taxable income of a business:
0% for taxable income up to AED 375,000.
9% for taxable income over AED 375,000.
And a higher tax rate (15%) for major multinational corporations that meet certain requirements based on Pillar II of the OECD BEPS.
- A company subject to CT must register with the FTA and get a tax identification number within the time frame that the law will specify.
- If a person does not voluntarily register a business for CT reasons, the FTA may also do so.
- If a company is no longer subject to CT, it may also deregister.
- Businesses will only need to prepare and file one tax return (together with other pertinent supporting schedules) with the FTA for each tax period, which will save time and money on administrative tasks.
- Within nine months of the conclusion of the applicable tax period, a CT return must be completed, and any associated payments must be made.
- In order to calculate taxable income, the UAE CT regime suggests using the accounting net profit (or loss) position in the financial accounts of a corporation.
- The assessment will be based on IFRS standards, which are generally employed by enterprises in the UAE, but the CT law will also permit the use of other financial reporting standards.
- A participation exemption from CT on dividends received and capital gains made from the sale of shares of a subsidiary firm will be included in the CT statute.
- All domestic dividends received from UAE-based enterprises will be excluded from the UAE CT regime, including dividends paid by a free zone registered entity that benefits from the 0% CT regime.
- The UAE shareholder company must own at least 5% of the shares of the subsidiary company in order to qualify for the participation exemption.
- On taxable income (1) from a PE in the UAE and (2) that is sourced in the UAE, “non-residents” will be subject to UAE CT.
- As a result, the existence of a PE in the UAE will be assessed in light of whether the “non-resident” person has a “permanent place of business” there or if a “dependent agent” regularly exercises their right to sign contracts on their behalf.
- For UAE CT purposes, a legal entity that is incorporated in the UAE is automatically regarded as a “resident” person. For the purposes of the UAE CT regime.
- Any “natural person” who is involved in a business or commercial activity in the UAE, whether directly or through an unincorporated partnership, will also be regarded as a resident person.
- If a foreign firm is effectively “managed and controlled” in the UAE, it may be classified as a resident person.
- Business will be entitled to deduct losses from taxable income in future periods up to a maximum of 75% of each subsequent period’s taxable income.
- If the same shareholders own at least 50% of the share capital from the beginning of the period when a loss is incurred to the conclusion of the period in which a loss is offset against the taxable income, tax losses will be allowed to be carried forward indefinitely.
- Businesses on the mainland are required by law to conduct annual audits. However, there is no requirement that this be filed to any authority.
- The majority of freezone authorities demand that an annual audit be completed and submitted to them at the time of license renewal.
- Whatever the circumstance, doing an annual audit with a reputable audit firm is always advised.
- In the future, it will be necessary to disclose information to the government because UAE compliance standards are now at an international level.
- Businesses operating in the free zones of the United Arab Emirates will be subject to the new federal tax system and be required to register and submit a CT return.
- However, as long as they continue to adhere to all zone-specific regulations and refrain from doing business with the mainland, they will still be eligible for 0% CT rate (passive income such as interest, royalties, dividends, and capital gains from mainland company shares are excluded).
- Free zone entities that have a branch on the mainland will remain enjoy the 0% rate on their free zone income but will pay CT at the standard rate on income received from the mainland.
- Transactions between entities in a free zone and group companies on the mainland will be taxed at 0%, but payments made by a mainland group to one of its entities in a free zone will not be tax deductible.
- If certain conditions are met, a collection of UAE-based businesses may create a tax group and be given the same treatment as one fiscal unit.
- All group members have the same fiscal year end, neither the parent nor subsidiaries are exempt from CT or operate in a free zone and receive the 0% CT rate, and the parent business owns at least 95% of the share capital and voting rights of its subsidiaries.
- Losses may be transferred between group firms for tax purposes even if the group of companies does not fulfill the 95% ownership requirement, but the parent holds at least 75% of the share capital and voting rights of its subsidiaries.
- Under certain circumstances, “qualifying” intra-group transactions and reorganizations won’t be subject to UAE CT.
- Providing the firms are at least 75% commonly held and the assets or liabilities to be transferred have been owned by the group for at least three years, transfers of assets and liabilities between UAE-resident companies will qualify for intra-group transfer relief.
- Some restructuring transactions can also be done in a tax-neutral manner, although if assets are being transferred to a third party, the three-year ownership restriction still applies.
- Businesses will have to register with the Federal Tax Authority (FTA) within a predetermined timeframe.
- For each tax period, only one CT return needs to be electronically submitted, and any CT that is owed needs to be paid within nine months of when the tax period ends. Failure to comply will result in penalties.
- A single consolidated return can be submitted by UAE group firms for the whole tax group.
- While the current Ministry of Finance will continue to be the “competent authority” in terms of international tax agreements and the exchange of information for tax reasons, the FTA will be in charge of administering, collecting, and enforcing UAE CT.
- Companies based in the UAE that have foreign branches will be able to choose between claiming an irrevocable exemption for all of their foreign branch profits or a foreign tax credit for the tax that their foreign branches have already paid in their home country.
- If the overseas branch is not subject to enough tax in the foreign country, the exemption could not be accessible, and any unused tax credits cannot be carried forward or back.
- As long as the UAE shareholder company owns at least 5% of the shares of the subsidiary company and the foreign subsidiary is subject to a corporate tax rate of at least 9% in its own jurisdiction, the participation exemption for income from dividends received and for capital gains earned from the sale of a subsidiary will be applicable.
- Domestic dividend income from UAE-based enterprises, including that received from organizations operating in free zones, will likewise be excluded.
- If UAE enterprises are given the same tax treatment in their home jurisdiction, non-residents that operate or lease ships or planes utilized for international transportation are exempt from CT.
- According to the interest limitation regulations in Action 4 of BEPS, interest expenditure deductions will be capped at 30% of EBITDA.
- Payments made by affiliated UAE mainland entities to free zone entities will not be tax deductible.
- Tax deductions are not available for fines, recoverable VAT, or contributions made to organizations that are not recognized charities or public benefit organizations.
- Up to 50% of entertainment costs will be deductible.
- Entities involved in the extraction of UAE natural resources
- Charities and other public benefit organizations, provided that an exemption application is submitted to the ministry of finance and approved by Cabinet decision; the federal UAE government.
- Emirate governments; and their departments and authorities; wholly government-owned UAE companies that are If they meet certain criteria, regulated investment funds and REITs may petition for exemption.
- When preparing financial accounts, Financial Reporting Standards should be followed. If IFRS are used, IAS 12 (Income Taxes) should be used for the accounting of CT. The testing of recognition and measurement as well as disclosures regarding income taxes will fall under the purview of external auditors.
- Entities with registered offices on the UAE mainland may use international accounting standards and practices, such as IFRS and US GAAP.
- Entities that are registered in different free zones must abide by the rules set forth by those authorities. For instance, in accordance with the DMCCA Company Regulations, IFRS must be used mandatorily for entities registered with the Dubai Multi Commodities Centre (DMCC).
- All LLCs, private joint stock companies, public joint stock companies, and foreign branches are required to publish audited financial statements under the UAE Commercial Companies Law.
- Additionally, free zones like DMCC and JAFZA demand that audited financial accounts be presented to the free zone authorities within a certain amount of time following the conclusion of the fiscal year.
- The CT will be in effect for fiscal years beginning on or after 1 June 2023
- 31 May financial year-end should file their first UAE CT return for the financial year-ending 31 May 2024
- 30 September financial year-end should file their first UAE CT return for the financial year-ending 30 September 2024
- 31 December financial year-end should file their first UAE CT return for the financial year-ending 31 December 2024
- Legal people who reside in the UAE will be taxed there on their international income. Only income from a natural person’s business operations conducted in the UAE will be taxed.
- Tax Credits: As noted above, UAE resident companies will be subject to UAE CT on their worldwide income, which includes foreign sourced income that may have been subject to tax of a similar nature to CT in another country.
- To avoid double taxation, the UAE CT regime will allow a credit for a foreign tax paid in a foreign jurisdiction against the UAE CT liability on the foreign-sourced income that has not been otherwise exempted.
- CT regime will permit regulated UAE investment managers to offer discretionary investment management services to foreign clients without triggering a UAE PE for the foreign investor or the foreign investment fund.
- This investment management exemption will, however, “be subject to conditions that are comparable to similar regimes in leading financial centers.”
- Subject to fulfilling specific requirements, regulated investment funds and Real Estate Investment Trusts may apply to the FTA for an exemption from CT.
- UAE businesses come together as a “fiscal union” for UAE CT purposes and If certain requirements are completed, a UAE group of firms may choose to establish a tax group and be considered as a single taxable person. A UAE tax group will only need to submit one tax return for the group.
- If the prerequisites are satisfied, qualifying intra-group transactions and reorganizations won’t be subject to UAE CT.
- Transactions between related and connected parties should be subject to transfer pricing rules. As a result, any dealings between parties who are connected or related must be done on an “arm’s-length basis”.
- To make sure that their transactions are conducted on an arm’s-length basis, large business groups, especially family-owned conglomerates with international operations, may need to rethink their group structures and evaluate their intra-group transactions from a transfer pricing perspective.
a. Following licenses that conduct relevant activity must submit a notification, 6 months post the financial year end, and an Economic Substance Report 12 months post the financial year end
- – Banking Businesses
- – Insurance Businesses
- – Investment Fund Management Businesses
- – Lease-Finance Businesses
- – Headquarters Businesses
- – Shipping Businesses
- – Holding Company Businesses
- – Intellectual Property Businesses
- – Distribution and Service Centre Businesses
Table 1: Comparison of VAT and CT Rates in the GCC
Transfer pricing referring to the rules and methods for pricing transactions within and between enterprises under common ownership or control. Transfer pricing accounting occurs when goods or services are exchanged between divisions of the same company. A transfer price is based on market prices in charging another division, subsidiary, or holding company for services rendered.
With the introduction of a corporate income tax, the OECD Transfer Pricing Rules would be applicable in the UAE. All companies would have to comply with the transfer pricing rules and documentation requirements. The Organization for Economic Cooperation and Development (OECD) The Organization for Economic Co-operation and Development (OECD) is a unique forum where the governments of 37 democracies with market-based economies collaborate to develop policy standards to promote sustainable economic growth.
The definition of PE generally includes a branch, place of management or other fixed place of business, and an agent that has and habitually exercises authority to conclude contracts on behalf of the non-resident company.
A living human being. Legal systems can attach rights and duties to natural persons without their express consent. A ‘Legal Person’ for the purposes of the law and specifically for the requirement in the UAE to undertake UBO disclosures can be an individual ‘Natural Person’ or it can also be a company acting as a ‘Legal Person’.
A UBO or Ultimate Beneficial Owner is the person that is the ultimate beneficiary when an institution initiates a transaction.