UAE Corporate Tax Services

Tax update

The UAE releases its first federal Corporate Tax Law

On December 9, 2022, the UAE released 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 applies to Financial Years starting on or after June 1, 2023.

An unofficial English translation is available on the Ministry of Finance website. The Ministry has also published FAQs, which provide several valuable clarifications.

Salient features

What the UAE CT Law covers

• Scope: Corporate Tax ('CT') applies to UAE-based entities, foreign entities, and natural persons carrying out business activities in the UAE, including Free Zone persons, along with some specific persons granted exemptions upon application and subject to meeting the conditions.
• Non-residents: Non-resident businesses are subject to CT on income derived from a Permanent Establishment in the UAE. Non-residents with a "Nexus" (details awaited) in the UAE are also subject to CT. Non-resident businesses with a place of effective management in the UAE are taxed as resident businesses.
• Rates: The standard CT rate of 9% applies to taxable income above the basic exemption amount (expected to be AED 375,000). Taxable income up to the basic exemption amount is taxed at 0%.
• Free Zones: Qualifying Free Zone entities deriving Qualifying Income (details awaited) benefit from a rate of 0%, subject to conditions of substance in the UAE, compliance with the arm's length principle, and Transfer Pricing documentation. Non-qualifying income earned by a Free Zone person is taxed at 9%.
• Transfer Pricing: Transactions between 'related parties' and 'connected persons' must meet the arm's length principle per the OECD Guidelines. Transfer Pricing documentation must be maintained and a disclosure form submitted. The Authority may adjust taxable income, with a corresponding adjustment to the other party, for transactions not at arm's length. The threshold for Transfer Pricing documentation is yet to be confirmed.
• Deductions & relief: The Law details eligible deductions, exempt incomes, and reliefs to taxpayers, including relief for small businesses.
• Tax Groups: UAE group companies can elect to form a Tax Group if members meet the shareholding conditions in the Law. The parent is responsible for administering the Tax Group, including filing returns and paying the tax due.
• Losses: Losses incurred after the Law's applicable date can be carried forward indefinitely, subject to certain conditions. Up to 75% of losses can be offset in a particular year.
• Registration: Businesses must register and obtain a Tax Registration Number for CT purposes. Cessation of business activity, dissolution, or liquidation requires businesses to deregister.
• Anti-abuse: General Anti-Abuse rules apply — any transaction or arrangement entered into without a valid commercial or non-fiscal reason, and not reflecting economic reality, may be adjusted by the Tax Authority.
• Pillar One & Two: The Law makes no reference to Pillar One or Pillar Two.

Next steps

Preparing for the new CT regime

The implications of the new CT regime are extensive for all businesses operating in the UAE, across every business function.

In the meantime, corporations and businesses must plan and initiate an assessment of impact, review their business structure, and commence the implementation process, including preparation of Transfer Pricing policies and documentation, to determine how the provisions apply to the flow of business. A detailed assessment will help businesses get their accounts in order, define appropriate and acceptable accounting policies for areas where management estimates or judgment are required, and implement those policies consistently starting immediately.

Further information and updates will be released over the coming months through a series of Ministerial decisions. Businesses should continue to monitor these and prepare for compliance by the respective effective dates.