Corporate Tax
What is corporate tax?
Under the new tax regime, corporations and other businesses with taxable profits exceeding Dh375,000 will be mandated to pay a standard rate of 9 per cent. The tax will be effective for financial years starting on or after June 1, 2023.Who is entitled to pay corporate tax?
The corporate tax applies to:- UAE-incorporated entities;
- Individuals (foreign or resident) who conduct a business or business activity in the UAE; and
- Foreign legal entities that have a permanent establishment in the UAE or that are managed and controlled in the UAE
Who are the residents and non-residents?
The corporate tax is imposed on ‘taxable persons’ which are defined as either resident persons or non-resident persons (residence for corporate tax is a concept defined in the UAE corporate tax law and is not impacted by where a person resides). A resident person is a legal entity incorporated or established under UAE corporate law (including free zone entities). It also includes a foreign legal entity that is effectively managed and controlled in the UAE, and any individual who conducts business in the UAE. A non-resident person on the other hand is a non-UAE resident individual that has a permanent establishment in the UAE. He/she qualifies as a non-UAE resident person when they earn state-sourced income (subject to a 0 per cent withholding tax).Who is exempted from corporate tax?
Government entities; government-controlled entities; public and private pensions or social security funds; qualifying investment funds; and qualifying public benefit entities are exempt. According to a presentation by the Ministry of Finance, “businesses engaged in the extraction of the UAE’s natural resources and in the non-extractive aspects of the natural resources value chain that are subject to emirate-level taxation will be outside the scope of the UAE corporate tax regime”. Corporate tax exemptions may extend to subsidiary companies that are wholly owned by an exempt person (for example, a holding company used by an investment fund to hold a certain asset). Such entities can apply with the Federal Tax Authority to be exempt from corporate tax.What about free zones?
Free zones will be within the scope of the UAE corporate tax regime and subject to the administrative and compliance obligations prescribed by the law. Qualifying Free Zone Persons (QFZPs) can benefit from a 0 per cent corporate tax rate on “qualifying income”. The regular corporate tax rate of 9 per cent will apply to taxable income that is not qualifying income. To qualify as a QFZP, the free zone must:- Maintain adequate substance in the UAE;
- Derive “qualifying income” (to be specified in a Cabinet decision);
- Not have made an election to “opt-out” of the free zone corporate tax regime;
- Comply with the transfer pricing rules and documentation
- Meet any other conditions as may be prescribed by the minister
Foreign income
UAE resident legal entities will be subject to UAE corporate tax on their worldwide income, although income from foreign subsidiaries and foreign branches can be exempt from corporate tax. Where income earned from abroad is not exempt, income taxes paid in the foreign jurisdiction can be taken as a credit against the corporate tax payable in the UAE on the relevant income to prevent double taxation. UAE residents can elect to exempt their income from foreign permanent establishments from corporate tax (subject to meeting the relevant conditions). Non-resident persons will only be subject to UAE corporate tax on income from their permanent establishment in the UAE on income which is sourced in the UAE (subject to a 0 per cent withholding tax). While asked if a foreign-headquartered company which has a branch in UAE would be taxed on foreign profits, Begum said to Gulf News that the branch would be treated as a non-resident for the purposes of the UAE corporate tax, and they would only pay tax on the income or the profits that are generated from the UAE so they would not be subject to tax on their worldwide income as a non-resident.What are the non-taxable income streams?
There are a number of income streams that would be treated as non-taxable for corporate tax purposes, which include:- Dividends or other profit distributions received from UAE-incorporated or resident legal entities;
- Dividends or other profit distributions received from greater than 5 per cent owned foreign legal entities where the taxpayer has held the ownership interest for at least 12 months and all of the conditions for the ‘participation exemption’ are met;
- Certain other income (e.g. capital gains, foreign exchange gains/losses and impairment gains or losses) received from greater than 5 per cent owned UAE resident or foreign legal entities where the taxpayer has held the ownership interest for at least 12 months and all the conditions for the ‘participation exemption’ are met
- Income from a foreign branch or foreign permanent establishment where an election is made to claim the ‘Foreign Permanent Establishment exemption’
What are the tax reliefs?
The corporate tax law provides a number of tax reliefs that taxpayers may benefit from subject to meeting specified conditions:- Tax Loss Relief: This relief allows for tax losses to be offset against the taxable income of future periods, up to a maximum of 75 per cent of the taxable income and tax losses can be carried forward without limitation
- Tax Loss Transfer: UAE resident companies may be able to transfer tax losses to another taxable person where there is 75 per cent common ownership.
- Business Restructuring Relief: Gains or losses arising on business mergers, legal mergers, divisions of entities and other qualifying restructuring transactions can be excluded from Taxable Income.
- Small Business Relief: Taxpayers resident in the UAE may elect for small business relief if their revenue earned in a relevant tax period and previous tax periods does not exceed a threshold which will be specified in a ministerial decision
Qualifying groups v/s tax groups
UAE companies or non-resident companies that have a permanent establishment in the UAE will automatically be part of a qualifying group where:- They are under at least 75 per cent common ownership
- Neither company is an exempt person or a Qualifying Free Zone Person
- Both companies use the same accounting standards and have the same financial year
- Within a qualifying group, assets and liabilities can be transferred on a no gain/no loss basis for corporate tax purposes subject to certain conditions being met
- The parent company holds (directly or indirectly) at least 95 per cent of legal and economic ownership of its subsidiaries
- Neither the parent nor any group member is an exempt person or a Qualifying Free Zone Person
- All group members use the same accounting standards and have the same financial year
- Tax groups file one consolidated CT return for the entire group and tax losses are carried forward on a tax group basis