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 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.
A Taxable Person can be either a Resident or Non-Resident.
A Taxable Resident Person is any of the following:
A Taxable Non-Resident Person is a person who either:
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:
As per Art. 13 of the Corporate Tax Law, income shall be considered UAE-Sourced Income in any of the following instances:
Art. 13 further states that UAE -Sourced Income shall include:
A Qualifying Free Zone Person is a juridical person incorporated, established, or otherwise registered in a FZ that meets all the following conditions:
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:
Non-Qualifying Free Zone Person:
The threshold for 0% rate will likely be fixed at AED 375.000 as anticipated in the consultation papers.
Qualifying Free Zone Person:
A Qualifying Free Zone Person can elect to be subject to CT as a Non-Qualifying Free Zone Person.
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.
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:
Dividends received from a UAE Juridical Person (domestic dividends) are exempt irrespective of the percentage of ownership and the holding period.
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.
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.
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.
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.
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.
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