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UAE Corporate Tax Update

UAE Introduces Corporate Taxation

Important Note: 

UAE Free Zone Companies will retain their 0% tax status as before for income / transactions arising outside the UAE (Qualifying income). A condition for the 0% tax status, as stipulated by the law, is that the free zone company maintains adequate economic substance as per the UAE Economic Substance Law. This is also something we always advised.

Urgent Action Point:

Contact Elena Charalambous asap (manager of our UAE office) to get a quotation for our UAE Economic Substance packages. Note that we are a provider of outsourced economic substance as per the provisions of the UAE’s Economic Substance Law allowing and accepting such outsourcing to fit and proper corporate services providers such as our firm.

UAE income arising from mainland UAE will be taxed at 9%.

See also section 6. Below for further details.

Summary of Changes to Corporate Tax

Current income tax landscape in the UAE

  • No Federal corporate income tax legislation.
  • Companies engaged in extraction of oil & gas and natural resources were taxed at progressive rates of up to 55% in certain Emirates.
  • No personal income tax and no withholding tax.
  • Branches of foreign banks taxed at 20% in certain Emirates.

Taxable income will be the Net Profit as per the Financial Statements (FS) minus/plus any adjustments. The final taxable income between AED 0 – AED 375,000 will be taxed at 0% and taxable income above AED 375,000, the difference between the amount of taxable income and this threshold will be taxed at 9%. Foreign tax credit if applicable can be claimed.

Ministry of Finance – The ‘competent authority’ for purposes of bilateral / multilateral agreements and the international exchange of information for tax purposes.

Federal Tax Authority (FTA) – Responsible for the administration, collection  and enforcement of UAE Corporate Income Tax (CT).

1. Effective Date

Corporate tax will be implemented on 01 June 2023. Taxpayers with Financial Year End (FYE) 31 May will have to comply first and their first reportable period will be 01 June 2023 to 31 May 2024. Taxpayers with FYE 31 December will have their first reportable period from 01 January 2024 to 31 December 2024.

Payment of tax and filing of tax return will be 9 months after the end of the reporting period.

2. Subject to Corporate Tax

Taxable persons

  • Natural persons conducting a business in the UAE. Employment or other income earned by UAE and foreign individuals (i.e. investment in real estate, dividends, capital gains, interest from bank deposits) will not be subject to corporate tax.
  • UAE companies or other legal persons incorporated in the UAE.
  • Foreign legal persons that are effectively managed and controlled in the UAE or have a permanent establishment in the UAE.
  • Limited liability companies and Free Zone entities.
  • Unincorporated partnerships and foreign partnerships that are not subject to tax in another jurisdiction will be treated as ‘transparent’ for UAE CT purposes. A family foundation can also be treated as an unincorporated partnership.

Exempt persons

  • Federal and Emirate Governments.
  • Government-owned and controlled UAE companies that carry out a mandated activity.
  • Businesses engaged in the extraction and exploitation, as well as non-extraction of UAE natural resources that are subject to Emirate-level taxations.
  • Qualifying public benefit entity.
  • Qualifying investment fund.
  • Pension and social security fund.

3. Tax Rates

  • 0% – Taxable income up to AED 375,000.
  • 9% – Taxable income above AED 375,000.
  • Large Multinationals will be subject to “Pillar Two” criteria.
  • WHT rate: 0%

4. Exempt Income

1. Domestic dividends and profit distributions.

2. Foreign dividends and profit distributions, capital gains/losses from participating interest, FX gains/losses, impairment gains/losses. These are exempt provided that they meet the conditions as per Art.23 of CT law.

 Participation exemption conditions:

  • More or equal to 5% ownership in shares/capital of entity.
  • Intention to hold the interest for  an uninterrupted period of 12 months.
  • Participation is subject to CT of at least 9%. This will not apply if the participation is a Holding Co. with qualifying Participating Interests and the participation is a Qualifying FZ or Exempt person.
  • Taxable person is entitled to receive equal or more than 5% of available profits for distribution or liquidation proceeds.
  • Not more than 50% of Participation’s assets comprise ownership interests or entitlements that would not be qualified for exemption if these were held directly by the Taxable Person.

3. There is an election to claim an exemption for foreign PE/branch income and associated expenditure provided that the foreign PE/branch is subject to tax in the foreign jurisdiction of at least 9% or more.

4. Income derived by a non-resident from operating aircraft or ships in international transportation

5. Deductions

Non-deductible expenses

  1. Non-business expenses.
  2. Donation to non-approved charities.
  3. Fines and penalties.
  4. Bribes or illicit payments.
  5. Dividends/profit distributions.
  6. Withdrawals.
  7. UAE and foreign CT.
  8. Recoverable input VAT
  9. 50% cap on entertainment expenditure.

Net interest expense capped to 30% of Accounting Earnings before interest, tax, depreciation and amortization (EBITDA), excluding exempt income. This does not apply for banks, insurance companies and businesses carried out by natural persons.

Losses up to 75% of taxable income can be carried forward indefinitely and offset against future taxable income. In order to carry forward the losses there should be no change in the majority of the shareholders or if there is a change the new owners will carry the same business. Also tax losses can be used against taxable income of another taxable person provided that both companies are UAE resident legal entities, there is a 75% common ownership, are no exempt/qualifying FZ persons, have the same Financial Year and the same FS accounting standards. Losses to be offset cannot be more than 75% of the taxable income of the receiving company.

There is a relief of intra-group transfer of assets and liabilities.

Restructuring relief.

6. Free Zone Persons

Free Zone persons are in scope of the UAE CT. The qualifying FZ persons will be subject to 9% tax on non-Qualifying income and 0% tax on Qualifying income (income arising outside the UAE). A qualifying FZ person can elect to be subject to 9% tax on all income.
FZ persons will be required to register to tax and file CT returns (we will be in touch for details and actions in due course).

FZ persons will be required to register to tax and file CT returns (we will be in touch for details and actions in due course).

A Qualifying FZ person is a person who:

  • Has qualifying income. We expect clarifications from the Ministry on what is Qualifying income.

  • Has adequate substance in the UAE. For this as well we expect clarifications on what is considered adequate substance.

  • Does not elect to be subject to 9% tax.

  • Complies with arms-length and Transfer pricing provisions.

7. Transfer Pricing Documentation Requirements in the UAE

Transfer pricing disclosure form, local and master file. The conditions to maintain a local or master file will be clarified at a later stage by the Ministry of Finance.

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