The Ministry of Finance (MoF) in the United Arab Emirates (UAE) recently issued Federal Decree-Law No. 47 of 2022, known as the Corporate Tax Law, which introduces a new corporate tax (CT) regime in the country. This legislation, accompanied by 158 Frequently Asked Questions (FAQs), will come into effect from June 1, 2023. Businesses and individuals operating in the UAE should carefully analyze the implications of these new regulations, including understanding their application, assessing financial impacts, considering exemption provisions, and establishing compliance procedures. It is crucial to stay updated on forthcoming Ministerial Decisions to ensure timely compliance with the new CT regime.
On December 9, 2022, the UAE MoF published the Corporate Tax Law, scheduled to take effect for financial years starting on or after June 1, 2023. This release follows a public consultation document issued on April 28, 2022, which outlined the main features and design principles of the proposed CT regime.
The Corporate Tax Law will apply to both resident and nonresident persons. Resident persons include juridical entities incorporated, established, or recognized in the UAE, as well as natural persons engaged in business activities within the country. Nonresident persons may be subject to CT if they have a permanent establishment (PE) in the UAE, derive UAE-sourced income, or have a nexus in the UAE (specifics of the nexus rules to be determined through a Ministerial Decision).
Under the new regime, most UAE businesses will be subject to a 9% CT rate. Income falling below a particular threshold (expected to be AED375,000 based on FAQs) will be taxed at a 0% rate. While the Corporate Tax Law does not explicitly mention higher rates for large multinationals subject to Pillar Two, the FAQs reaffirm the UAE's commitment to implementing these rules in due course.
Certain entities and activities will be exempt from CT under specific conditions. These include persons engaged in the exploitation of UAE natural resources, government and government-controlled entities, qualifying public benefit entities, charities and public benefit organizations, pension or social security funds, and qualifying investment funds. Additionally, exemptions may extend to entities incorporated in the UAE that are wholly owned and controlled by exempt persons, provided they fulfill certain criteria.
UAE businesses will be liable for CT on their worldwide income, with exceptions for dividend income, capital gains, and income from specific sources that meet participation exemption conditions. The law also provides for a foreign branch profits exemption when such profits have been subject to a minimum tax rate of 9% overseas. Foreign tax credits will be available for taxes paid overseas on income not exempt from UAE CT. Natural persons who are UAE residents and subject to CT will only be taxed on income derived from business activities conducted within the UAE. Non-residents will be subject to CT on taxable income attributable to a PE or nexus in the UAE or income considered UAE-sourced.
A non-resident person will be deemed to have a PE in the UAE if they have a fixed place of business or a dependent agent within the country. The language used in the Corporate Tax Law aligns with the standards of the Organisation for Economic Co-operation and Development (OECD). Determination of other forms of nexus that may create a PE will be established through a Ministerial Decision.
The Corporate Tax Law specifies various types of income that will be classified as UAE-sourced. Generally, income earned by a UAE resident person and income derived from activities, assets, or rights utilized for economic purposes within the UAE will be considered UAE-sourced.
The Corporate Tax Law introduces the concept of a "Qualifying Free Zone Person" (QFZP), a category of entities operating within designated free zones that meet specific criteria. QFZPs will be subject to a 0% CT rate on qualifying income. However, they have the option to be taxed at the standard CT rate.
The taxable income will be determined based on the accounting income reported in the financial statements, subject to certain adjustments. Specific rules regarding the determination of taxable income and allowable deductions will be provided through a Ministerial Decision.
Businesses will be able to carry forward tax losses indefinitely, subject to certain conditions, and utilize them to offset future taxable income. The exact details and limitations of tax loss carry forward provisions will be clarified in forthcoming Ministerial Decisions.
A parent entity can apply to form a tax group with its UAE subsidiaries, subject to certain conditions. This provision allows for the consolidation of taxable income and losses within the group, facilitating more efficient tax planning.
The Corporate Tax Law does not introduce a general withholding tax regime. However, payments made by UAE businesses to non-resident persons earning UAE-sourced income will generally be subject to a 0% withholding tax rate. Specific provisions regarding withholding tax requirements will be provided in a Ministerial Decision.
Businesses subject to CT must register with the Federal Tax Authority (FTA) and obtain a Tax Registration Number. They are required to file tax returns, pay taxes, and maintain appropriate records in line with the UAE tax laws and regulations. The FTA may request financial statements from taxpayers for verification and auditing purposes.
Transactions between related parties must comply with the arm's-length principle. The Corporate Tax Law empowers the MoF to issue transfer pricing rules, including requirements for documentation, comparable data, and methodologies. Taxpayers should prepare for the introduction of comprehensive transfer pricing regulations and ensure compliance with these rules.
The introduction of the Corporate Tax Law marks a significant development in the UAE's tax landscape. Businesses and individuals operating in the UAE should carefully assess the impact of these new regulations on their operations, financials, and compliance obligations. Staying up to date with Ministerial Decisions and guidance from the FTA will be crucial to ensuring compliance with the CT regime. Professional advice and support from tax experts can assist businesses in navigating the complexities of the new tax framework and optimizing their tax strategies.
If you require assistance in relation to the above and/or would like to discuss anything further, please do not hesitate to contact email@example.com or your usual A.C.T. contact.