UAE Corporate Tax Law: the key highlights

The UAE Corporate Tax Law has finally been published. Is it all settled? No, but the corporate tax framework is getting clearer.

After announcing the introduction of corporation tax back in January 2022 and releasing a consultation paper in April 2022, UAE authorities finally published the Federal Decree-Law No. 47 of 2022 (hereinafter referred to as the Corporate Tax Law or "CTL").

CTL provides the legislative basis for introducing and implementing the Federal taxation on Corporations and Businesses in the UAE (hereinafter referred to as the Corporate Tax "CT").

The CTL mostly confirms and expands the anticipations included in the consultation paper; however, essential definitions and thresholds are yet to be specified by further Cabinet Decisions to be published.

The main content of the UAE Corporate Tax Law

When?

The CT will be effective for financial years starting on or after 1st June 2023. For all companies with a financial year corresponding to the calendar year, corporate tax will be applicable on profit from 1st January 2024 onward. 

Who are Taxable Persons?

A Taxable Person can be either a Resident or Non-Resident.

A Taxable Resident Person is any of the following:

1. a juridical person that is incorporated or otherwise established or recognized under the applicable legislation of the UAE, including Free Zones (FZ);
2. a juridical person that is incorporated or otherwise established or recognized under the applicable legislation of a foreign jurisdiction that is effectively managed and controlled in the UAE;
3. a natural person who conducts a Business or Business Activity in the UAE (to be specified in a Cabinet Decision).

A Taxable Non-Resident Person is a person who either:

1. has a Permanent Establishment (PE) in the UAE as under Article 14 of the Corporate Tax Law;
2. derives UAE-Sourced Income as under Article 13 of this Decree-Law;
3. has a nexus in the State as shall be specified in a Cabinet Decision

Tax Base

A Taxable Resident Person is subject to CT on their taxable income derived from the UAE and from outside the UAE. 

A Taxable Non-Resident person is subject to CT on the following:

1. the taxable income that is attributable to the PE of the non-resident person in the UAE;
2. UAE-sourced income that is not attributable to a PE of the non-resident person in the UAE;
3. the taxable income attributable to the nexus of the non-resident person in the UAE (as specified in a Cabinet Decision).

UAE-Sourced Income

As per Art. 13 of the Corporate Tax Law, income shall be considered UAE-Sourced Income in any of the following instances:

1. where it is derived from a resident person;
2. where it is derived from a non-resident person and the income received has been paid or accrued in connection with, and attributable to, a PE of that non-resident person in the UAE;
3. where it is otherwise accrued in or derived from activities performed, assets located, capital invested, rights used, or services performed or benefitted from in the State.

Art. 13 further states that UAE -Sourced Income shall include:

1. income from the sale of goods in the UAE;
2. income from the provision of services that are rendered or utilized or benefitted from in the UAE;
3. income from a contract insofar as it has been wholly or partly performed or benefitted from in the UAE;
4. income from movable or immovable property in the UAE;
5. income from the disposal of shares or capital of a resident person;
6. income from the use or right to use in the UAE, or the grant of permission to use in the UAE, any intellectual or intangible property;
7. interest that meets any of the following conditions:
   1. the loan is secured by movable or immovable property located in the State;
   2. the borrower is a Resident Person;
   3. the borrower is a Government Entity;
8. insurance or reinsurance premiums in any of the following instances:
   
   1. the insured asset is located in the UAE;
   2. the insured person is a Resident Person;
   3. the insured activity is conducted in the UAE.

Qualifying Free Zone Person

A Qualifying Free Zone Person is a juridical person incorporated, established, or otherwise registered in a FZ that meets all the following conditions:

1. maintains adequate substance in the State;
2. derives Qualifying Income as specified in a decision (to be) issued by the Cabinet at the suggestion of the Minister;
3. has not elected to be subject to the Corporate Tax;
4. complies with arm's length and transfer price principles as defined in the CTL;
5. meets any other conditions as may be prescribed by the Minister. 

Taxable Income

The taxable income for a Tax Period will be the business's accounting net profit (or loss) reported in its financial statements prepared as per internationally acceptable accounting standards after making adjustments for certain items specified in the Corporate Tax Law.

Adjustments to the accounting net profit (or loss) will need to be made for the following items:

• unrealized gains and losses (subject to the election made regarding the application of the realization principle);
• exempt income such as qualifying dividends and capital gains;
• income arising on intra-group transfers;
• deductions that are not allowable for tax purposes;
• transactions with Related Parties and Connected Persons;
• transfers of tax losses within the group where relevant;
• incentives or tax reliefs; and
• any other adjustments as will be specified by the Minister of Finance.

Corporate Tax Rate

Non-Qualifying Free Zone Person:

• 0% (zero per cent) on the portion of the Taxable Income not exceeding the amount specified in a decision (to be) issued by the Cabinet at the suggestion of the Minister of Finance.
• 9% (nine per cent) on the exceeding Taxable Income.

The threshold for 0% rate will likely be fixed at AED 375.000 as anticipated in the consultation papers.

Qualifying Free Zone Person:

• 0% (zero per cent) on Qualifying Income as specified in a decision (to be) issued by the Cabinet at the suggestion of the Minister of Finance
• 9% (nine per cent) on Non-Qualifying Income

A Qualifying Free Zone Person can elect to be subject to CT as a Non-Qualifying Free Zone Person.

Small Business Relief

Art. 21 of Corporate Tax Law introduces a Small Business Relief regime.

The Minister of Finance will set the threshold of revenues (not income) and some other conditions to be met in order to make an election for the application of the regime. Under this regime, businesses will be treated as having no taxable income during the relevant Tax Period.

Participation Exemption (PEX) Regime

Art. 22 and 23 regulate the exemption for Dividends and Capital gains.

The PEX regime on Dividend and Capital gains are subject to the following conditions:

• 5% or greater ownership interest.
• 12 months holding period
• Investee company subject to a corporation tax of at least 9%.

Dividends received from a UAE Juridical Person (domestic dividends) are exempt irrespective of the percentage of ownership and the holding period.

Arm's Length Principle and Transfer Pricing Documentation

In determining the Taxable Income, transactions between Related Parties and Connected Persons must meet the arm's length principle.

The definition of a Connected Person includes any natural person that directly or indirectly has an ownership interest in the company and also the director/s of the company.

Withholding Tax

Art. 45 of CTL introduces a withholding tax on UAE-sourced income derived by Non-Resident persons. The withholding tax rate will be zero or any other rate to be specified by a Cabinet decision.

Introducing a zero-rate withholding tax may sound like an oxymoron; however, this is to be read as a systemic provision of the new CTL that also targets UAE-sourced income earned by foreign entities.

Awaited Cabinet Decisions

The Corporate Tax Law has now clarified the framework of CT in UAE; however, the below important topics remain to be defined by further executive legislation.

• Threshold for zero rate CT (likely to be AED 375.000)
• Threshold for Small Business Relief
• Definition of Business or Business Activity conducted by a natural Person that will be subject to CT.
• Definition of Qualifying Income for Free Zone Persons that will be entitled to zero rate.
• Definition of a Non-Resident Person with a nexus with UAE.
• Categories of UAE-sourced income derived by Non-Resident Persons that shall be subject to a withholding tax (either zero or other rates also to be determined).
  
  As many companies are established in Free Zones, the publication of the Cabinet decision detailing the concept of Qualifying Income entitled to the zero-rate taxation will be crucial to clearly understand how the new CT will impact UAE business activities.
  
  FZ companies with taxable income below 375.000 AED (or slightly exceeding this threshold) likely will find it more convenient to opt for regular taxation.

Conclusions

Administrative burdens

Preparing financial statements is already required by the UAE company law and by most FZ Regulations. However, so far, these authorities have not been interested in looking at the accuracy of such financial statements, and the correct application of commonly accepted accounting principles is left to the internal policy of each company.

With the introduction of CT, the Federal Tax Authority will definitely be interested in checking the taxable income and all business, even dormant companies and small activities likely to fall in the zero-rate zone will be required to maintain accurate accounting records.

International relations

Despite the exceptional growth of UAE in international business relations witnessed in recent years, there are still foreign investors and overseas business counterparts that are reluctant to enter into business relations with UAE entities, perceiving the country as a blacklisted offshore jurisdiction.

The introduction of CT will further strengthen the position of the UAE as an international business hub. The jurisdiction shall be perceived as entirely onshore while maintaining an overall friendly tax environment (low/zero corporate tax; low/zero VAT; no personal income tax).

It is also worth mentioning that the UAE has an extensive network of international agreements for the avoidance of double taxation that shall prevail on the domestic Corporate Tax Law.

Actions required

• Check your financial year in order to understand when CT will be applicable at your business. If required, you may adopt a resolution to amend your financial year to better plan the effective date since your business will be subject to the CT.
• Scrutinize all transactions that your business (will) carry out with Related Parties and Related Persons and assess whether or not they meet the arm’s length requirements. 
  Any kind of remuneration (Salary/allowance/bonus/manager compensation, etc.) to business owners and directors of the company will be subject to the arm’s length principle.
• Make sure your business has an accurate accounting recording system in place in accordance with commonly accepted international accounting principles (IFRS is the most common adopted in UAE).
• Be prepared to register your business for CT purposes toward Federal Tax Authority Portal.
  All companies shall have to register since there is no minimum threshold registration.

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