For many years, Foreign banks and companies engaged in extractive and non-extractive of natural resource businesses have long been subject to corporate tax regime in UAE under the respective Emirates Tax Decrees. The scenario has changed since 9th December 2022 when UAE Cabinet has issued ‘The Federal Decree-Law No. 47 of 2022 (the “Decree”) on the Taxation of Corporations and Businesses. The Decree provides the legislative basis for a federal corporate tax in UAE. In accordance with the Decree, the MOF-UAE in January 2022 has announced that the Corporate Tax (CT) will become applicable for the businesses effective for financial years starting on or after 1st June 2023.
The Federal Corporate Tax shall co-exist with the Corporate tax regime applicable under the Emirates tax decrees. It implies that the companies engaged in extractive and non-extractive natural resource businesses shall continue to be taxed under the respective emirates tax decree.
Corporate Tax is a form of direct tax levied on the net income of corporations and other businesses. It is also otherwise known as “Corporate Income Tax” or “Business Profit Tax” in other jurisdictions. CT is applicable for the following “Taxable Persons”:
UAE companies and other juridical persons incorporated or effectively controlled in the UAE
Individuals conducting business or business activity in the UAE
Juridical person established in a UAE Free zone
Foreign legal entities having a permanent establishment in the UAE or Non – Resident Persons earning UAE sourced income that is within the scope of CT
Government Entities
Government Controlled Entities
Persons (Natural or juridical) engaged in extractive and non – extractive natural resource business subject to meeting certain criteria
Qualifying Public Benefit Entities
Qualifying Investment Funds
A public pension or social security fund, or a private pension or social security fund that is subject to regulatory oversight of the competent authority in the State and that meets any other conditions that may be prescribed by the Minister
A juridical person incorporated in the State that is wholly owned and controlled by an Exempt Person specified in paragraphs (a), (b), (e) and (f) above subject to meeting the certain conditions
Any other Persons as may be determined by a Cabinet Decision
Tax Rates:
0% on Taxable Income up to and including AED 375,000
9% on Taxable Income above AED 375,000
CT Base:
Resident Person is taxed on income derived from both UAE and non-UAE sources (as for as resident natural person concerned, only incomes derived from business or business activity conducted the natural person in the UAE are taxed)
Non- Resident Person is taxed only on income derived from sources within UAE
Accordingly, the Non-Resident Person is subject to CT on the Taxable Income:
from their Permanent Establishment in UAE
from State Sourced Income that is not attributable to its Permanent Establishment in the UAE.
A Non- Resident Person is considered having a PE in UAE where
it has fixed or permanent place in the UAE through which its business is wholly or partly conducted.
the Person has and habitually exercises an authority to conduct business activity in the state on behalf of Non-Resident Person.
it has any other form of nexus in the state as specified by the Cabinet decision at the suggestion of Minister.
An Income is considered to be ‘State Sourced’ where
it is earned from a Resident Person or is derived from activities or assets located in the UAE.
it is derived by a Non-Resident Person from another Non-Resident Person who conducts business or business activity through a PE in the UAE.
it has any other form of nexus in the state Where it is derived from activities performed, assets located, capital invested, rights used, or services performed or benefitted from in the UAE as specified by the Cabinet decision at the suggestion of Minister.
A Non-Resident Person shall not be considered having a PE where the person conducts a Business or Business Activity in the UAE through an independent agent and acts for the Non-Resident Person in the ordinary course of Business or Business Activity.
An Investment Manager shall be considered an independent agent when acting on behalf of a Non-Resident Person while the Investment Manager meets the following conditions:
Engage in the business of providing Investment or brokerage services
Subject to the regulatory oversight of the competent authority in the UAE
Carry out the transactions in the ordinary course of Investment Manager business.
Act in an independent capacity in relation to the transactions
Transact on an Arm’s length basis and receives due consideration for their services
Is not the Non- Resident Person’s representative in the UAE in any other income or transactions that are subject to CT
Meet any other conditions as may be prescribed by Cabinet Decisions
Accordingly, regulated UAE Investment Managers are allowed to provide discretionary investment management services to foreign clients without triggering a UAE PE of the foreign investor or Investment fund.
The base for determining the Taxable Income is the Taxable Person’s financial statement prepared for the financial reporting purpose. Taxable Income for a Tax Period shall be the Accounting Income for that period and adjusted for the followings as applicable:
Unrealized gains or losses i.e., the gains or losses resulting from changes in the value of an asset or liability before it is sold or settled (as detailed under Clause 3)
Exempted Income as specified under Chapter 7 such as Dividend income, gains and other income from a Participating Interest, Income earned through a qualifying foreign PE and income from the operation of aircraft and ships in international transportation.
Reliefs provided under Chapter 8 such as intra-group transfers and other qualifying business restructuring
Deductions as specified under Chapter 9; mainly legitimate business expenditures incurred wholly and exclusively for the purposes of the Taxable Person’s Business.
Transactions with Related Parties and Connected Persons as specified in Chapter 10.
Tax loss relief as specified in Chapter 11
Any incentives or special reliefs for Qualifying Business Activity as specified by the Cabinet decision.
Any Income or expenditure not considered while determining the Taxable Income under the above provisions but as may be specified by the Cabinet decision.
Any other adjustments as may be specified by the Minister.
For the purpose of Taxable Income under the Degree law, the Taxable Person that prepares his financial statements on accrual basis may elect to take into account gains and losses (including gains and losses from Foreign exchange) on realization basis. In this respect, the Taxable Person has the option to elect the realization basis either:
for all unrealized gains and losses or
only unrealized gains or losses in relation to the assets and liabilities held on capital account at the end of a Tax period. If this option is elected, gains or losses in relation to assets and liabilities held on that Person’s revenue account would remain to be taken into account and be subject to Corporate Tax on a current basis.
Capital account is related to non-current assets and liabilities. Capital assets refer to assets that a Person does not trade, that are eligible for depreciation under the applicable accounting standards as property and equipment, investment property and intangible assets. Capital liabilities refer to liabilities incurring of which does not give rise to deductible expenditure under chapter 9 of the Decree law or liabilities treated under applicable accounting standards as non-current liabilities.
Assets and liabilities held on a revenue account are items that have a short-term impact on a Business, such as trading stock and inventory, and any associated expenditure.
Notwithstanding the above, the Minister may prescribe any of the followings:
Specific circumstances where a Taxable Person can prepare their financial statements on a cash basis;
Any adjustments to the accounting standards to be applied for the purposes of determining the Taxable Income for a Tax Period
A different basis for determining the Taxable Income of a Qualifying Business Activity
Gains and other incomes from Participating Interest are exempted from Taxable Income subject to meeting certain conditions as laid out under Article 23 of the Degree Law.
Participating Interest, for this purpose refers to a 5% or greater ownership interest in the shares or capital of a Juridical Person. The following conditions to be met to become eligible for exemption:
The Participating Interest must be held or intended to be held for an uninterrupted period of at least 12 months.
The Participation must be subject to corporate tax of at least 9%.
The ownership interest in the Participation must entitle the Taxable Person to receive not less than 5% of the profits available for distribution and not less than 5% of liquidation proceeds on dissolution of Participation.
50% or less of the assets of the Participation consists of non-qualifying ownership interests.
Any other conditions as may be prescribed by the Minister.
Subject to meeting the above conditions, the following income shall be exempted from Taxable Income:
Dividends and profit distributions received from a foreign Participation that is not a Resident Person.
Gains or losses on the transfer, sale, or other disposition of Participating Interest (subject to two years’ period where a Participation was acquired in exchange for the transfer of an ownership interest not met the conditions or exempted transfers under the Degree Law).
Foreign exchange gains or losses in relation to a Participating Interest.
Impairment gains or losses in relation to a Participation Interest.
Resident Person is taxable on both UAE and non-UAE sourced income. However, the Resident Person can elect and claim exemption from Corporate Tax for his income derived through a Foreign Permanent Establishment (FPE) that meets conditions of this Article.
A FPE is defined as branch or other presence or activities of the Resident Person in a foreign jurisdiction and recognized as PE by the relevant jurisdiction
Where exemption is elected under this Article, the exemption from CT shall apply on a net income basis i.e., both income and associated expenditure of FPE shall not be taken into account while calculating taxable income for a Resident Person. Accordingly, the followings shall not be taken into account while determining the taxable income of a Resident Person
Losses in any of the FPE (calculated as if the relevant FPE were a Resident Person)
Positive income and associated expenditure in any of its FPE
Any Foreign Tax Credit available under Article 47 had the election for exemption under this Article not been made
The exemption shall apply only to a FPE that is subject to Corporate Tax or a tax of similar nature under the applicable legislation of the relevant foreign jurisdiction at a rate not less than the rate as specified under this Decree Law
No gain or loss arising from transfer of one or more assets or liabilities between closely related two Taxable Person, defined as members of a Qualifying Group needs to be taken into account while calculating Taxable Income.
Two or more juridical persons are treated as Qualifying Group if all of the following conditions are met:
Juridical Person is either Resident Person or Non- Resident Person having a Permanent Establishment in the UAE.
Either of the Taxable Person has a direct or indirect ownership interest of at least 75% in the other Taxable Person or a third Person holds direct or indirect ownership of at least 75% in each of the Taxable Person.
Neither of the Taxable Person is an Exempt Person or a Qualifying Free Zone Person.
The Taxable Persons follow the same Financial Year end and preparing their financial statements using the same accounting standards.
This relief from the CT will only apply to transfers between members of the Qualifying Group that will continue to be part of that same Qualifying Group for at least two years from the date of the relevant tax period.
For the purpose of this article, the assets or liabilities shall be treated as being transferred at its net book value at the time of transfer and if any consideration paid or received against the qualifying transfer will be treated as being equal to the net book value of the transferred asset or liability.
No gain or loss needs to be taken into account in determining Taxable Income:
a. Where a Taxable Person transfers its entire Business or independent part of its Business to another Person
b. Where one or more Taxable Person transfer their entire Business to another Person
In either case the consideration received by the transferring entity or its owners must be shares or other ownership interests of the transferee entity and the transfer must be to a Person who is a Taxable Person or will become a Taxable Person as a result of the transfer.
For the purpose of tax relief from Business restructuring, the following conditions must be met:
The transfer is in accordance with and met all the conditions applicable as per the legislation of the UAE.
Taxable Persons are Resident or Non Resident Persons that have Permanent Establishment in the UAE.
None of the Persons are an Exempt Person.
None of the Persons are a Qualifying Free Zone Person.
The Financial Year of each of the Taxable Persons ends on the Same date.
The Taxable Persons prepare their financial statements using the same accounting standards.
The transfer is undertaken for a valid commercial or non-fiscal reasons which reflect economic reality.
Where relief from Corporate Tax under Business restructuring is sought:
The assets and liabilities transferred must be transferred at their net book value for Corporate Tax purposes at the time of transfer.
The shares or ownership interests received from the transferee cannot be recorded as exceeding the net book value of the assets transferred and any liabilities assumed less the value of any other form of consideration received in the case of transfer mentioned in (a) above or exceeding the book value of the shares or other ownership interests of the Taxable Person that ceases to exit less the value of any other form of consideration received in the case transfer mentioned in (b) above.
Taxable Income is calculated after making necessary adjustments to Accounting Income for items of expenditure not meeting the conditions as stipulated under Article 28 of Decree-Law.
Accounting Income is derived after allowing for expenditure accounted for under the relevant accounting standards.
For the purpose of Taxable Income for a Tax Period, deduction is allowed only for expenditure incurred wholly or exclusively by a Taxable Person for the purpose of their Business.
No deduction is allowed in respect of the followings:
Capital expenditure – (for capital expenditure, the deductible amounts would be generally being recognized by way of depreciation or amortization of relevant asset or benefit over the expected economic life).
Expenditure not incurred for the purposes of the Taxable Person’s Business.
Expenditure incurred in deriving Exempt Income
None of the Persons are a Qualifying Free Zone Person.
Losses not connected with or arising out of the Taxable Person’s Business
Such other expenditure as may be specified by the Cabinet decision.
Where an expenditure is incurred partly to derive Taxable Income and partly for some other purpose, only the proportion of the expenditure related to the Taxable Income shall be allowed to be deducted for arriving at the Taxable Income.
Interest expenditure or finance costs incurred for the purpose of Taxable Person’s Business are deductible while calculating Taxable Income subject to certain limits.
Net Interest Expenditure shall be deductible up to 30% of Taxable Person’s accounting EBITDA for the relevant Period. The accounting EBITDA must be adjusted for any exempt income as allowed under Article 22 of the Decree-Law.
Net Interest Expenditure is defined as Interest expenditure in excess of the Interest Income. Net Interest Expenditure for a Tax Period includes the Net Interest Expenditure incurred in that Tax Period and any carried forward Net Interest Expenditure that was disallowed in the previous Tax Periods.
The Net Interest Expenditure disallowed in a Tax Period can be carried forward and deducted in ten subsequent Tax Periods in which the Interest Expenditure incurred.
The deduction of Interest expenditure follows a “first in first out” rule, where carried forward Net Interest Expenditure incurred in earlier Tax Periods is deducted to the fullest extent allowable before the deduction of Net Interest Expenditure incurred in more recent Tax Periods or in the current Tax Period.
General Interest deduction limitation rule shall not apply to Banks, Insurance providers, Natural Person undertaking a Business or Business Activity in the UAE and any other Persons as may be determined by the Minister.
There are specific situations in which no deduction shall be allowed for interest expenditure incurred.
No deduction will be allowed for Interest expenditure incurred by a Taxable Person on a loan obtained from a Related Party in respect of the following transactions:
A dividend or profit distribution to a Related Party.
A redemption, repurchase, reduction or return of share capital to a Related Party.
A capital contribution to a Related Party.
The acquisition of an ownership interest in a Person who is or becomes a Related Party following the acquisition.
However, if the Taxable Person can demonstrate that the main purpose of borrowing the amount and carrying out the transaction is not to obtain a Corporate Tax advantage, the Taxable Person shall be allowed to claim Interest deduction, based on the specific facts and circumstances underlying the transaction.
A transaction or related financing shall not be deemed to have been entered into for the purpose of Corporate Tax advantage, where the Taxable Person can demonstrate that the recipient of the Interest is subject to Corporate Tax or a similar tax under the applicable legislation of a foreign jurisdiction at a rate not lower than the Corporate Tax as specified under the Decree-Law.
Expenses incurred for entertaining existing or potential customers or to promote products and services are recognized as part of conducting Business or Business Activity.
Taxable Person is allowed to deduct 50% of Entertainment Expenditure incurred during a Tax Period.
Entertainment Expenditure is any entertainment, amusement, or recreation expenditure incurred for the purposes of receiving and entertaining the Taxable Person’s customers, shareholders, suppliers or other business partners.
It includes but not limited to, expenditure in related to any of the followings:
Meals
Accommodation
Transportation
Admission fees
Facilities and equipment used in connection with such entertainment, amusement or recreation
Such other expenditure as specified by the Minister
Arm’s Length Principle should be followed to establish the prices of transactions and arrangements between Related Parties while determining the Taxable Income of a Taxable Person.
Transfer price is considered to meet the ‘arm’s length principle’ if the price between Related Parties is consistent with the results that would have been realized if parties to the transaction were independent from each other and had engaged in a similar transaction or arrangement under similar circumstances.
The Taxable Person can use one or more of the following transfer pricing methods to determine the arm’s length transfer price depending on the facts and circumstances of each transaction or arrangement.
The comparable uncontrolled price method
The resale price method
The cost-plus method
The transactional net margin method
The transactional profit split method
While choosing and applying of a transfer pricing method, the Taxable Person should take into account the contractual terms and characteristics of the transaction or arrangement, the economic circumstances in which the transaction or arrangement conducted, the functions performed, asset employed, risk assumed and business strategies employed by Related Parties entering into the transaction or arrangement.
Taxable Person can apply transfer pricing methods other than those mentioned above as long as the Taxable Person can demonstrate that none of the methods listed above can be reasonably applied to determine the arm’s length result and any such other transfer pricing method meets the requirements as stipulated.
Related Party is an individual or juridical person that has pre-existing relationship with other Person through ownership, control or kinship (in the case of natural person).
For the purpose of the Decree Law, the following relationships are considered as Related Parties:
Entertainment Expenditure is any entertainment, amusement, or recreation expenditure incurred for the purposes of receiving and entertaining the Taxable Person’s customers, shareholders, suppliers or other business partners.
Two or more natural persons who are related within fourth degree of kinship or affiliation. It includes adoption and guardianship.
A natural person and a juridical person where the natural person alone or together with its Related Parties directly or indirectly owns 50% or more ownership interest in the juridical person or directly or indirectly controls the juridical person.
Two or more juridical persons where
Two or more juridical persons where
The juridical person alone or together with its Related Parties directly or indirectly owns 50% or more ownership interest in the other juridical person or
directly or indirectly controls the other juridical person; or
any person alone or together with its Related Parties directly or indirectly owns 50% or more ownership interest in or Controls such two or more juridical persons;
A Person and its Permanent Establishment or Foreign Permanent Establishment.
Two or more Persons that are partners in the same Unincorporated Partnership.
A Person who is the trustee, founder, settlor or beneficiary of a trust or foundation, and its Related Parties
For this purpose, control means the ability of a Person whether in their own right or by agreement or otherwise to influence another Person.
In July 2023, the Ministry of Finance UAE has come up with an update on the Corporate Tax regarding Violations and Administration Penalties. The Penalties will be levied for non-filing and non-payment of Tax on time and failure to properly keep records etc., It became effective from 1st August 2023.
Key Highlights:
Failure to maintain required records and information specified in the Tax Procedures Law
AED 10,000/-
Failure to submit the data, records, and documents based to Tax in Arabic to the Authority when requested
AED 5,000/-
If registrants fail to submit a deregistration application within the time specified
AED 1000/- (late Submission)
AED 10,000/-
If registrants fail to inform the Authority that needs amendment of data related to his Tax record
AED 1,000/-
If Legal Representatives fail to file a Tax Return within the time specified
AED 500/- per month (1st twelve months)
AED 1,000/- per month (from 13th month onwards)
If a taxable person fails to settle the Payable Tax
AED 500/- per month (1st twelve months)
AED 1,000/- per month (from 13th month onwards)
If registrant submits an incorrect Tax Return
14% per annum (monthly)
If submitting Voluntary Disclosure by Taxable Person pertaining to errors in Tax Return/Tax Assessment/Tax refund application
1% on Tax Difference
If Taxable Person fails to submit a Voluntary Disclosure pertaining to errors in Tax Return/Tax Assessment/Tax refund application
15% on Tax Difference (fixed)
If Taxable person submits Voluntary Disclosure after notification by the Authority
1% on Tax Difference (monthly)
If a person fails to submit or late submission of Declaration to the Authority
AED 500/- per month (1st twelve months)
AED 1,000/- per month (from 13th month onwards)
Director Projects & Value Chain @ SAM Corporate LLC is an ex-banker having 20+ years of professional experience.
His domain expertise includes Credit Structuring, Risk Management (Basel, ISO 31000: Risk Management, COSO - Integrated ERM, Rating and risk Modelling), OCEG Capability Model, Internal Audit, Finance, IFRS, CBUAE Banking and financial market regulations including DFSA, ADGM & SCA regulations and ESG & Climate risk management.
Prior to his current engagement, he worked as Risk Manager of a bank based in UAE. His previous major appointments include, Audit & Account Consultant, Senior Accountant and Trainer & visiting faculty.
He holds distinction in Master of Philosophy (MPhil) in Commerce, Master’s degree in Financial Management and PG Diploma in Personnel Management & Labour Law. He also holds PRM, GRCP, GRCA, CRCMP and CBiii Pro. Certifications.
Disclaimer:
The above content is purely and solely for the knowledge purpose and awareness to our clients and the general public without any intention to solicit business opportunities related to tax services. No content on this page constitutes our opinion or advice. SAM corporate is not responsible or liable for any errors, omissions and does not guarantee its completeness, accuracy and timeliness.
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