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.