In a move intended to assist the United Arab Emirates (“UAE”) to respond to international calls for leading global economies to implement a minimum tax on corporates, the UAE issued the Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses (the “Corporate Tax Law”) on 9 December 2022, which will become effective for the financial years on or after 1 June, 2023.
What are the key features of the UAE corporate tax regime?
The regime aims to build from best practices globally and incorporates principles that are internationally known and accepted.
Who is subject to corporate tax?
Corporate Tax applies to:
- UAE companies and other legal entities that are incorporated or effectively managed and controlled in the UAE
- Natural persons who conduct a business or business activity in the UAE under a license
- Non-resident entities that have a “Permanent Establishment” (as discussed herein) in the UAE
The Ministry of Finance has highlighted that Free Zone companies will be subject to the new Corporate Tax regime. Free Zone persons are, therefore, within the scope of Corporate Tax as “Taxable Persons” and may benefit from a Corporate Tax rate of 0% on their Qualifying Income if they meet the conditions to be considered a Qualifying Free Zone Person. The Ministry of Finance will thereby honor the corporate tax holiday offered to Free Zone companies, provided they comply with the regulatory requirements and do not conduct business in the UAE.
Non-residents that do not have a Permanent Establishment in the UAE or that earn UAE sourced income that is not related to their Permanent Establishment may be subject to withholding tax at a rate of 0%.
Who is exempt from corporate tax?
Exempt persons include:
- Government entities
- Government-controlled entities specified in a Cabinet Decision
- Extractive businesses and non-extractive natural resource businesses (if notified to the Ministry of Finance and not subject to meeting certain conditions)
- Qualifying public benefit entities (if listed in a Cabinet Decision)
- Public or private pension and social security funds
- Qualifying investment funds, wholly-owned and controlled UAE subsidiaries of government entities, government-controlled entities, qualifying investment funds, or public or private pension or social security funds (if approved by the Federal Tax Authority and subject to meeting certain conditions)
How is a taxable person subject to corporate tax?
The Corporate Tax Law taxes income on both a residence and source basis. A “Resident Person” is taxed on income derived from both domestic and foreign sources, while a “Non-Resident Person” will be taxed only on income derived from sources within the UAE. Residence, for Corporate Tax purposes, is determined by specific factors set out in the Corporate Tax Law.
What is the definition of a Resident Person?
Companies and other legal entities that are incorporated or otherwise formed or identified under the laws of the UAE are automatically considered a “Resident Person” for Corporate Tax purposes. This includes entities incorporated in the UAE under UAE Federal legislation or applicable Free Zone regulations.
Foreign companies may be treated as Resident Persons for Corporate Tax purposes if they are managed and controlled in the UAE. Natural persons will also be subject to Corporate Tax as a Resident Person on income from both domestic and foreign sources where such income is derived from a business conducted by such person in the UAE.
Who is a Non-Resident Person?
A Non-Resident Person is a legal entity who is not a Resident Person and either has a Permanent Establishment in the UAE or derives State-sourced income. They will be subject to Corporate Tax on Taxable Income that is attributable to their Permanent Establishment.
What is a permanent establishment?
A Permanent Establishment is a principle of international tax law used to determine if a foreign person has established sufficient presence in a country to warrant their business profits to be subject to Corporate Tax. The definition of Permanent Establishment in the UAE is based on the OECD Model Tax Convention and the position adopted by the UAE under the Multilateral Instrument to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.
What is corporate tax imposed on?
Corporate Tax is imposed on Taxable Income earned by a Taxable Person in a Tax Period. It is calculated and paid by the Taxable Person on a self-assessment basis through the filing of a Corporate Tax Return with the Federal Tax Authority.
What income is exempt from corporate tax?
Certain types of income are exempt from Corporate Tax in the UAE, including dividends and capital gains from domestic and foreign shareholdings. Additionally, a Resident Person can elect to not take into account income from a foreign Permanent Establishment for UAE Corporate Tax purposes.
What expenses are deductible for corporate tax purposes?
In general, all legitimate business expenses incurred wholly and exclusively for the purposes of deriving Taxable Income will be deductible. However, some expenses that are deductible under general accounting rules may not be fully deductible for Corporate Tax purposes.
What is the corporate tax rate in the UAE?
The Corporate Tax rate in the UAE is 9% on Taxable Income exceeding AED 375,000, and 0% on Taxable Income below this threshold. For Qualifying Free Zone Persons, the rate is 0% on Qualifying Income and 9% on Taxable Income that does not meet the “Qualifying Income” definition. “Qualifying Income” has not been fully defined in the legislation, therefore, there continues to be uncertainty as to the circumstances in which a Free Zone company may be required to pay Corporate Tax. Practitioners are waiting for further disclosures and guidance notes from the Ministry of Finance to assist with this definition.
What is the withholding tax rate in the UAE?
A 0% withholding tax may apply to certain types of UAE sourced income paid to non-residents. Withholding tax does not apply to transactions between UAE resident persons.
When can a free zone person be considered a qualifying free zone person?
A Free Zone Person can be considered a Qualifying Free Zone Person if they maintain adequate substance in the UAE, derive "Qualifying Income", do not make an election to be subject to Corporate Tax at the standard rates, and comply with the transfer pricing requirements under the Corporate Tax Law. The Minister may also prescribe additional conditions.
What are tax groups and when can they be formed?
Tax Groups are formed by two or more Taxable Persons who meet certain conditions, such as being resident legal entities, having the same Financial Year and preparing financial statements using the same accounting standards. The parent company must also own at least 95% of the share capital, hold at least 95% of the voting rights, and be entitled to at least 95% of the profits and net assets of the subsidiary.
How is the taxable income of a tax group calculated?
The parent company must prepare consolidated financial accounts covering each subsidiary to determine the Taxable Income of a Tax Group. Transactions between the parent company and each group member and transactions between the group members would be eliminated when calculating the Taxable Income.
Registering, filing and paying corporate tax
Taxable Persons, including Free Zone Persons, must register for Corporate Tax and obtain a Corporate Tax Registration Number. Taxable Persons are required to file a Corporate Tax return for each Tax Period within nine months from the end of the relevant period. See examples below: