Highlights of the UAE Corporate Tax Law

On 9 December 2022, the United Arab Emirates (UAE) issued the Federal Decree-Law No. 47 of 2022 on the taxation of corporations and businesses (the law). The law contains twenty chapters and comprises seventy articles. The law will be effective fifteen days after publication in the official gazette.

The law requires that corporate tax (CT) shall be imposed on the taxable person, and the taxable person shall be either a resident person or a non-resident person.

The resident taxable persons include (i) the juridical person incorporated in the UAE, including free zones businesses, (ii) the juridical person established out of the UAE but controlled and managed from the UAE, (iii) any natural person who conducts a business or business activity in the UAE and (iv) any other person determined in a decision issued by the Cabinet. While; the non-resident taxable persons comprise (i) the permanent establishment (PE) of the non-resident person in the UAE, (ii) UAE-sourced income of the non-resident person, and (iii) nexus in the UAE of the non-resident person to drive UAE-sourced income. The LLC, PSC, and PJSC are juridical persons, while sole establishments and civil companies fall under the definition of natural persons.

Government entities, government-controlled entities, persons engaged in an extractive business, persons engaged in a non-extractive natural resource business, qualifying public benefit entities, qualifying investment funds, pension funds and social security funds will be exempt from CT subject to fulfilling the conditions as given in the respective articles of the law. CT will not apply to unincorporated partnerships, and a family foundation, upon fulfilling the conditions, can file an application to the Federal Tax Authority (FTA) to be treated as an Unincorporated Partnership.

The juridical taxable persons, established in the UAE or established out of the UAE but controlled and managed from UAE, will be subject to CT on their worldwide taxable income, while a natural resident taxable person will pay CT on their taxable income related to the UAE business only, even the income earned out of UAE. The non-resident taxable person will be liable to pay tax on the taxable income attributable to the PE, UAE-sourced taxable income not attributable to the PE and taxable income that is attributable to the nexus of the non-resident person in the UAE.

The taxable person shall pay zero per cent CT on taxable income not exceeding the threshold and nine per cent on taxable income exceeding the threshold. The threshold will be specified in the Cabinet Decision, and we can assume it will be Dh 375,000 as provided in the Ministry's initial announcement related to the CT.

The qualifying free zone person will pay zero per cent CT on the qualifying free zone income and nine per cent on the non-qualifying taxable income. The person will be considered a qualifying free zone person if they maintain adequate substance in the UAE, derive qualifying income, comply with transfer pricing rules, and not elected to be subject to CT. All free zone taxable persons will be required to register and file a CT return, regardless of whether they are qualifying free zone persons.

The taxable income of each taxable person will be determined separately based on financial statements prepared as per applicable accounting standards. To arrive at the taxable income, adjustments will be made in the accounting income for the unrealized gain or loss, exempt Income, reliefs, deductions, related party transactions, tax Loss relief, incentives or special reliefs, income or expenditure that has not otherwise been considered etc.

While calculating taxable income, transactions with the related parties and connected persons should be reported at arm’s length price. The law recommends applying the five transfer pricing methods given in the OECD guidelines or another appropriate method to determine the arm’s length price. If the transactions are not at arm’s length, adjustments will be made by the FTA. Taxable persons are required to main the proper documentation related to the transfer pricing like master file and local file.

Taxable persons can carry forward their tax losses and adjust it against the future taxable income, but the amount of tax loss used to reduce the taxable income for any subsequent tax period should not exceed 75% of the taxable income for that tax period before any tax loss relief. The taxable person cannot claim tax loss relief if the losses are incurred before the commencement of CT and/or before a person becomes a taxable person. Moreover, the taxable person cannot claim tax loss relief related to the asset or activity, the income of which is exempt from CT. Subject to the fulfilment of conditions, tax loss of one taxable person can be adjusted against the taxable income of another.

If all related conditions are met, a resident taxable person can make a tax group with other resident taxable person/persons. The parent company must apply to the FTA to make a tax group.

Any taxable person shall register for CT with the FTA and obtain a tax registration number, except in the circumstances prescribed by the Minister.

The FTA can ask for financial statements. There is no requirement for audited financial statements, but the Minister may issue a decision to prepare and maintain audited financial statements.

The ending balances of the financial year that ends immediately before the first tax period commencement will be considered the opening balances for CT purposes, and opening balances shall be prepared considering the arm’s length principles.

All amounts should be quantified in the UAE dirham, and if the amounts are not in the UAE dirham, then it must be converted at the applicable exchange rate set by the Central Bank of the UAE.

The law does not support any arrangement or transaction to avoid the tax unless there is a valid commercial or other fiscal reason which reflects economic reality. By applying the provisions of the anti-abuse rules, the FTA can decide to adjust the advantage taken.

The taxable persons will be liable to submit the CT return and pay the due amount of tax within nine months from the end of the relevant tax period. Taxable Persons shall maintain all records and documents for seven years following the end of the Tax Period.

The law shall apply to the tax period commencing on or after 1 June 2023.

Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above is not an official but a personal opinion of the writer based on the UAE corporate tax law. For any queries/clarifications, please write to him at compliance@kresscooper.com.