A long-awaited legislation providing for the introduction of a corporate income tax regime featuring a nine percent rate has been released by The United Arab Emirates.
The regime is set out in Federal Decree-Law No. 47 of 2022 on the Taxation of Corporation and Businesses, which was released in December, and it will apply to companies with taxable income exceeding AED375,000 (USD102,100). The tax regime for natural resources businesses will remain unchanged.
In articles 37,38, and 39 of the Law, it is proposed that tax losses may be carried forward and set off against taxable income in future years, provided certain conditions are met.
Article 23 provides for a participation exemption. A participating interest means a 5% or greater ownership interest in the shares or capital of a juridical person.
The Law also excludes from corporate tax liability the following types of income and related expenditure in article 22:
Dividends and other profit distributions received from a juridical person that is a Resident Person;
Income derived by a Non-Resident Person from operating aircraft or ships in international transportation that meets the conditions of Article 25 of the Decree-Law;
Dividends and other profit distributions received from a Participating Interest in a foreign juridical person as specified in Article 23 of the Decree-Law; and
Any other income from a Participating Interest as specified in Article 23 of the Decree-Law.
Further, it also provides that a UAE group of companies can elect to form a tax group and be treated as a single taxable person, filing one return for the whole group, in Article 40, 41 and 42.
Provided the conditions are met, tax losses from one group company may be used to offset taxable income of another group company.
Article 34 and 36 of the law prescribe that related-party transactions must be undertaken at arm’s length, while Article 35 defines the terms related party and control.
Taxpayers may elect to apply one or a combination of the following transfer pricing methods: the comparable uncontrolled price method; the resale price method; the cost-plus method; the transactional net margin method; or the transactional profit split method. A taxable person may apply a different transfer pricing method if they are able to demonstrate that none of the above methods can reasonably be applied to determine an arm’s length result.
Article 55 sets out transfer pricing documentation rules. It explains that the Authority may require a taxable person to file together with their tax return a disclosure containing information regarding the taxable persons transactions and arrangement with related parties and connected parties.
If the taxpayer’s transactions meet thresholds to be prescribed, the taxpayer must prepare a master file and local file, which be submitted within 30 days of a request or on any other date established as a deadline by the Authority. The Law also provides that a taxable person must provide the Authority with any information to support the arm’s length nature of the taxable person’s transactions or arrangements with its related parties or connected persons within 30 days of a request, or by another date prescribed by the authority.
Article 50 sets out a general anti-abuse rule.
In Article 51, the Law sets out the obligation on taxpayers to register for tax and prescribes that a corporate tax return must be filed and any tax due must be paid within 9 months of the end of the relaxant tax period, in Article 48 and 53.
The Decree-Law is to apply to tax periods starting on or after June 1st, 2023 and it will be mandatory for taxpayers to keep records for 7 years following the tax year to which they relate.
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