On December 9, 2022, the Ministry of Finance (MoF) of the United Arab Emirates (UAE) released the Federal Decree-Law No. 47 of 2022 (the ‘Corporate Tax Law’). This newly introduced statute reflects the UAE’s dedication to international tax transparency standards and seeks to enhance the country’s revenue streams and foster growth. In this article, we will present a summary of the Corporate Tax Law and discuss its potential impact.
Scope of the Corporate Tax Law
The Corporate Tax Law encompasses all Emirates and is applicable to taxable individuals and entities engaged in various business and commercial activities. It will be effective for financial years commencing on or after June 1, 2023. However, it’s important to note that individuals involved in the extraction of natural resources will still be subject to taxation at the Emirate level.
Persons Subject to Corporate Tax
Taxable persons are categorized as either Resident or Non-Resident for the purpose of Corporate Tax Law.
Resident Taxable Persons:
- Companies incorporated in the UAE (including their branches within the UAE) and entities operating in Free Zones.
- Foreign companies that are effectively managed and controlled in the UAE.
- Natural persons involved in business activities within the UAE.
- Other persons as determined by a Cabinet decision.
Non-Resident Taxable Persons:
- Persons who have a Permanent Establishment (PE) in the UAE.
- Persons earning UAE-sourced income.
- Persons who have a nexus in the UAE.
Determination of Tax Base
Resident Taxable Person is subject to corporate tax on their taxable income derived both within and outside the UAE.
Taxable Non-Resident person is subject to corporate tax on:
- the taxable income that is attributable to the PE of the non-resident person in the UAE;
- UAE-sourced income that is not attributable to a PE of the non-resident person in the UAE;
- the taxable income attributable to the nexus of the non-resident person in the UAE.
Tax Treatment of Free Zone Persons (FZP)
Companies and branches operating within Free Zones are considered taxable persons and must adhere to the regulations stipulated in the Corporate Tax Law. Free Zone Persons, including both Free Zone companies and branches, is subject to taxation.
A Qualifying Free Zone Person (QFZP) has the opportunity to benefit from a preferential corporate tax rate of 0% on their ‘Qualifying Income,’ provided they meet certain conditions specified in the law. However, any income that does not meet the criteria for Qualifying Income will be taxed at the standard corporate tax rate of 9%. The conditions and requirements for availing the preferential tax rate and determining Qualifying Income are outlined in the Corporate Tax Law and related guidelines.
Corporate Tax Rate
Taxable persons, excluding Qualifying Free Zone Persons (QFZPs), are subject to corporate tax as follows:
- A corporate tax rate of 0% applies to taxable income up to and including AED 375,000.
- For taxable income exceeding AED 375,000, a corporate tax rate of 9% is applicable.
Qualifying Free Zone Persons (QFZPs) are subject to corporate tax as follows:
- A preferential corporate tax rate of 0% is applied to their Qualifying Income.
- Any income categorized as Non-Qualifying Income of a QFZP is subject to a corporate tax rate of 9%.
Persons Exempt from Corporate Tax
Certain entities in the UAE are eligible for exemptions from corporate tax as a recognition of their significance and contributions to the country’s social fabric and economy. Such entities include:
- Government Entities: This includes entities directly or indirectly controlled by the government, and they are automatically exempt from corporate tax.
- Extractive and Non-Extractive Businesses: Persons involved in extractive and non-extractive businesses are also automatically exempt from corporate tax.
- Public Benefit Entities: Public benefit entities, investment funds, and specific juridical persons have the option to apply for exemption from corporate tax. The application should be submitted to the Federal Tax Authority (FTA) for review and consideration.
Determining Taxable Income
Taxable income is determined on an annual basis using the accounting income (net profit or loss before tax) derived from financial statements prepared according to accounting standards accepted in the UAE. Certain adjustments are made to the accounting income to arrive at the taxable income, including, but not limited to:
- Exempt income.
- Non-deductible expenditures.
- Interest expenses.
- Unrealized gains or losses.
- Intercompany transactions or payments between related parties, if not conducted at an Arm’s Length basis.
- Any other expenses specified in a Cabinet decision to be considered for adjustments.
Income Exempt from Corporate Tax
The Corporate Tax Law provides exemptions for specific types of income for resident persons. These exemptions include dividends received from resident juridical persons, income from participating interest (subject to conditions), income from foreign permanent establishments (subject to conditions). Further, income derived by non-resident persons from the operation of aircraft or ships in international transportation is also exempt.
Income that falls outside the scope of the Corporate Tax Law
Personal income earned by individuals, including employment income, real estate income, savings income, and investment returns, is not subject to corporate tax. However, it is important to note that business income generated by individuals with commercial licenses will be subject to corporate tax.
Administrative Requirements for Corporate Tax
Taxable persons, including free zone persons, must register for corporate tax and obtain a Tax Registration Number. The Federal Tax Authority (FTA) may also require certain exempt persons to register for corporate tax.
Taxable persons are obligated to file a corporate tax return for each tax period and make the payment of any corporate tax owed within 9 months from the end of the relevant period. The tax period generally follows the Gregorian Calendar Year (January to December) or any other 12-month period aligned with the taxpayer’s financial statements.
If a person with a Tax Registration Number ceases their business or business activity, they must submit a Tax Deregistration application to the FTA in the prescribed form and manner, within the specified timeline. This applies to situations such as dissolution, liquidation, or any other cessation of business.
The FTA will provide guidance on the Form of the corporate tax return Navigating and adhering to the Corporate Tax Law can be intricate and time-intensive. Therefore, it is essential to seek professional guidance to ensure compliance and maximize tax planning strategies.
AMA Audit & Advisory equipped with the expertise and experience will assist your business in navigating the complex landscape of UAE’s Corporate Tax. Our team of knowledgeable tax professionals is dedicated to offering tailored solutions that meet your unique requirements. Let us help you understand the intricacies of the Corporate Tax Law and optimize the advantages for your business. Contact us today for expert assistance.
Disclaimer: The above content serves as a brief overview of the Corporate Tax (CT) Law and is provided for informational purposes only. It does not include detailed analysis of the law’s provisions, nor does it represent the official views or interpretations of the Ministry of Finance or the Federal Tax Authority. For comprehensive information, please refer to the relevant Cabinet Decisions and Ministerial Decisions pertaining to the UAE’s CT regime, available at www.mof.gov.ae
It is important to note that the information presented is general in nature and should not be considered as professional tax advice. AMA Audit & Advisory, its partners, or employees do not assume any responsibility for any losses or damages that may arise from actions taken or refrained from based on the information provided or omitted. For personalized guidance and advice, we recommend consulting with a tax professional.