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UAE Corporate Income Tax

UAE CIT Law: Gathering the pulse of the UAE MoF

UAE CIT Law: Gathering the pulse of the UAE MoF

After the announcement of the introduction of Corporate Income Tax (CIT) and the publication of the Frequently Asked Questions (FAQs) on 31 January 2022, and the release of the Public Consultation Document in April 2022, the Corporate Income Tax (CIT) Law was finally released on 9 December 2022.

 

The UAE CIT Law is Federal Decree-Law No. 47 of 2022 issued on 3 October 2022, and is effective 15 days after its publication in the Official Gazette. The UAE CIT Law was published on 10 October 2022 in issue #737 of the UAE Official Gazette. The CIT law is applicable on business profits effective for financial years starting on or after 1 June 2023.

The CIT regime has been implemented by the UAE in view of achieving the following objectives:

  • Cementing the UAE’s position as a world-leading hub for business and investment;
  • Meeting international standards for tax transparency and preventing harmful tax practices, and;
  • Accelerating the UAE’s development and transformation to achieve its strategic objectives.

We include hereafter the main features of the new regime, as announced by the Ministry of Finance (MoF) and the Federal Tax Authority (FTA). We have already expressed a brief overview of the CIT Law in our earlier newsletter here and in a webinar available on YouTube here. The slide deck presented in the webinar is available on this LinkedIn post. We have also captured the 10 most striking aspects of the CIT law here.  

The UAE MoF conducted 3 Awareness Sessions (Sessions) in the month of January 2023, and we have summarised the major points discussed in the Abu Dhabi Session here and the Dubai Session here.

Below we discuss the main features of the UAE Corporate Income Tax regime and some of our comments and observations.

Scope

CIT will apply on the adjusted worldwide accounting net profits of the business. The UAE CIT regime introduces two different rates:

  • A 0% tax rate will apply for taxable profits up to a a threshold of AED 375,000, is now confirmed in Cabinet Decision No. 116 of 2022. This Cabinet Decision also includes an anti-fragmentation rule (inspired by the General Anti-Abuse Rules, discussed later below). The rule seeks to prevent a business dividing their activities into multiple registered entities such that each entity earns income below the threshold of AED 375,000 and avoids paying tax.
  • The standard statutory tax rate will be 9 per cent. Because of the low tax rate, the UAE will continue to be highly competitive at a global level. There are also many exemptions applicable.

There is currently no mention in the Law of the 15% global minimum tax rate applicable for MNEs that fall within the scope of ‘Pillar Two’ of the OECD Base Erosion and Profit Shifting project (BEPS Project).

Specifically, this would apply to MNEs that have consolidated global revenues in excess of EUR 750m (c. AED 3.15 billion), in any two of the previous four years. The FAQs still refer to the possibility of adoption in the UAE of these rules. In the Dubai MoF Session, it was mentioned that the UAE is a member of the OECD’s Inclusive Framework (IF) and is committed to implementing the ‘Pillar Two’ proposal. Further details in this regard will be released shortly. Until then, the existing rates of 0% and 9% apply to UAE businesses.

Individuals who are residents are subject to corporate tax insofar as they engage in a business activity. The definition of business is inspired by the VAT definition, and is therefore extremely broad. In the Dubai MoF Session, it was mentioned that a Cabinet Decision will be published in regard to the application of CIT to natural persons, including on the nature of ‘business activities’ sought to be covered within the ambit of the CIT regime. A Cabinet Decision on determination of tax residency for tax purposes was already issued in 2022. We have summarised the permutations and combinations for determination of tax residency for an individual in the form of a decision tree here.

For non-individuals (e.g., companies), the tax residency vests with the UAE if the entity is either (i) incorporated or otherwise established or recognised in terms of applicable UAE legislation, or (ii) an entity that is effectively managed or controlled in the UAE. In this regard, the MoF mentioned in the Dubai session that an example of ‘effectively managed or controlled’ is where the Directors are located or where they make key decisions for the entity.

There is a 0% regime for businesses established within UAE free zones that (1) maintain adequate substance, and (2) earn Qualifying Income. What constitutes Qualifying Income will be determined in a Cabinet Decision. Presumably, this is a reference to the requirement not to conduct business with mainland UAE, as previously outlined in the Public Consultation Document. It is confirmed as well that Free Zone businesses can voluntarily elect to be subject to Corporate Income Tax at the rate of 9 per cent. In the Dubai and the Abu Dhabi MoF Sessions, it was reiterated that the UAE’s economy is heavily dependent on Free Zones. At the same time, this relationship is stated to be ‘two sided’. The position of the MoF so far is that while the Government will honour their commitment with respect to Free Zones, Free Zone persons are also required to honour their commitments. Details in this regard will be provided soon.

There will be a 0% withholding tax on categories of State Sourced Income derived by a Non-Resident. This means that foreign investors who do not carry on business in the UAE will in principle not be subject to tax in the UAE.

For foreign entities, they could be considered a resident in the UAE if they are managed and controlled in the UAE. For foreign entities not considered resident in the UAE, but who may have a Permanent Establishment (PE) in the UAE, the Permanent Establishment definitions encompass definitions of a fixed PE and an agency PE. We expect further details about the PEs in a Ministerial Decision. For the financial sector, the Investment Manager Exemption from the Public Consultation Document is retained in the UAE CIT Law.

Specific rules apply for Partnerships. It has been reiterated in the Sessions that if the Partnership is unincorporated (such as an unincorporated association of persons), the profits are taxed at the individual (partner) level. If the Partnership is incorporated, the profits are taxed at the partnership level. The partners may make an application to the FTA to have the business profits taxed at the level of the Partnership. Family Foundations can also elect for tax transparency (i.e., being taxed at the level of the individual(s)). It was mentioned in the Dubai MoF Session that the policy consideration behind the Family Foundation’s default treatment being taxed on its business activities at the level of the foundation is to reduce compliance at the level of the individual(s).

Government Entities and Government Controlled Entities will be exempt from the UAE CIT Law, as will Qualifying Public Benefit Entities and Qualifying Investment Funds. It has been clarified in the Dubai MoF session that entities such as Qualifying Investment Funds are required to first register for CIT if it conducts business activities, and then apply for the exemption (meaning, that the exemption is not automatically granted). Extractive businesses (upstream oil & gas businesses) will also be exempt, to the extent they earn income from the extractive business and are taxed at the Emirate level. Similarly, even non-extractive businesses will be exempt if the income from the business is already taxed at the Emirate level. In principle, banking operations will be subject to CIT (unless the institution is in a Free Zone and qualifies for the 0% rate).

Date of implementation

Article 69 of the UAE CIT Law provides that the Law will apply to Tax Periods starting on or after 1 June 2023.

Businesses with a financial year starting 1 January will be subject to CIT as from 1 January 2024.

Deductible expenses

Expenses incurred wholly and exclusively for business purposes, and which are not to be capitalized, are deductible immediately. Likewise, depreciation and amortisation expenses are also generally tax deductible, in line with international standards. Deductions are not allowed for expenditures incurred to obtain exempt income. When there is a mixed purpose, the deduction is only partially allowed.

Interest expenses are deductible subject to a cap of 30% of the EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation). The so-called financial assistance rules are in place, which prevents businesses from obtaining financing to pay out dividends or profit distributions. Entertainment expenses are capped at 50% deductibility.

Non-deductible expenses include donations made to a non-Qualifying Public Benefit Entity, fines, bribes and dividends. Importantly as well, amounts withdrawals from the Business by a natural person who is a taxable person are not deductible.

Exempt income and relief

The following categories of income will be exempt from CIT (Article 22 UAE CIT Law):

  • Capital Gains, Dividends and other profit distributions from a Resident Person;
  • Capital Gains, Dividends and other profit distributions from a Qualifying shareholding in a foreign legal person, subject to a holding period of 12 months, having a minimum participation of 5%, and at a minimum subject to tax at 9% CIT in the country of source;
  • Income from a Foreign PE, subject to conditions and an election to apply the exemption (rather than a credit);
  • Income derived by a non-resident Person derived from operating aircraft or ships in international transportation (subject to reciprocity).

The following transactions are subject to specific relief, i.e. effectively a deferral of taxes:

  • Qualifying intragroup transactions and restructurings – entities will qualify if they have 75% common ownership
  • Business restructuring relief – subject to certain conditions.

Transfer pricing

 

Article 34 of the UAE CIT Law confirms the requirement for related party transactions to be conducted in accordance with the Arm’s Length Principle (ALP). Furthermore, it outlines the five traditional OECD transfer pricing methods as being appropriate to support the arm’s length nature of related party arrangements, while allowing the use of other methods where suitable.

 Additionally, Article 34 outlines that in the event of an adjustment imposed by a foreign tax authority which impacts a UAE entity, an application must be made to the FTA for a corresponding adjustment to provide the UAE company with relief from double taxation. Any corresponding adjustments related to domestic transactions does not require such an application.

Article 55 covers transfer pricing documentation requirements. UAE businesses will need to comply with the transfer pricing rules and documentation requirements set with reference to the OECD Transfer Pricing Guidelines. This means a three tier reporting, i.e., Master File, Local File and Country-by-Country Reporting (CbCR). There is also a reference to a controlled transactions disclosure form, details of which remain outstanding. Additionally, it is noted that no materiality thresholds have been provided so far. At the same time, in the Dubai Seminar, the MoF mentioned that small businesses are not required to comply with the Transfer Pricing document requirements. Separate legislation will be issued later.

Advanced pricing agreements will be available as well, through the regular clarification process already in place.

While not necessarily transfer pricing, the UAE has implemented provisions requiring payments and benefits made to connected persons to be at market value, for those amounts to be tax deductible. For the application of this principle, the same principles are applied as in article 34 of the UAE CIT Law, which refers to a transfer pricing methodology.

Administration and enforcement 

The MoF seems to remain the competent authority for the purposes of multi-lateral or bilateral agreements and the international exchange of information. The FTA will be responsible for the administration, collection and enforcement of the new corporate income tax regime. Based on the Establishment Law of the FTA, regular engagement between the FTA and the MoF on international tax matters, will be required. Penalties and fines are determined by the Tax Procedures Law.

Businesses will need to obtain a Tax Registration Number (TRN) with the FTA. The TRN issued for CIT purposes is different from the TRN issued for VAT purposes. As on date of writing this piece, according to statements made by MoF, some businesses have already been invited to pre-register for CIT. The FTA released ‘Corporate Tax Registration Manual’ explaining the procedure for application of registration and navigation through the EmaraTax portal. We did a post covering this update here.

Further, it has been clarified in both the Abu Dhabi and the Dubai Sessions that no penalties will be levied on late registration (penalties for late filing of returns and late payment will still be levied nonetheless). It has also been emphasized by the MoF that if business activities are being conducted, the business must register. Further, the MoF has clarified that registration is necessary even if income is earned below the threshold of AED 375,000, or if there is otherwise no tax liability (such as businesses in the Free Zone).

Businesses that are subject to UAE CIT will be required to file a CIT return electronically for each financial period within 9 months of the end of the Financial Period. A financial period is generally any 12-month financial period year. Free Zone businesses subject to 0% CIT are also required to file a CIT return.

Other considerations

  • Foreign tax will be allowed to be credited against UAE corporate tax payable. The mechanism of the application is as in the Public Consultation Document. Businesses can claim the lower of the corporate tax due, or the amount of withholding tax effectively deducted. There will be no carry forward. There are no credits for taxes paid to the individual Emirate.
  • Fiscal consolidation or Tax Group: UAE companies will be able to form a “fiscal unity” or Tax Group for UAE CIT purposes upon application with the FTA. The most important condition for a Tax Group to comply with is the (in)direct shareholding requirement of 95%. Free zone entities subject to 0% cannot enter into a Tax Group. In addition, the parent (which can be intermediate) needs to be a UAE company. Under this arrangement, only one tax return and one set of Financial Statements for tax purposes needs to be declared.
  • Losses can be carried forward up to 75% of the Taxable Income (article 37 of the UAE CIT Law).
  • Losses can be transferred between members of the same group of companies, provided the entities are 75% direct or indirectly commonly held. Losses cannot be transferred from exempt persons or free zone entities. The loss offset is also subject to the 75% cap, as for businesses rolling forward losses. In this regard, it has been clarified in the MoF Sessions that upon meeting certain conditions, two or more UAE entities can constitute a qualifying group automatically (i.e., there is no requirement to apply before the FTA for availing such benefits). Some of the major conditions are (i) common ownership, (ii) none of the entities must be Exempt Persons or Free Zone persons (iii) all the entities follow the same financial year and accounting standard. The individual entities will still be considered as separate taxable persons and need to file separate tax returns.
  • Tax deductible losses can be lost when there is a change of control (50% or more) except if the new owner conducts the same or a similar business. The conditions for this have now been defined.
  • Extensive and broad ranging UAE sourcing rules are applicable. The provision captures the following instances:
    • Income where derived from a Resident Person,
    • Income derived from a Non-Resident Person in connection with, and attributable to a Permanent Establishment of the non-resident in the UAE,
    • Income otherwise accrued or derived from activities performed, assets located, capital invested, or services performed or benefitted from in the State.

The provisions also provide certain examples of income considered to be sourced in the UAE, such as:

    • Income from sale of goods within the UAE,
    • Income from contract wholly or partially performed or benefitted from in the UAE,
    • Income from movable or immovable property in the UAE.
  • The UAE implements a General Anti-Abuse rule, or “GAAR”, which is inspired by the Principal Purpose Test (PPT) found in the Multilateral Instrument (MLI). The GAAR applies to situations where one of the main purposes of a Transaction is to obtain a Corporate Tax Advantage not consistent with the intention or purpose of the UAE CIT Law. The FTA will counteract or adjust the transaction. The GAAR applies for transactions or arrangements entered into on or after the date the UAE CIT Law is published in the Official Gazette. The UAE CIT Law was published in the UAE Official Gazette of 10 October 2022 in issue #737. Quite interestingly, The MoF mentioned in the Dubai session that businesses may choose to reorganise themselves before the operation of the CT Law to the business. At the same time, the MoF maintains that a mere tax benefit is not sufficient for the reorganisation to be approved by the FTA. In other words, a commercial purpose is also necessary for the restructuring to be approved by the FTA. The MoF even gave an anecdote of the ‘newspaper test’ – implying whether the business is comfortable having the reorganisation to be displayed on the front page of the newspaper? The MoF furthered that as long as there is a commercial purpose along with a tax purpose for conducting the restructuring, the FTA will not counteract the tax advantages. At this moment, the letter of the law does not seem entirely aligned with the comments made by the MoF, and we are sure that further clarity will arrive soon on the exact position the interpretation of the GAAR. We expressed our views on Anti-abuse rules, PPT and GAAR from a tax-treaty point of view in one of our earlier articles available here.
  • Business mergers are to be treated in a tax-neutral manner (meaning, there will be a no-gain and no-loss of taxable income). This benefit is subject to the business not being subsequently transferred in the forthcoming two years to another third party. If the business is transferred, the earlier restructuring benefit is ‘clawed back’ and treated at market value.
  • Further details will be provided in due course on the future of Economic Substance Regulation (ESR) compliance upon the operation of the CIT Law.
  • Documentation must be maintained for a period of 7 years for all registered entities, including exempted persons and those entities that do not have a tax liability.

Unanswered questions and final thoughts:

Indeed, the outreach activities of the MoF are certainly laudable, with a few more Sessions scheduled to be conducted soon. Some of the burning questions which we hope will be clarified soon are as follows:

  • The extent of benefits that may be available to Free Zone persons: Specifically, whether a Free Zone Person earning active income from a Mainland person in the UAE loses the 0% CIT benefit on all its income, or only to the extent of that active income earned?
  • The exact position on GAAR: As explained above, it appears that the position taken by the MoF on the interpretation of the GAAR is somewhat more lenient than the wordings of the provisions suggest. Hence, clarity on the exact position of the MoF on GAAR will be welcome for businesses, especially those seeking to restructure before the CIT law becomes operational to such businesses. We expect that the ruling process will be paramount for businesses going forward.
  • Timelines for implementation of the Pillar Two project: In addition to the comments above, the MoF also acknowledged the delays in the global implementation of the Pillar Two proposal in the United States, the European Union, and other regions. Knowing the timelines for implementation of the Pillar Two proposal is very important for businesses with global revenues above EUR 750 million, more so if operating in the Free Zones and subject to 0% CIT rate.    

Overall, the headline rate of 9% along with the relatively simple design elements shows that CIT system has been well thought out. The building blocks of the CIT system reflect the commitment to adapt to the best practices internationally and to minimise the compliance for taxpayers. Many of the design elements are indeed in line with the Public Consultation Document issued in April 2022, and many of the finer details will be issued subsequently by the MoF or the FTA. Businesses have sufficient time to prepare for the new regime as most businesses have their return filing and payment liabilities only in September 2025. Meanwhile, the business community eagerly await further inputs from the MoF in the Sessions.hehere

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UAE Corporate Income Tax

10 things to know about UAE CIT

10 things to know about UAE CIT

The UAE Corporate Income Tax has been introduced recently, and even though the law will be effective starting June 2023, it is crucial to get familiar with it and be ready for its implementation on time.

The new law will bring many changes and will significantly impact all companies. Many still need help understanding how CIT affects their businesses, and what steps to take to ensure compliance. We listed the top 10 things about CIT that everyone should know right now.

See our previous analysis here:

UAE Publishes Corporate Income Tax Law

Categories
UAE Corporate Income Tax

UAE Publishes Corporate Income Tax Law

UAE Publishes Corporate Income Tax Law

After the announcement of the introduction of Corporate Income Tax (CIT) and the Frequently Asked Questions (FAQs) on 31 January 2022, and the release of the Public Consultation Document in April 2022, the Corporate Income Tax (CIT) Law has finally been published today (9 December 2022). The UAE CIT Law is Federal Decree-Law No. 47 of 2022 issued on 3 October 2022, and is effective 15 days after its publication in the Official Gazette. The UAE CIT Law was published on 10 October 2022 in issue #737 of the UAE Official Gazette. The CIT law is applicable on business profits effective for financial years starting on or after 1 June 2023.

The CIT regime has been implemented by the UAE in view of achieving the following objectives:

  • Cementing the UAE’s position as a world-leading hub for business and investment;
  • Meeting international standards for tax transparency and preventing harmful tax practices; and
  • Accelerating the UAE’s development and transformation to achieve its strategic objectives.

We include hereafter the main features of the new regime, as announced by the Ministry of Finance (“MoF”) and the Federal Tax Authority (“FTA”). 

Aurifer will conduct a webinar on 14 December 2022 at 2 pm UAE time. Interested participants can register here.

The text of the UAE Corporate Tax Law (UAE CIT Law), can be found here, and the FAQ’s here.

 

Scope

CIT will apply on the adjusted worldwide accounting net profits of the business. The UAE CIT regime introduces two different rates:

  • A 0% tax rate will apply for taxable profits up to an amount to be specified in a Cabinet Decision, although the FAQ’s refer to a threshold of AED 375,000.
  • The standard statutory tax rate will be 9 per cent. Because of the low tax rate, the UAE will continue to be highly competitive at a global level.

There is currently no mention in Article 3 of the 15% global minimum tax rate applicable for MNEs that fall within the scope of ‘Pillar Two’ of the OECD Base Erosion and Profit Shifting project. Specifically, this would apply to MNEs that have consolidated global revenues in excess of EUR 750m (c. AED 3.15 billion), in any two of the previous four years. The FAQs still refer to the possibility of adoption in the UAE of these rules.

Individuals are subject to corporate tax insofar as they engage in business activity. The definition of business is inspired by the VAT definition, and is therefore broad. A Cabinet Decision will be published in regard to the application of CIT to natural persons.

There is a carve-out regime for businesses established within UAE free zones that (1) maintain adequate substance, and (2) earn qualifying income. What constitutes qualifying income, will be determined in a Cabinet Decision. Presumably, this is a reference to the requirement not to conduct business with mainland UAE, as previously outlined in the Public Consultation Document. It is confirmed as well that Free Zone businesses can voluntarily elect to be subject to Corporate Income Tax at the rate of 9 per cent.

There will be a 0% withholding tax on categories of State Sourced Income derived by a Non-Resident.  This means that foreign investors who do not carry on business in the UAE will in principle not be subject to tax in the UAE.

For foreign entities, they could be considered a resident in the UAE if they are managed and controlled in the UAE. For foreign entities not considered resident in the UAE, but who may have a Permanent Establishment in the UAE, the Permanent Establishment definitions encompass definitions of a fixed PE and an agency PE. We expect further details about the PEs in a Ministerial Decision. For the financial sector, the Investment Manager Exemption from the Public Consultation Document is retained in the UAE CIT Law. Specific rules apply for Partnerships, which could be transparent, and Family Foundations can also apply for tax transparency.

Government entities and government-controlled entities will be exempt from the UAE CIT Law, as will qualifying public benefit entities and qualifying investment funds. Extractive businesses (upstream oil & gas businesses) will also be exempt, to the extent they earn income from the extractive business. In principle, banking operations will be subject to CIT (unless the institution is in a Free Zone and qualifies for the 0% rate). 

 

Date of implementation 

Article 69 of the UAE CIT Law provides that the Law will apply to Tax Periods starting on or after 1 June 2023. 

Businesses with a financial year starting 1 January will be subject to CIT as from 1 January 2024.

 

Deductible expenses

Expenses incurred wholly and exclusively for business purposes, and which are not to be capitalized, are deductible immediately. Deductions are not allowed for expenditures incurred to obtain exempt income. When there is a mixed purpose, the deduction is only partially allowed. Interest expenses are deductible subject to a cap of 30% of the EBITDA. So-called financial assistance rules are in place, which prevents businesses from obtaining financing to pay out dividends or profit distributions. Entertainment expenses are capped at 50% deductibility.

Non-deductible expenses include donations made to a non Qualifying Public Benefit Entity, fines, bribes and dividends. Importantly as well, amounts withdrawn from the Business by a natural person who is a taxable person are not deductible.

 

Exempt income and relief

The following categories of income will be exempt from CIT (article 22 UAE CIT Law):

  • Capital Gains, Dividends and other profit distributions from a Resident Person
  • Capital Gains, Dividends and other profit distributions from a Qualifying shareholding in a foreign legal person, subject to a holding period of 12 months, minimum participation of 5%, at a minimum subject to 9% CIT in the country of source
  • Income from a Foreign PE, subject to conditions and an election to apply the exemption (rather than a credit)
  • Income derived by a non-resident Person derived from operating aircraft or ships in international transportation

The following transactions are subject to specific relief, i.e. effectively a deferral of taxes:

  • Qualifying intragroup transactions and restructurings – entities will qualify if they have 75% common ownership
  • Business restructuring relief – subject to certain conditions.

Transfer pricing 

Article 34 of the UAE CIT Law confirms the requirement for related party transactions to be conducted in accordance with the arm’s length principle. Furthermore, it outlines the five traditional OECD transfer pricing methods as being appropriate to support the arm’s length nature of related party arrangements, while allowing the use of other methods where required. 

Additionally, Article 34 outlines that in the event of an adjustment imposed by a foreign tax authority which impacts a UAE entity, an application must be made to the FTA for a corresponding adjustment to provide the UAE company with relief from double taxation. Any corresponding adjustments related to domestic transactions does not require such an application.

Article 55 covers transfer pricing documentation requirements. UAE businesses will need to comply with the transfer pricing rules and documentation requirements set with reference to the OECD Transfer Pricing Guidelines. This means three tier reporting, i.e., master file, local file and country-by-country reporting. There is also a reference to a controlled transactions disclosure form, details of which remain outstanding. Additionally, it is noted that no materiality thresholds have been provided. Separate legislation will be issued later.

Advanced pricing arrangements will be available as well, through the regular clarification process already in place.

While not necessarily transfer pricing, the UAE has implemented provisions requiring payments and benefits made to connected persons to be at market value, for those amounts to be tax deductible. For the application of this principle, the same principles are applied as in article 34 of the UAE CIT Law, which refers to a transfer pricing methodology.

 

Administration and enforcement 

  • The MoF seems to remain the competent authority for the purposes of multi-lateral / bilateral agreements and the international exchange of information.
  • The FTA will be responsible for the administration, collection and enforcement of the new corporate income tax regime. Penalties and fines are determined by the Tax Procedures Law.
  • Businesses will need to obtain a Tax Registration Number with the FTA.

Businesses that are subject to UAE CIT will be required to file a CIT return electronically for each financial period within 9 months of the end of the Financial Period. A financial period is generally any 12-month financial period year. Free Zone businesses subject to 0% CIT are also required to file a CIT return. 

 

Other considerations

  • Foreign tax will be allowed to be credited against UAE corporate tax payable. The mechanism of the application is as in the Public Consultation Document. Businesses can claim the lower of the corporate tax due, or the amount of withholding tax effectively deducted. There will be no carry forward. There are no credits for taxes paid to the individual Emirate.
  • Fiscal consolidation or Tax Group: UAE companies will be able to form a “fiscal unity” or Tax Group for UAE CIT purposes. The most important condition for a Tax Group to comply with is the (in)direct shareholding requirement of 95%. Free zone entities subject to 0% cannot enter into a Tax Group. In addition, the parent (which can be intermediate) needs to be a UAE company.
  • Losses can be carried forward up to 75% of the Taxable Income (article 37 of the UAE CIT Law).
  • Losses can be transferred between members of the same group of companies, provided the entities are 75% direct or indirectly commonly held. Losses cannot be transferred from exempt persons or free zone entities. The loss offset is also subject to the 75% cap, as for businesses rolling forward losses.
  • Tax deductible losses can be lost when there is a change of control (50% or more) except if the new owner conducts the same or a similar business. The conditions for this have now been defined.
  • Extensive UAE sourcing rules are applicable, which may be of great relevance for the Free zone businesses.
  • The UAE implements a General Anti-Abuse rule, or “GAAR”, which is inspired by the Principal Purpose Test found in the MLI. The GAAR applies to situations where one of the main purposes of a Transaction is to obtain a Corporate Tax Advantage not consistent with the intention or purpose of the UAE CIT Law. The FTA will counteract or adjust the transaction. The GAAR applies for transactions or arrangements entered into on or after the date the UAE CIT Law is published in the Official Gazette. The UAE CIT Law was published in the UAE Official Gazette of 10 October 2022 in issue #737.

Our initial thoughts

The introduction of CIT is a direct result of OECD’s ‘Pillar Two’ which is part of the Base Erosion and Profit Shifting (“BEPS”) project.

With a headline rate of 9% on taxable income and small business relief, the UAE is striking the right balance.

Interestingly as well is that with the implementation of CIT, the UAE also introduced mandatory transfer pricing regulations.

The rules are very much in line with the Public Consultation Document published earlier this year. Much of the detail is deferred to Cabinet and Tax Authority Decisions, and there’s surely a great deal of guidance to be expected. 

Aurifer will conduct a webinar on 14 December 2022 at 2 pm UAE time. Interested participants can register here. In the meantime, feel free to reach out to your regular Aurifer contact for more detail. 

Categories
UAE Corporate Income Tax

UAE Corporate Tax – Public Consultation Document

UAE Corporate Tax – Public Consultation Document

Download Aurifer’s reply to the Public Consultation initiated by the UAE Ministry of Finance in regard to the implementation of Corporate Income Tax in the UAE as of June 2023

Categories
Free Zones UAE Corporate Income Tax

Free Zones and UAE Corporate Income Tax – a complicated harmony

Free Zones and UAE Corporate Income Tax – a complicated harmony

In the text of the public consultation, published by the UAE Ministry of Finance, it discusses its proposed regime for Free Zone Companies.

While the Corporate Income Tax concepts are thus far fairly straightforward, they are much less so for Free Zones.

Contrary to perhaps more simple exemptions for Free Zone companies in the Philippines or India, the UAE is implementing a fairly complex regime, trying to balance a number of interests.

Free Zones have been one of the success stories of the UAE, but incorporating there comes with limitations too, as e.g. the prohibition to trade with the mainland. In mainland, foreign businesses needed a local sponsor or shareholder.

In recent times, those lines have blurred, with more legal possibilities for foreign businesses to fully own a mainland businesses. In addition, free zones businesses were sometimes awarded a “dual license”, allowing them to operate in the mainland, and sometimes were even awarded importer codes.

The principle under the Corporate Income Tax Law which will be implemented with effect from June 2023, is that the UAE will honour the tax incentives currently being offered to Free Zone businesses that maintain adequate substance and comply with all regulatory requirements.

Presumably the reference to substance is a reference to the Economic Substance Regulations introduced in 2019 by way of Cabinet Decision No. 57 of 2020. It would be helpful if it is clarified whether for example a free zone business with a mainland branch can count its mainland substance towards the substance required for ESR purposes.

In addition, it is assumed that when a Free Zone business loses its tax exemption, the substance requirements are no longer applicable.

The CT exemption only continues to apply if the business solely transacts with other Free zone businesses (in the same free zone or another) or with third countries. This offers substantial possibilities, as JAFZA alone, according to its own claims, in 2019 contributed 23.8% to Dubai’s GDP (1).

There are some interesting considerations as regarding what constitutes transacting with the mainland. If a Free Zone business does so, without having incorporated a branch subject to CT, then the income of the Free Zone business is fully subject to CT. In other words, there is no more blanket exemption available.

What constitutes transacting with the mainland is interesting to note, as:

  • Free zone businesses in a Designated Zone for VAT purposes are not considered transacting with the mainland, if the buyer is the importer of record.
  • Conversely, assumed, though not made explicit, services rendered to the mainland are considered, and therefore such FZ businesses involved in these services will loose their tax exemption.

As regarding goods, there are a number of situations to be considered:

  • Free Zone businesses do not control the status of the Free Zone as a Designated Zone. Such a status needs to be applied for by the Free Zone Authority, and is subject to approval. Moreover, Free Zones can loose or gain Designated Zone status with retroactive effect. This has an adverse impact on legal certainty in regard to the application of the tax exemption.
  • There is a stark contrast with traders in a free zone (e.g. commodity traders), who may buy in mainland to sell in mainland, or to bring those goods into a free zone. Those seem to be excluded from the tax exemption, whereas they are conducting the same trade, just in the opposite direction.
  • Retail sales in the Designated Zone look to be at an advantage. For VAT purposes, they are subject to VAT, but when conducted by a Free Zone business with mainland and free zone branches, the mainland branches’ income is subject to CT, and the free zone branches in a designated zone are not.

Certain transactions are further allowed to be conducted with the mainland, such as situations where a free zone business earns passive income, i.e. interest, royalties, dividends and capital gains from mainland companies. This is good news for holding companies in free zones.

Transactions from a Free zone to a group company in mainland are also allowed without losing the benefit of the 0% CT. However, payments made to a Free zone business will not constitute a deductible expense for CT purposes.

So far, we have not identified an anti-abuse rule preventing a free zone company to make the charge to a business abroad, for that business to subsequently charge the mainland business, this nonetheless creating a deductible expense.

Group Treasury Centres or HQs often established in Free Zones may considered the non-deductibility on a group level a disadvantage. This may tempt groups to reconsider their structure, and put their regional headquarter in a different country with a low level of taxation (e.g. Bahrain or a gree zone abroad), and where payments would nonetheless be deductible. Additionally, the non deductibility looks limited to UAE Free Zones.

A business who relocates their Group Treasury Centre for example to a KSA Free zone, or a HQ, may continue to benefit from tax exempt income on the one hand, and deductibility on the other hand.

From a policy perspective, the UAE may consider an anti-abuse rule considering this situation, which may for example consist of defining a Free Zone in a broad enough manner in order for it to encompass foreign free zones as well, as no or only nominal tax jurisdictions in which activities may be relocated.

It is fair to say that due to the complexities, compliance will need to be closely monitored.

(1) https://www.dpworld.com/en/uae/parks-and-economic-zones/jebel-ali-free-zone, consulted on 4 May 2022.

Categories
UAE Corporate Income Tax

UAE Corporate Tax FAQ

Categories
UAE Corporate Income Tax

UAE announces Corporate Income Tax

UAE announces Corporate Income Tax

51 years after the inception of the UAE today is the historic day on which the UAE announces the introduction of corporate income tax.

In a historic moment, the Ministry of Finance has announced today that the UAE will introduce a Federal Corporate Income Tax on business profits.

The CIT regime has been implemented by the UAE in view of achieving the following objectives:

  • Cementing the UAE’s position as a world-leading hub for business and investment
  • Meeting international standards for tax transparency and preventing harmful tax practices
  • Accelerating the UAE’s development and transformation to achieve its strategic objectives

We include hereafter the main features of the new regime, as announced by the Mistry of Finance (“MoF”) and the Federal Tax Authority (“FTA”). 

Scope

CIT will apply on the worldwide adjusted accounting net profits of the business. The UAE CIT regime introduces three different rates:

  • An exemption will apply for taxable profits up to AED 375,000 to support small businesses and startups.
  • The standard statutory tax rate will be 9 percent. Because of the low tax rate, the UAE will continue to be highly competitive at a global level.
  • A different tax rate will be applicable for MNEs that fall within the scope of under ‘Pillar Two’ of the OECD Base Erosion and Profit Shifting project. Specifically, MNEs that have consolidated global revenues in excess of EUR 750m (c. AED 3.15 billion) will be subject to different tax rates.

For Free zone businesses, the CIT will apply but the tax holidays will continue to be granted to businesses established within UAE free zones that (1) comply with all regulatory requirements and (2) do not conduct business with the UAE mainland. Further details on the compliance obligations of free zone businesses will be provided in due course.

There will be no withholding tax on domestic and cross border payments. This means that foreign investors who do not carry on business in the UAE will in principle not be subject to corporate tax.

In principle, banking operations will be subject to CIT. Further details on the current Emirate level corporate taxation will be provided in due course.

Date of implementation 

The UAE CIT regime will become effective for financial years starting on or after 1 June 2023. Businesses will become subject to UAE corporate tax from the beginning of their first financial year that starts on or after 1st June 2023.

Exempt income

The following categories of income will not be subject to CIT:

  • Capital gains and dividends received by UAE businesses from qualifying shareholding. A qualifying shareholding refers to an ownership interest in a UAE or foreign company that meets certain conditions to be specified in the UAE CIT law.
  • Qualifying intragroup transactions (presumably this refers to the fiscal consolidation regime) and restructurings (presumably this refers to tax neutral mergers).
  • Income from the extraction of natural resources (relevant for the oil and gas industry). This income will remain subject to Emirate level corporate taxation.

Businesses engaged in real estate management, construction, development, agency and brokerage activities will be subject to UAE CIT.

Transfer pricing 

UAE businesses will need to comply with transfer pricing rules and documentation requirements set with reference to the OECD Transfer Pricing Guidelines. This likely means three tiers, master file, local file and country by country reporting. 

Administration and enforcement 

  • The Ministry of Finance will be the competent authority for the purposes of multi-lateral / bilateral agreements and the international exchange of information.
  • The Federal Tax Authority will be responsible for administration, collection and enforcement of the new corporate income tax regime.
  • Business which are subject to UAE CIT will be required to file a CIT return electronically for each financial period. A financial period is generally a year. Businesses established in a free zone will be required to register and file a CIT return.
  • Businesses will be subject to penalties for non-compliance with the CIT regime. 

Other

  • Foreign tax will be allowed to be credited against UAE corporate tax payable.
  • Fiscal consolidation: UAE companies will be able to form a “fiscal unity” for UAE CIT purposes.
  • There will be beneficial transfer of losses and utilisation rules.

Our initial thoughts

The introduction of CIT is a direct result of OECD’s ‘Pillar Two’ which is part of the Base Erosion and Profit Shifting (“BEPS”) project.

With a headline rate of 9% on taxable income, carve outs for start-ups and small business and free zone companies, while at the same time imposing different tax rates for MNEs, the UAE is striking the right balance.

Interesting as well is that with the implementation of CIT, the UAE seems to have also introduced mandatory transfer pricing regulations.

Free zone companies are seemingly outside the scope of the new CIT regime, however, it seems that the carve out is at least subject to certain conditions, such as complying with all regulatory requirements and not conducting business in mainland UAE.

We also anticipate that the implementation of CIT will have an impact on the Economic Substance Regulations that were implemented in 2018.

Next steps 

UAE businesses will need to assess how CIT will apply to their activities and ensure they are ready for the implementation of CIT in 2023. Businesses and tax professionals will have to await the publication of the CIT law to know the exact scope.

For example, the law foresees in an income exemption for dividends received by UAE businesses from qualifying shareholding. What constitutes a qualifying shareholding will depend on the conditions in the law. 

What to look out for

We have listed 10 items to be looking out for once the Corporate Income Tax law is published:

  • Extent non business expenses
  • Interest deduction limitation
  • Conditions participation exemption
  • Clarifications Free Zones
  • No special regimes? (Transparent partnerships, collective investment vehicles, investment trusts, …)
  • Confirmation application FTP Law
  • Transitional provisions
  • Anti-avoidance rules (e.g. rep offices used for commercial purposes)
  • Existence exit tax
  • Extent PEs and profit allocation rules