By Rima Ghalayini
There has been international pressure from the OECD to onboard as many countries to sign up to global tax framework arising from the recognition of imbalances in the global economy and especially large multinationals that structure their companies across multiple jurisdictions, taking advantage of the various tax regimes in each to avoid taxes. This has created, according to the OECD, distortions and unfair practices which impact the global economy. The OECD has sought to build a consensus with major countries to address these issues, which lead to a global tax treaty agreement under BEPS Pillar 2 enacted in 2021. Over 150 global signatories have signed the BEPS Pillar 2 treaty wherein signatory countries agreed to a minimum rate of corporate tax at 15% for multinationals. However, under this framework, all signatories to this treaty will also introduce corporate income tax across their own economy.
The UAE as signatory to OECD framework in 2018, and the BEPS Pillar 2 framework, has resulted in the adoption of UAE Federal Decree-Law No. 47 of 2022 on taxation of corporations and businesses (the “Corporate Tax Law”).
The UAE regime seeks to leverage global best practices aligned to OECD BEPS Pillar 2 but at the same time continue the UAE’s strategy to remain a leading destination for inward investment with a competitive corporate tax regime.
The Corporate Tax Law comes into effect June 2023, giving businesses time to understand and prepare for the new corporate tax regime.
UAE Corporate Income Tax Highlights
| Corporate Income Tax Rate: |
- 0%-on taxable income up to AED 375,000
- 9% on taxable above AED 375,000
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| Scope: |
Applies to:
- Legal persons incorporated in the UAE or foreign persons managed in the UAE (branch)
- Natural persons conducting business or commercial activities under a trade license (professional companies/ establishments)
- Non-Resident persons carrying out business via a permanent establishment. Essentially any entity or agent or person physically present in UAE conducting business on behalf of a foreign company creates a legal tax presence. For example, a salesperson or agent in the UAE engaged by a foreign entity creates permanent establishment
|
| Exempt Persons: |
- Federal and Emirate governments
- Wholly government owned UAE companies that carry out a sovereign activity
- Businesses in extraction and exploitation of UAE natural resources
- Charities and other public benefit organizations persons and investment funds
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| Tax Base |
- Corporate Tax applies on worldwide income
- Based on accounting net profit subject to:
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- Exemptions
- Non-deductible items or limitations
- Tax losses can be carried forward and used to offset income of other group company
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| Income Not subject to Corporate Tax: |
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- Investment in real estate
- Salary /employment income
- Dividends, capital gains, other income earned from owning shares or other securities
Generally speaking, passive income, investments, salary income is excluded from Corporate Tax; Active income will be subject to Corporate Tax. |
| Determination of Corporate Tax Payable |
Final Taxable income is determined as follows:
- Net Profit as per financial statement
- Less (-) deductible expenses, interest expense, depreciations, etc. plus (+) any adjustments to income
- Less (-) Foreign Tax Credit (if applicable)
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| Exemptions: |
The following are exempt from Corporate Tax:
- Domestic dividends including dividends paid by a Free Zone person benefiting from the 0% Corporate Tax regime
- Foreign dividends /capital gains if UAE shareholder with 5% of the shares of the subsidiary and foreign subsidiary is subject to Corporate Tax of at least 9%
- Capital gains from sale of shares in a Free Zone person
- If Free Zone person is a holding company
- Substantially all of its income is from shareholdings in subsidiary companies that meet participation exemption conditions
|
| Losses: |
- Tax Losses can be carried forward and used to offset income of other group companies
- Losses can be offset by up to 75% of taxable income in future tax periods
- Same shareholders holding at least 50% of share capital or same business carried on by new owners
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| Exclusions to Loss Relief |
- Losses incurred before the effective date of Corporate Tax Law
- Losses incurred before a person becomes a taxpayer for UAE Corporate Tax purposes
- Losses incurred from activities or assets which generate income from UAE Corporate Tax
- Losses incurred by a FZ person that are not attributable to a private enterprise in the mainland
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| Compliance |
- Companies must file Corporate Tax return and pay the applicable tax within 9 months of the end of the tax period
- Companies are not required to file provisional Corporate Tax filings or advanced Corporate Tax payments (only final filing)
- Non-compliance penalties apply:
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- Fixed penalties for non-reporting
- Interest penalties for non-payment
- Penalties for infringements
|
| Transfer Pricing |
Transfer pricing will be implemented in the UAE. Related/connected parties must act on arms’ length basis based on fair commercial value to ensure profit and attributable profit is actually realised. In this respect:
- Disclosure Form must be filed; and
- Supporting documents to provide clarity on structure and individual commercial agreements with related parties (must be documented)
|
| Tax Groups |
Tax Groups under the Corporate Tax Law are distinct and separate from tax groups under VAT.Under the Corporate Tax Law, the following apply for tax groups
- The Parent company should hold at least 95% of the shares in subsidiaries; and all subsidiaries will need to be submitted to the FTA to create a tax group
- A notice signed by the parent company and all subsidiaries will need to be submitted to the FTA
- Neither the parent company nor any of the subsidiaries can be an exempt person/ Free Zone person that benefits from the 9% Corporate Tax rate
- Single taxable person: The parent company will be responsible for the administrative and payment of Corporate Tax on behalf of the tax group
- Disclosure requirements – The parent company will have to consolidate the financial accounts of each subsidiary for the relevant tax period and eliminate intragroup transactions
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| Disallowable expenses and other considerations |
- Interest Expenses – up to 30% of EBITDA
- Related party payments to FZ persons
- Entertainment expenses – 50%
- Administrative penalties, recoverable VAT & donations to non-approved organizations disallowed
- Employee salaries allowed; but director salaries deductions are capped
|
Application of UAE Corporate Tax Law on the Free Zones
The Free Zones have a special role in UAE economy and there are many of them. Free Zone entities are required to register and report, and while Free Zones are not exempt from corporate tax regime, they can benefit from Zero Rated Corporate Tax.
| 0% Corporate Tax (zero rated) |
- Applies to Free Zone entities operating
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- Outside UAE
- Within same Free Zone
- Any other Free Zone
- Free Zone Companies and Mainland Group entities (branch income) (Associated payments made by Mainland entity will not be deductible under UAE Corporate Tax)
- Sale of goods by Free Zone companies to Mainland companies that are importing goods to mainland
- Passive received income from Mainland companies (interest, royalties, dividend, capital gains)
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| 9% Tax Rate |
- Will apply to FZ transactions with other mainland UAE companies
- FZ and mainland branch on income received on mainland (continue to benefit from 0% Corporate Tax rate on its other income)
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| Compliance: |
- Register and file 0% Corporate Tax return
- Audited statements to claim 0% Corporate Tax benefit
- Free Zone benefitting from 0% cannot form a Tax Group
- Free Zone can elect to be part of regular Corporate Tax regime; Once regular status is granted, it will be permanent
|
UAE Withholding Tax
The UAE has not introduced a withholding tax under the Corporate Tax Law and accordingly 0% withholding tax will apply on the following:
- UAE income earned by foreign company not attributable to a UAE
- Mainland UAE income earned by a Free Zone person
- Dividends and other profit made by Free zone person to a mainland UAE shareholder
Future Action
In light of the above, companies should conduct an impact assessment of their business and business group, as applicable and identify gaps and opportunities including a review current legal structures and transactional documents and accordingly prepare a plan and roadmap to be followed to prepare for the introduction of the Corporate Tax Law.
A comprehensive legal review should include:
- How best to structure a company/group to benefit from tax groups and/or relief offered under the Corporate Tax Law,
- How best to structure contracts, transactions and revenue set up to benefit from provisions under the law (whether under tax relief provisions, 0 rated tax, or tax groups);
- Free Zone and Mainland entities and relationships; and
- Transfer pricing considerations to ensure compliance
If you have any queries on this topic please do not hesitate to reach out to us on the following email: contact@legalboutique.ae
