UAE Ministry of Finance, Federal Tax Authority released – Corporate Tax Law
On December 9, 2022, the UAE released the Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses. The Corporate Tax Law was published in the official gazette on October 10 and is effective from October 26 in the UAE. The Law is applicable for the Financial Years starting on or after June 1, 2023.
Some of the salient features of the UAE CT Law
- The Corporate Tax ('CT') applies to UAE-based entities, foreign entities, and natural persons carrying out business activities in the UAE, including the Freezone persons, along with some specific persons being granted exemptions upon application and subject to meeting the conditions.
- Non-residents businesses shall be subject to CT on the income derived from a Permanent Establishment in the UAE. In addition, non-residents having “Nexus” (details awaited) in the UAE shall also be subject to the CT. Non-resident businesses having a place of effective management in the UAE shall be taxed as resident businesses.
- The standard CT rate of 9% shall apply to taxable income above the basic exemption amount (expected to be AED 375,000). Taxable income upto the basic exemption amount shall be taxed at 0%
- Qualifying Free Zone entities deriving Qualifying Income (details awaited) shall benefit from a rate of 0%, subject to conditions of substance in the UAE, compliance with arm's length principle & Transfer Pricing Documentation. Additionally, if the Freezone person earns non-qualifying income, it shall be taxed at 9% for that particular non-qualifying income.
- Transactions between 'related parties' and 'connected persons', should meet the arm's length principle as per the OECD Guidelines. The Transfer Pricing documentation must be maintained, and a disclosure form shall also be required to be submitted. Authority may adjust taxable income with the corresponding adjustment to the other party for transactions that are not at Arm's length price. The threshold for applicability of Transfer Pricing documentation is yet to be confirmed.
- The CT law also details eligible deductions, exempt incomes, and reliefs to taxpayers, including relief to small businesses.
- The UAE group companies can elect to form a Tax Group if the Group members meet the shareholding conditions outlined in the Law. The parent shall be responsible for the administration of the Tax Group, including filing returns and making payments of the due tax.
- Losses incurred after the applicable date of Law can be carried forward indefinitely, subject to certain conditions. Upto 75% of the losses can be offset in a particular year.
- Businesses must register and obtain a Tax Registration Number for CT purposes. In addition, cessation of business activity, dissolution, or liquidation shall require businesses to deregister.
- General Anti-Abuse rules find a place in the Law, and consequently, any transaction or arrangement entered without valid commercial or non-fiscal reason not reflecting the economic reality shall find themselves being adjusted by the Tax Authority.
- There is no reference to Pillar 1 & 2
The implication of the new CT regime is extensive for all businesses operating in the UAE undertaking business functions.
In the meantime, Corporations & Businesses must plan & initiate the assessment of impact, review the business structure, and commence the implementation process, including preparation of Transfer Pricing policies and documentation to see the applicability of the provisions on the flow of business. The detailed assessment shall help businesses to get their accounts in order, define appropriate, acceptable accounting policies for areas where management estimates/judgments are required, and implement such policies consistently starting immediately.
For further information/updates, which will be released over the upcoming months through a series of Ministry decisions, businesses should continue to monitor and be prepared with the compliances by the respective effective date.
Our team of tax experts can support you in understanding the potential impact of CT & Transfer Pricing, and how this may affect the specific business. This could involve the following:
- Conduct and deliver technical Tax Training and Workshops
- Perform qualitative impact and readiness/maturity assessments
- Provide implementation support on tax practices along with post implementation support