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UAE Corporate Income Tax Regime – A new Era

January 6, 2023

For the first time in the United Arab Emirates, the state issued Federal Decree-Law No. (47) of 2022 regarding taxes incurred by companies and businesses. This is yet another development in the UAE taxation system which has witnessed significant maturity and prosperity in the past 6 years. The imposition of the corporate and business tax, as reported by the Federal Tax Authority, came to support the state in achieving its strategic objectives in the field of business and investment and to accelerate the pace of its development and growth with regard to the tax system in accordance with international standards.

The law entered into force 15 days from its promulgation in the official gazette (i.e., 18th October 2022, as per the law which was promulgated on 9 December 2022), and it is of particular note that the general anti avoidance provisions contained in the law are now applicable with immediate effect; even though the law will apply to tax periods commencing on or after June 2023. 

The law imposes corporate tax on the company’s taxable income at rates of 0% and 9%, payable to the Federal Tax Authority. The applicability of either rate on the taxable amounts is subject to a threshold that is yet to be determined by virtue of a decision by the cabinet (although it is expected that if Taxable Profit exceeds AED 375,000, the 9% rate will apply). Qualified Free Zone Persons that meet certain conditions, including inter alia, maintaining a de facto presence in the UAE are also subject to the same rates, depending on whether they achieve “Qualifying Income”.

The law has exempted several entities from such tax, including but not limited to, governmental entities, government controlled entities, businesses involved in concessions or has licenses to perform extractive works, businesses involved in non-extractive natural resources works, qualifying public entities, qualifying investment funds, public and private pension or social security fund, legal entities wholly owned or controlled by an exempted person, provided that certain criteria are met. 

A taxable legal person can either be a resident or non-resident. Investment managers, partners in incorporated partnerships, family foundations, foreign establishments, and non-resident persons operating aircraft or ships in international transportation can also benefit from exemption provided that they meet an exhaustive criteria. The law provides a relief option to small businesses from taxes, provided that their revenues do not exceed a specific threshold, that is yet to be determined by virtue of a ministerial decree. Similar exemption is available to “transfers within qualifying groups” and business restructuring.

Deductions are set to apply to deductible expenditures that are not capital in nature, interest expenditures, entertainment expenditures subject to certain limitations (ceilings). The law applies the arm length principle to transactions with related parties. It also regulates related parties and control and payments to connected parties.

Under the new law, tax loss can be settled against the taxable income of subsequent tax periods, subject to the fulfillment of certain conditions as well as to (legally prescribed) limitations.

A resident parent company also has the option to submit a request to the Federal Tax Authority to form a tax group with one or more resident persons, where the parent company, inter alia, owns at least 95% of the share capital of the subsidiary, as well as 95% voting rights and entitlement to share-profits. The law provides for a special regime in taxing a tax group.

A tax rate of 0% withholding tax (or any other rate as may be further specified by subsequent cabinet decrees) is applicable to certain categories of state-sourced income derived by a non-resident persons specified by a decision issued by the cabinet. It is also noted that the due corporate tax is calculated in UAE Dirhams.

The registration of taxable legal persons with the authority will be subject to the authority’s prescribed form, manner and time-line. In case of cessation of business, the taxable person can apply for an application to the authority to de-register itself. Filing tax returns will also be subject to further direction from the tax authority no later than 9 months from the end of the relevant tax period.

A taxable legal person must maintain all records and documents for a period of 7 years following the end of the tax period, whenever they relate to, (a) supporting information accompanying the tax return or documents filed with the authority; and (b) enable the taxable income to be readily examined by the authority.

The law clarified relevant penalties and fines are imposed by the Tax Procedure Law (in accordance with its latest amendments).

In conclusion, and in light of the foregoing, we recommend companies and business owners to review the law on the website of the Ministry of Finance and the website of the Federal Tax Authority to conduct an initial assessment of the implications of the law and to understand the requirements under the Corporate Tax Law.

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