Corporate tax in the UAE

The start date for corporate tax in the United Arab Emirates (1 June 2023) is fast approaching. Federal Decree-Law No. 47 of 2022 on the taxation of corporations and business (“the Corporate Tax Law”) was signed on 3 October 2022, but many questions remain over how the law will apply in practice to various kinds of companies. Official questions and answers regarding the law were published immediately after the law itself was issued.

Local regulators are constantly issuing new decisions regarding particular aspects of corporate tax. These include a range of tax reliefs. Recently, for example, it was decided that companies with annual revenues of up to AED 3 million would be exempt from the tax until the end of 2026.

One landmark document is the Explanatory Guide on Federal Decree-Law No. 47 of 2022, which was published last week. Prepared by the Ministry of Finance, it provides an explanation of the meaning and intended effect of each article of the Corporate Tax Law. It is stated in the preamble that the Guide may be used in interpreting the Law. It follows the structure of the Corporate Tax Law itself, containing 20 chapters and 70 articles which cover, inter alia, the scope of corporate tax and explanations of individual provisions of the law as well as administrative issues.

The Explanatory Guide must be read in conjunction with the Corporate Tax Law itself and various decisions issued by the Cabinet of Ministers, the Ministry and the Federal Tax Authority regarding the implementation of certain provisions of the Corporate Tax Law. The Guide itself may be periodically updated and modified. However, it does not itself constitute law, but only an interpretation of the law.

Corporate tax may be imposed on resident and non-resident persons. Resident persons are taxable on all income (subject to reliefs), whether received in the UAE or elsewhere. Non-resident persons are taxed only on income from UAE sources, income from a permanent establishment in the UAE and other income received by reason of some connection with the Emirates.

Resident persons include juridical persons registered in the UAE, including residents of “free zones”, and foreign juridical persons that are effectively managed and controlled in the UAE.

The main question mark is still over the application of reliefs for free zone companies. The Guide does not address this issue. The Law itself establishes tax benefits for “qualifying free zone persons”, which are available where a company:

• Maintains adequate substance in the UAE
• Receives “qualifying income” meeting requirements which are yet to be determined by the Cabinet of Ministers of the UAE
• Complies with transfer pricing requirements
• Meets any other conditions as may be prescribed by a decision of the regulator

The following rates are established for qualifying free zone persons:

• 0% on qualifying income
• 9% on taxable income that is not qualifying income (starting from the first AED rather than from AED 375,000 as in the case of ordinary companies)

Alternatively, a free zone person may elect to be taxed on all income at the standard rate of 9%, i.e., may effectively waive relief.

The Guide is written in such a way as to imply that reliefs may also be applied to free zone branches of ordinary Emirate companies (mainland companies). This does not follow from the Law (under the Law, relief is available to free zone companies and free zone branches of foreign companies).

The standard tax rate is set at 9% (the first AED 375,000 are taxed at 0%). There is no withholding tax at this stage, but it may be introduced at a later date.

In certain cases, even individuals who carry on business activity in the UAE may be classed as payers of the tax. However, individuals would be taxed only on income from that business activity, while other income (such as salary, investment income, including property investments, etc.) should not be taxable. Income is taxed if it exceeds AED 1 million in a calendar year.

Certain entities are exempt from tax, including:

• Companies engaged in the exploitation of the natural resources of the UAE
• State companies and companies in which the state has a participating interest
• Qualifying investment funds, et al

Taxable income

Accounting income as reported in a company’s financial statements forms the basis for determining taxable income, with adjustments made for items such as the following:

• Dividend income and other profit distributions from a resident person
• Dividends and capital gains under the participation exemption
• Income received by a non-resident person from the operation or leasing of aircraft and ships in international transportation
• Profits or losses from business restructuring or intra-group transfers of assets and/or liabilities subject to certain conditions
• Net interest expenditure will be limited to 30% of EBITDA (earnings before the deduction of interest, tax, depreciation and amortisation)
• Entertainment expenditure will be deductible up to a limit of 50% of the amount incurred

A taxpayer’s income may be reduced by reasonable expenditure. Additional explanations are expected to be issued regarding non-deductible expenditure.

All taxpayers, including free zone companies, must register with the tax authorities and receive a registration number.

The tax period is the 12 months for which the company prepares statements, i.e., depends on the taxpayer’s financial year.

The filing of a return and the payment of tax must take place within 9 months of the end of a tax period or by another date as directed by the tax authority.

Transfer pricing rules now have increased importance in the UAE. Transactions with related parties must comply with the arm’s length principle. The wording used in the tax law to define the arm’s length principle and other aspects of transfer pricing is largely similar to the OECD standards. However, the definitions of related parties and connected persons are broader than the international standards.

The parent company of a group may apply to the tax authority to form a tax group together with its UAE subsidiaries subject to certain conditions being met. Parent companies of tax groups are only required to file one tax return.

Losses may also be transferred between entities not forming part of a tax group where there is an ownership interest of at least 75% and other conditions are met.
The development of tax reform in the UAE should be monitored in the context of international tax reforms (BEPS 2.0, especially Pillar 2).

In view of the above, it is advisable for companies and individuals with subsidiaries in the UAE to assess the impact of the new tax in the UAE. B1’s professionals are happy to help analyse the implications for companies and individuals and to provide support in registering with the tax authorities.