The Ministry of Finance (“MoF”) published Cabinet Decision No. 75 of 2023, adopted by the UAE’S Federal Cabinet, outlining the Administrative Penalties for Violations of the Corporate Income Tax legislation. This new Decision is set to be effective from August 1, 2023. We’ve incorporate our own insights based on this Cabinet Decision. Read on to know more.

The following penalties apply for different violations related to CT compliance:

1. Failure to maintain the required records and information will result in a penalty of AED 10,000 for each violation. In case of repeated violations, the penalty increases to AED 20,000.
   
   These are the same penalties as for VAT and Excise Tax violations.

2. Non-compliance with the request to submit tax-related data, records, and documents in Arabic will incur a penalty of AED 5,000.
   
   This is a different penalty than for VAT and Excise Tax violations, where the penalty is AED 20,000.

3. Failing to submit a deregistration application within the specified timeframe will be penalised with AED 1,000 monthly, with a maximum cap of AED 10,000.

These are the same penalties as for VAT and Excise Tax violations.

4. Neglecting to notify the authorities of cases that may require amendments to the provided information will result in a penalty of AED 1,000 for each violation. In case of repeated violations within 2 years from the date of the last violation, the penalty increases to AED 5,000.

This is a different penalty than for VAT and Excise Tax violations, where the penalty is AED 5,000 for the first-time violation and AED 10,000 in case of repetition.

5. Failure of the Legal Representative to provide notification of their appointment within the specified timeframes will be subjected to a penalty of AED 1,000.

This is a different penalty than for VAT and Excise Tax violations, where the penalty is AED 10,000, and the penalty is due from the Legal Representative’s funds.

6. Failing to file a Tax Return within the timeframes will incur a monthly penalty of AED 500 for the first 12 months and AED 1,000 per month from the 13th month onward, whether by the taxable person is his legal representative.

This penalty is marginally lower than the failure to submit a VAT and Excise Tax return, which attracts a penalty of AED 1,000 for the first violation, and AED 2,000 for any subsequent violations.

7. Failure to settle payable tax will attract a monthly penalty of 14% per annum.

This somewhat intriguing formulation presumably means that the penalty will be prorated per month, which would result in a monthly penalty of 1.17%. This is comparably high and does more than just compensate for the value of money over time (even with high inflation). It also does not mention the starting date from which the penalty applies, presumably the filing due date of the CT return.

This again is different from VAT and Excise Tax, where the late payment penalty could potentially not apply in case of a Voluntary Disclosure before being notified of an audit and settling the VAT or Excise Tax on time (we note another penalty may be applied though which can range from 5 to 40%).

8. Submitting an incorrect tax return will result in a penalty of AED 500 (unless corrected before the deadline).

This penalty is again marginally lower than the failure to submit a VAT and Excise Tax return, which attracts a penalty of AED 1,000 for the first violation, and AED 2,000 for any subsequent violations.

9. Submitting a Voluntary Disclosure related to Tax Return errors will lead to a monthly penalty of 1% on the Tax Difference.

Presumably, this penalty would not apply when the taxable person incurs a loss, and there’s a negative change to the loss (i.e. after correction, there are more tax losses). It will remain to be seen what will happen to a change in loss, where after the correction, there are fewer tax losses (e.g. a company recorded a tax loss of 100, and after correction, it’s only 50). The described situation, in regard to losses, does require the compulsory submission of a Voluntary Disclosure.

The penalty provision is not comparable to VAT and Excise tax, where the equivalent penalty would range from 5 to 40%, and is also time-dependent but structured in a different manner. We encourage readers to check out our webinar, where we covered the 2021 changes to the UAE penalties regime for VAT and Excise Tax.

10. Neglecting to submit a Voluntary Disclosure in relation to errors in the Tax Return before being notified by the authority will incur a fixed penalty of 15% on the Tax Difference and a monthly penalty of 1% on the Tax Difference.

To write this provision in a positive way, it describes the penalties applicable to a business after it has been notified of an audit and it has not submitted a Voluntary Disclosure.

The penalty provision is not comparable to VAT and Excise tax, where the equivalent penalty would be 50% for violations detected during an audit. For VAT and Excise Tax, there is an additional penalty of 4% per month from the due date of the tax for the relevant tax return until the issuance of the Tax Assessment.

11. Failing to facilitate the Tax Auditor during the Tax Audit will result in a penalty of AED 20,000.

This provision is the same as for VAT and Excise Tax and is the exceptional stick the FTA will use in case of non-cooperation.

12. Not submitting or late submission of a Declaration to the Authority will lead to a monthly penalty of AED 500 for the first 12 months and AED 1,000 per month from the 13^th month onward.

This may be applicable to a range of requirements, such as the declaration to be filed on behalf of the partners in an unincorporated (transparent) partnership or the declaration to request for an exemption of CT (e.g. for a qualifying public benefit entity, a qualifying investment fund, a public pension or social security fund).

The recently published Cabinet Decision No. 81 of 2023 introduces new conditions for Qualifying Investment Funds (“QIF”) that must be fulfilled to qualify for the CT exemption (aside from the ones under the CT law).

The conditions are as follows:

• ‘Investment Business’ activities should be the main business activity conducted.
• The ownership of the investment fund by a single investor and its related parties is limited as follows:
  • If the investment fund has less than ten investors, the investor and its related parties cannot own more than 30% of the ownership interests;
  • If the investment fund has ten or more investors, the investor and its related parties cannot own more than 50% of the ownership interests.
• The Fund must be managed or advised by an Investment Manager with at least 3 investment professionals.
• Investors should not be involved in the day-to-day management of the Fund.

Other important considerations are that, as per Article 2(3), the ownership interest ratios mentioned above are not mandatory to be met in the Fund’s initial 2 financial years. However, evidence of the investors’ intention to meet these conditions after the first 2 financial years is necessary. If the ownership interest requirements are not fulfilled, the Fund will lose its exempt status from the beginning of the 3^rd financial year, and it may not be able to regain this status afterwards.

This provision allows for a buildup in the financial track record for new QIFs. It also means that privately owned funds will be unable to claim a tax exemption. Even funds which are partially privately held may not qualify.

The Decisions also specify exemption conditions for a Real Estate Investment Trust (REIT) as follows (Article 3):

• The value of real estate assets, excluding land, under management or ownership of the REIT exceeds AED 100 m. Further clarification is needed to determine the exact basis for assessing the value of these assets (i.e., acquisition or carrying value).
• The REIT have at least 20% of its share capital floated on a Recognised Stock Exchange. Alternatively, the REIT can be directly wholly owned by two or more investors, provided that at least 2 of those investors are not Related Parties.

In the UK, at least 35% of the units should be freely available. In the US, the beneficial ownership of the REIT must be held by at least 100 persons. In Singapore, a listing is required in order to benefit from the tax exemption. Note that we have simplified the conditions.

• REIT must have an average Real Estate Asset Percentage of at least 70%.

In the UK, US and Singapore, this percentage is 75% (nuances apply). In other jurisdictions, sometimes certain provisions exist around related party transactions (e.g. loans from related parties, investments in related parties’ assets, …). So far, there are no such requirements in the UAE.

We note that the REIT does not have a minimum distribution requirement, contrary to the UK, US and Singapore, which all require that 90% of income is distributed (again, nuances apply).

Moreover, there is no potential initial build-up period or grace period for the Fund or REIT to establish a track record while it is privately held to subsequently list. The UK does provide such a grace period for up to three years. The only way for a REIT to enjoy a similar treatment is if it is first held by institutional investors and then marketed further.

In addition to the mentioned provisions, the Decision further specifies the treatment of Investors’ Income (and related nonresident Investment Manager) and unincorporated partnerships and offers guidance on what constitutes an Institutional Investor. Notably, it states that a non-transparent unincorporated partnership can qualify for the QIF exemption.