Public Consultation on UAE’s Corporate Tax Regime
The UAE Ministry of Finance (MoF) recently published a public consultation document on the Corporate Income Tax (CIT) to outline policy background and key principles of the proposed corporate tax regime, and to obtain input from the business community and other interest parties.
While the consultation document is not comprehensive and does not reflect the final view of the proposed tax regime, it is expected that it will not diverge much from the key principles and concepts announced.
Comments were open for submission online until 20 May 2022.
This article highlights key principles included in the consultation document and their potential practical impact.
Natural persons engaged in a business or commercial activity in the UAE will be subject to CIT. Examples are:
- Sole establishments or proprietorships
- Individual partners in an unincorporated partnership
An individual will be considered engaged in a business if they carry out an activity that requires obtaining a business license or equivalent permit from a relevant authority in the UAE.
Corporate Income Tax will, however, not be applicable to income of natural persons (individuals), employment and other personal income earned by UAE nationals and expats such as:
- Rental receipts
- Other investment income.
- UAE real estate and other investments that are held through a private or family trust on behalf of beneficiaries that are natural persons.
In general, CIT will be applicable to legal persons (entities that have separate legal personality such as LLCs.), which include:
- UAE companies and other legal persons incorporated in the UAE mainland and free zones.
- Foreign legal entities that have a permanent establishment (see paragraph [4.8]) in the UAE or that earn UAE sourced income
- Foreign legal entities that are effectively managed and controlled in the UAE
- Foreign legal entities earning UAE sourced income.
As a basic rule, it can be stated that any legal entity holding a license or permit issued by any licensing body including economic departments and free zones for carrying out business activity within the UAE will be subject to CIT.
Fiscally Transparent and flow-through principle
Limited and general partnerships and other unincorporated joint ventures and associations of persons will be treated as ‘transparent’ for UAE CIT purposes. This means that they will not be taxpayers in their own right, but their income will instead ‘flow through’ and be taxed in the hands of the partners or members only.
Whilst Free zone companies and branches will be within the scope of the UAE Corporate Tax and subject to tax return filing requirements, the proposed tax regime will honors existing tax incentives offered to Free Zone companies, provided that they:
- Maintain adequate substance (premises & resources) and
- Comply with all regulatory requirements.
- Prepare and maintain audited financial statements
Types of incomes earned by a Free Zone company that benefit a 0% CIT
Compliant free zone companies can benefit a 0% CIT on income earned from business within the same or other free zones or from outside the UAE. as well as passive income from mainland companies such as interest, dividends, or royalties.
Free zone companies will, however, be subject to the normal CIT rate of 9% on income generated by branches of free zone companies established in the UAE mainland.
Any other mainland sourced income will disqualify a Free Zone company from the 0% CIT regime in respect of all their income.
It is worth mentioning that free zone companies may elect to be subject to the normal CIT rate at any time. Once such an election has been made, it cannot be reversed.
Taxable income calculation
The starting point to determine the taxable income is the accounting net profit as stated in the company’s financial statements prepared as per the international accounting standards. Then, several adjustment and deductions need to be carried out to reach the taxable income.
While unrealized gains or losses from capital items is excluded, gains from revenue items such as inventory will be taxable.
The UAE CIT regime will exempt certain forms of income from taxation
- Income earned by UAE companies from investments in other companies, and from operations conducted outside the UAE through foreign subsidiaries or foreign branches
- All domestic dividends earned from UAE companies, including dividends paid by a Free Zone Person that benefits from the 0% CIT regime.
- Dividends paid by foreign companies, and capital gains from the sale of shares in both UAE and foreign companies, provided certain conditions are met.
- Foreign branch profits by either claiming a foreign tax credit for taxes paid in the foreign branch country, or elect to claim an exemption for their foreign branch profits.
Expenses incurred for the purpose of generating taxable income are deductible, for example, salaries, rent, licensing fees, irrecoverable VAT, and bad debts. However, the UAE Corporate Tax regime will disallow or restrict the deduction of certain expenses such as:
- Related party payments to free zone companies (unless payment for mainland branch)
- 50% of entertainment expense to customers, shareholders, suppliers and other business partners.
- Administrative penalties, recoverable VAT, donations to unapproved charities or public benefit organizations
UAE businesses will be able to offset a loss incurred in one period against the taxable income of future periods, up to a maximum of 75% of the taxable income in each of those future periods.
Group entities can transfer losses from one group company to another profitable group company (that at least 75% commonly owned), provided certain conditions are met. transfer of losses from free zone company that benefit from the 0% corporate tax is not allowed.
The total tax loss offset will not be allowed to exceed 75% of the taxable income of the company receiving the transferred losses in the relevant period.
A UAE resident group of companies can elect to form a tax group and be treated as a single taxable person if the parent company holds at least 95% of the share capital and voting rights of its subsidiaries.
To form a tax group, neither the parent company nor any of the subsidiaries can be an exempt person or a Free Zone company that benefits from the 0% Corporate Tax rate, and all group members must use the same financial year.
The UAE CIT regime will have transfer pricing rules to ensure that the price of a transaction is not influenced by the relationship between the parties involved. The tax regime will apply the internationally recognized “arm’s length” principle to transactions and arrangements between related parties.
Conditions of a transaction between related parties should be the same as the conditions for a comparable transaction between unrelated parties.
Compliance with transfer pricing will also require relevant companies to disclose information regarding transactions with related parties and to maintain a master and local file where the arm’s length value of their related party transactions exceeds a certain threshold in the relevant tax period.
Calculation of Corporate Tax liability
Corporate tax will be charged on the annual taxable income of a business as follows:
- 0%, for taxable income not exceeding AED 375,000; and
- 9%, for taxable income exceeding AED 375,000; or
0% withholding tax will apply on domestic and cross-border payments made by UAE businesses. The following income shall be subject to 0% withholding tax:
- UAE sourced income earned by a foreign company that is not attributable to a Permanent Establishment in the UAE of that foreign company;
- Mainland UAE sourced income earned by a Free Zone company that benefits from the 0% Corporate tax rate, unless the income is attributable to a mainland branch of that Free Zone company; and
- Dividends and other profit distributions made by a Free Zone company that benefits from the 0% CIT regime to a mainland UAE shareholder in the Free Zone company.
No obligation to file withholding tax return
Registration and deregistration
UAE mainland and free zone businesses are required to register for corporate tax purposes with the FTA and obtain a Tax Registration Number within a prescribed period.
Where a business ceases to be subject to the Corporate Tax (e.g. due to cessation or liquidation of the business), it will need to apply to the FTA to be deregistered for Corporate Tax purposes within three (3) months from the date of cessation.
Filing, payment and refund
Businesses will only need to prepare and file one tax return and other related supporting schedules with the FTA for each tax period within nine (9) months of the end of the relevant tax period.
There will be no requirement for a business to file a provisional Corporate Tax return and make advance payments of Corporate Tax.
Payments to settle a Corporate Tax liability will need to be made within nine (9) months of the end of the relevant tax period.
Businesses will be required to maintain financial and other records that explain the information contained within the Corporate Tax return and other documents submitted to the FTA.
Certain exempted companies will also be required to maintain records to allow the FTA to ascertain the person’s exempt status.
Whether the financial statements of a business are required to be audited by an accredited audit firm is and will continue to be determined by applicable company laws and regulations. However, Free Zone companies are required to have audited financial statements if it wants to benefit from the 0% CIT regime.
Taxable person’s opening balance sheet for Corporate Tax purposes would generally be their closing balance sheet for financial reporting purposes for the period that ends immediately before their first tax period begins.
We highly recommend all business to assess the impact of the introduction of corporate tax early and proactively plan a successful implementation.
- Clearly identify all tax implications on your business.
- Establish mitigation strategies to reduce compliance cost, and achieve high tax efficiency.
- Identify the needs to change your corporate restructure, operating model, tax function, and accounting system.
How can Audiix help?
We would be happy to assess your tax position and provide guidance and recommend the necessary actions that will help you achieve compliance and tax efficiency.
Download the MOF Public Consultation Document below:
For a detailed discussion on various aspects of this article, please contact us ([email protected])