The Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses (hereinafter referred to as the “Corporate Tax Lawâ€) was issued by the United Arab Emirates (“UAEâ€) on 09 December 2022.
The Corporate Tax Law provides the legislative basis for the introduction and implementation of a Federal Corporate Tax (“Corporate Taxâ€) in the UAE and is effective for financial years starting on or after 1 June 2023.
Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses
Corporate tax is a form of direct tax levied on the net income or profit of corporations and other entities from their business.
Corporate Tax will apply to all UAE companies and other juridical persons that are incorporated or effectively managed and controlled in the UAE; Natural persons (individuals) who conduct a Business or Business Activity in the UAE as specified in a Cabinet Decision to be issued in due course; and Non-resident juridical persons (foreign legal entities) that have a Permanent Establishment in the UAE (which is explained under [Section 8]).
Juridical persons established in a UAE Free Zone are also within the scope of Corporate Tax as “Taxable Persons†and will need to comply with the requirements set out in the Corporate Tax Law. However, a Free Zone Person that meets the conditions to be considered a Qualifying Free Zone Person can benefit from a Corporate Tax rate of 0% on their Qualifying Income (the conditions are included in [Section 14]).
Corporate Tax will apply equally to all categories of profits and other (net) income reported in the financial statements prepared in accordance with internationally acceptable accounting standards.
Cementing the UAE’s position as a world- leading hub for business and investment.
Meeting international standards for tax transparency and preventing harmful tax practices.
Accelerating the UAE’s development and transformation to achieve its strategic objectives.
The concept of Permanent Establishment is an important principle of international tax law used in corporate tax regimes across the world. The main purpose of the Permanent Establishment concept in the UAE Corporate Tax Law is to determine if and when a foreign person has established sufficient presence in the UAE to warrant the business profits of that foreign person to be subject to Corporate Tax.
The definition of Permanent Establishment in the Corporate Tax Law has been designed on the basis of the definition provided in Article 5 of the OECD Model Tax Convention on Income and Capital and the position adopted by the UAE under the Multilateral Instrument to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting. This allows foreign persons to use the relevant Commentary of Article 5 of the OECD Model Tax Convention when assessing whether they have a Permanent Establishment or not in the UAE. This assessment should consider the provisions of any bilateral tax agreement between the country of residence of the Non-Resident Person and the UAE.
The Corporate Tax regime will become effective for financial years starting on or after 1 June 2023.
Examples:
Â
| Taxpayer | Applicable CT rate |
| Individuals and juridical persons | 0% for taxable income up to and including AED 375,000 (this amount is to be confirmed in a Cabinet Decision) |
| Qualifying Free Zone persons
(see further information below) |
0% on qualifying income
9% on taxable income that does not meet the qualifying income definition |
The Corporate Tax liability will be calculated as follows:
The Corporate Tax liability for the year will be AED 0 + AED 2,250 = AED 2,250
The final amount of Corporate Tax payable will be reduced by any foreign taxes incurred on the relevant income.
The taxable income will be the accounting net profit / income of a business, after making adjustments for certain items to be specified under the Corporate Tax law. The accounting net profit / income of a business is the amount reported in the financial statements prepared in accordance with internationally acceptable accounting standards.
In principle, all legitimate business expenses incurred wholly and exclusively for the purposes of deriving Taxable Income will be deductible, although the timing of the deduction may vary for different types of expenses and the accounting method applied. For capital assets, expenditure would generally be recognised by way of depreciation or amortisation deductions over the economic life of the asset or benefit.
Expenditure that has a dual purpose, such as expenses incurred for both personal and business purposes, will need to be apportioned with the relevant portion of the expenditure treated as deductible if incurred wholly and exclusively for the purpose of the taxable person’s business.
Certain expenses which are deductible under general accounting rules may not be fully deductible for Corporate Tax purposes. These will need to be added back to the Accounting Income for the purposes of determining the Taxable Income. Examples of expenditure that is or may not be deductible (partially or in full) include:
| Types of Expenditures | Limitation to deductibility |
|
No deduction |
|
Partial deduction of 50% of the amount of the expenditure |
|
Deduction of net interest expenditure exceeding a certain de minimis threshold
Up to 30% of the amount of earnings before the deduction of interest, tax, depreciation and amortisation (except for certain activities) |
A Free Zone Person that is a Qualifying Free Zone Person can benefit from a preferential Corporate Tax rate of 0% on their “Qualifying Income†only.
In order to be considered a Qualifying Free Zone Person, the Free Zone Person must:
maintain adequate substance in the UAE.
The Minister may prescribe additional conditions that a Qualifying Free Zone Person must meet. If a Qualifying Free Zone Person fails to meet any of the conditions or makes an election to be subject to the regular Corporate Tax regime, they will be subject to the standard rates of Corporate Tax from the beginning of the Tax Period where they failed to meet the conditions.
Two or more Taxable Persons who meet certain conditions (see below) can apply to form a “Tax Group†and be treated as a single Taxable Person for Corporate Tax purposes.
To form a Tax Group, both the parent company and its subsidiaries must be resident juridical persons, have the same Financial Year and prepare their financial statements using the same accounting standards.
Additionally, to form a Tax Group, the parent company must:
The ownership, rights and entitlement can be held either directly or indirectly through subsidiaries, but a Tax Group cannot include an Exempt Person or Qualifying Free Zone Person.
To determine the Taxable Income of a Tax Group, the parent company must prepare consolidated financial accounts covering each subsidiary that is a member of the Tax Group for the relevant Tax Period. Transactions between the parent company and each group member and transactions between the group members would be eliminated for the purposes of calculating the Taxable Income of the Tax Group.
Based on the practices in other jurisdictions, the following documents may be required:
No advance Corporate Tax payment: In order to keep the administrative burden on taxpayers to a minimum, a business will only need to prepare and file one tax return and other related supporting schedules with the FTA for each tax period. There will be no requirement for a business to file a provisional Corporate Tax return and make advance payments of Corporate Tax.
Corporate Tax returns filing deadline: Each tax return and related supporting schedules will need to be submitted to the FTA within nine (9) months of the end of the relevant Tax Period.
Corporate Tax payment deadline: Payments to settle a taxpayer’s Corporate Tax liability for a Tax Period will need to be made within nine (9) months of the end of the relevant Tax Period. Where a taxpayer can demonstrate that a Corporate Tax refund may be due, the taxpayer can apply to the FTA to request a refund.
The table below illustrates the Corporate Tax filing and payment deadlines for businesses with financial year ends of 31 March, 30 June, and 31 December: How is the Corporate Tax period determined? According to the information published by the UAE MoF, the Corporate Tax will apply to ï¬nancial years starting on or after 1 June 2023. The UAE Corporate Tax period for an entity is determined based on its ï¬nancial year-end. As such, entities with a:
| UAE Corporate Tax returns filing and payment deadlines. | |||
| Financial year end | 30 June | 31 December | Â 31 March |
| First Tax period | 1 July 2023 –
30 June 2024 |
1 January 2024 –
31 December 2024 |
1 April 2024 – 31 March 2025 |
| Filing & payment deadline | 31 March 2025 | 30 September 2025 | 31 December 2025 |
The business should have commercial reasons for reorganisation. A reorganisation, without valid commercial reasons, aimed to gain tax benefits could be disregarded under anti-abuse rules.
The Corporate Tax Law includes general anti-abuse rules (GAAR) intended to disregard transactions or arrangements undertaken with the main purpose of obtaining a CT advantage. These rules apply from the date the Law is published in the Official Gazette.
AAR applies not only on business transactions but also on business arrangements entered on or after the official gazette publication. Arrangements such as change of financial year, restructuring of business operations/entities, share transfer, mergers/demergers could also be covered under AAR.
We assist our clients through the tax transformation taking place in the country. As a part of it, we organise workshops to educate and help our clients plan and comply with the tax rules and regulations followed by wide range of fully integrated tax services.
AGN Al MAQTARI AUDITING since 1986 is leading in advising our clients in Accounting, Audit & Tax.
The information here is meant to provide a brief understanding of the Corporate Tax regime and it is not intended to comprehensively address all possible aspects of the Corporate Tax regime or to provide definitive answers and should not be used for individual or business decisions without understanding the full interpretations of the law and ministerial decisions.
Disclaimer : AGN International Ltd is a company limited by guarantee registered in England & Wales, number 3132548, registered office 24 Greville Street, London EC1N 8SS, United Kingdom. AGN International Ltd (and its regional affiliates; together “AGN”) is a not-for-profit worldwide membership association of separate and independent accounting and advisory businesses. AGN does not provide services to the clients of its members, which are provided by Members alone. AGN and its Members are not in partnership together, they are neither agents of nor obligate one another, and they are not responsible or liable for each other’s services, actions or inactions.
