The Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses - issued 3 October 2022 (Effective 15 days after publishing in the Official Gazette), provides the legislative basis for the introduction and implementation of a federal corporate tax in the UAE and is effective for financial years starting on or after June 1, 2023. 

The Corporate Tax Law applies to Natural Persons i.e. Individuals, that derive annual Turnover exceeding AED 1 million, from a 'Business' of 'Business Activity' in the UAE, regardless of their citizenship or visa status. 

Thus, a Natural Person, living inside or outside the UAE, who is engaged in a Business or Business Activity in the UAE will be considered a Resident Person for UAE Corporate Tax purposes and be subject to the UAE Corporate Tax Law.

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The UAE Corporate Tax law defines the term "Non-Resident Person" to mean a Taxable Non-Resident Person. However, it is important to note that not all Non-Resident Persons are subject to Corporate Tax in the UAE. 

Under the Corporate Tax Law, a Juridical person is considered a Non-Resident Person if it is incorporated in a foreign country and is effectively managed and controlled outside the UAE. A Natural person is considered a Non-Resident Person for UAE Corporate Tax purposes if he or she is not engaged in a taxable Business or Business Activity in the UAE.

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As per Article 55(2) of the UAE Corporate Tax Decree-Law if a Taxable Person’s transactions with its Related Parties and Connected Persons for a Tax Period meet the conditions prescribed by the Minister, the Taxable Person must maintain both a Master File and a Local File in the form prescribed by the Authority.

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Effective Date

The UAE Corporate Tax (CT) regime will become effective for financial years starting on or after 1 June 2023.

Examples:

1. Financial year starting on 1 July 2023 and ending on 30 June 2024

The business will become subject to UAE CT from 1 July 2023 (which is the beginning of the first financial year that starts on or after 1 June 2023)

2. Financial year is a calendar year starting on 1 January 2023 and ending on 31 December 2023

The business will become subject to UAE CT from 1 January 2024 (which is the beginning of the first financial year that starts on or after 1 June 2023)

Scope

• All activities undertaken by a legal entity that has a commercial license to carry out business in the UAE will be deemed “business activities” and hence be within the scope of UAE CT
• The taxable income will be the accounting net profit of a business, after making adjustments for certain items to be specified under the UAE CT law
• The accounting net profit of a business is the amount reported in the financial statements prepared in accordance with internationally acceptable accounting standards

Corporate Tax Rates

The Corporate Tax rates will be as follows:

Individuals and juridical persons       

• 0% for taxable income up to and including AED 375,000 (this amount is to be confirmed in a Cabinet Decision)
• 9% for taxable income exceeding AED 375,000

Qualifying Free Zone Persons

• 0% on qualifying income
• 9% on taxable income that does not meet the qualifying income definition

Large Multinationals

A different tax rate will be applicable to large multinationals that meet specific criteria set with reference to 'Pillar Two' of the OECD Base Erosion and Profit Shifting project.

Example of how to calculate Corporate Tax Liability:

Business has earned a taxable income of AED 400,000 in a given financial year.

In this case the Tax liability will be calculated as follows:

Income of AED 0 upto AED 375,000 @ 0% = Tax of AED 0

Income Above AED 375,000 @ 9% = Tax of AED 2,250 as per below

AED 25,000 being the portion of taxable income exceeding AED 375,000 (i.e. AED 400,000 less AED 375,000 = AED 25,000) multiplied by 9%

The UAE CT liability for the year will be AED 0 + AED 2,250 = AED 2,250

The final amount of UAE CT payable will be reduced by any foreign taxes incurred on the relevant income.

Administration

• All businesses will be required to register for UAE CT purposes
• Taxpayers are expected to prepare and maintain financial statements 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 Authority.
• Only one CT return will need to be filed per financial period. No provisional or advance CT filings will be required
• A financial period is generally a year
• The CT return will need to be filed electronically.
• UAE businesses will not be required to make and provisional or advance UAE CT payments
• Similar to other taxes in the UAE (e.g. VAT), businesses will be subject to penalties for non-compliance with the CT regime.

Free Zones

• Free zone businesses will be subject to UAE CT, but the UAE CT regime will continue to honour the CT incentives currently being offered to free zone businesses that comply with all regulatory requirements and that do not conduct business with mainland UAE
• A business established in a free zone will be required to register and file a CT return
• The UAE CT treatment that will apply to businesses in free zones will be the same across all free zones
• Entities established in a Free Zone that meet the conditions will benefit from the 0% Free Zone CT regime for Qualifying Free Zone Persons.

Corporate Tax Exemptions:

• Businesses engaged in the extraction of natural resources will remain subject to Emirate level corporate taxation and be outside the scope of UAE CT
• UAE CT will not apply on an individual’s salary and other employment income (whether received from the public or private sector)
• The investment in real estate by individuals in their personal capacity should not be subject to UAE CT provided the individual is not required to obtain a commercial license or permit to carry out such activity in the UAE
• Individuals will not be subject to UAE CT on dividends, capital gains and other income earned from owning shares or other securities in their personal capacity
• Interest and other personal investment and savings income earned by an individual in their personal capacity should not be subject to UAE CT.
• Dividends and other profit distributions received from UAE incorporated or resident legal persons;
• Dividends and other profit distributions received from a Participating Interest in a foreign juridical person
• Certain other income (e.g., capital gains, foreign exchange gains / losses and impairment gains or losses) from a Participating Interest
• Qualifying intra-group transactions and reorganizations will not be subject to UAE CT provided the necessary conditions are met

Adjustments to accounting net profit (or loss)

Adjustments to the accounting net profit (or loss) will need to be made for the following items:

• Unrealised gains and losses (subject to the election made regarding the application of the realisation principle);
• Exempt income such as qualifying dividends and capital gains;
• Income arising on intra-group transfers;
• Deductions which are not allowable for tax purposes;
• Transactions with Related Parties and Connected Persons;
• Transfers of tax losses within the group where relevant;
• Incentives or tax reliefs; and
• Any other adjustments as specified by the Minister.

Adjustment of Losses

• The UAE CT regime, subject to certain conditions, allow a business to use losses incurred (as from the UAE CT effective date) to offset taxable income in subsequent financial periods
• Excess tax losses may be carried forward without limitation and used against taxable income in future years, provided certain conditions are met
• Tax losses from one group company may be used to offset taxable income of another group company, provided certain conditions are met

Tax group

• A UAE group of companies can elect to form a tax group and be treated as a single taxable person, provided certain conditions are met
• A UAE tax group will only be required to file a single tax return for the entire group

Withholding tax

A 0% withholding tax may apply to certain types of UAE sourced income paid to non-residents.

Tax credits

Foreign CT paid on UAE taxable income will be allowed as a tax credit against the UAE CT liability subject to certain conditions.

Transfer pricing

UAE businesses will need to comply with transfer pricing rules and documentation requirements set with reference to the OECD Transfer Pricing Guidelines

 

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