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UAE’s Logical Next Step! – Lifts Tax-Free Status for Certain Businesses

Overview

After 50 years UAE Ministry of Finance (“MoF”) has on Monday, 31 January 2022 rolled out the road map of its plans to impose Federal Corporate Tax (“CT”).
 

Earlier on 26 July 2021, the MoF, had issued an official statement confirming the UAE’s support of the global minimum effective tax rate as proposed under “Pillar Two” of the OECD Base Erosion and Profit Shifting (“OECD BEPS”) project.
A competitive CT regime based on international best practices will cement the UAE’s position as a leading global hub for business and investment and accelerate the UAE’s development and transformation to achieve its strategic objectives.
 

The introduction of the CT regime reaffirms the UAE’s commitment to meeting international standards for tax transparency and preventing harmful tax practices.
 

Role of Federal Tax Authority (“FTA”)
 

The Federal Tax Authority (“FTA”) will be responsible for the administration, collection, and enforcement of UAE CT.  

Role of Ministry of Finance (“MoF”)
 

The MoF will remain the ‘competent authority’ for purposes of bilateral/multilateral agreements and the international exchange of information for tax purposes.
 

Let us understand the details of the UAE CT roadmap hereunder:-
 

A. Basic Features of CT
 

1. What is CT – CT is a form of direct tax levied on the net income or profit of corporations and other businesses.
 

CT is sometimes also referred to as “Corporate Income Tax” or “Business Profits Tax” in other jurisdictions.
 

2. CT regime Effective from – UAE CT regime becomes effective for financial years “starting” on or after 1 June 2023.
 

Examples:
 

a. A business that has a financial year starting on 1 July 2023 and ending on 30 June 2024 – will become subject to UAE CT from 1 July 2023 (which is the beginning of the first financial year that starts on or after 1 June 2023).
 

b. A business that has a (calendar year) financial year starting on 1 January 2023 and ending on 31 December 2023 will become subject to UAE CT from 1 January 2024 (which is the beginning of the first financial year that starts on or after 1 June 2023)
 

c. Similarly, a business that has a financial year starting on 1 April 2023 and ending on 31 March 2024 – will become subject to UAE CT from 1 April 2024 (which is the beginning of the first financial year that starts on or after 1 June 2023).
 

3. Applicability of CT – CT is a Federal Tax and hence applicable to all UAE Businesses and Commercial activities in each Emirate;
 

a. EXCEPT for the extraction of natural resources, which will remain subject to Emirate level corporate taxation
 

b. Others as may be prescribed from time-to-time (Information on other UAE CT exemptions and exclusions is awaited)
 

4. Determination of “Business” that will be within the scope of CT
 

a. With respect to a Legal Entity – All activities undertaken by a Legal Entity will be deemed “Business activities” and hence within the scope of CT.
 

b. With respect to an Individual – This would generally be done by reference to the Individual having (or being required to obtain) a business licence or permit to carry out the relevant commercial, industrial and/or professional activity in the UAE.
 

In other words, an Individual earning Business income under a commercial license will be within the scope of UAE CT. Further, no CT will be payable unless the annual net income of the freelance professional exceeds AED 375,000 (i.e., USD 102,100/- or INR 7,700,000/- approximately).
 

5. Determination of “Business Profit/Income” that will be subject to CT
The accounting Net Profit of a business is the amount reported in the financial statements prepared in accordance with internationally acceptable accounting standards
 

The Taxable Income will be the accounting net profit of a business, after making adjustments for certain items to be specified under the UAE CT law (information awaited).
 

B. Rate of CT
 

The CT rates are:
 

a. 0% for taxable income up to AED 375,000 (i.e., USD 102,100/- or INR 7,700,000/- approximately);
b. 9% for taxable income above AED 375,000; and
c. a different tax rate for “large multinational corporations” that meet specific criteria set with reference to ‘Pillar Two’ of the OECD BEPS project;
 

Where,
 

A multinational corporation is a corporation that operates in its home country, as well as in other countries through a foreign subsidiary, branch or other form of presence / registration. Merely earning income from outside its home country without a foreign presence or registration would not make a business a “multinational corporation”.
 

In the context of the global minimum effective tax rate as proposed under ‘Pillar Two’ of the OECD BEPS project,” large” refers to a multinational corporation that has consolidated global revenues in excess of EUR 750 million (i.e., AED 3.15 billion approximately).
 

C. CT will NOT apply to
 

The following Incomes earned by an Individual will be outside the ambit of CT –
 

a. Individual’s Salary and other employment income (whether received from the public or private sector)
b. Individual’s, investment in Real Estate, in their personal capacity provided the Individual is NOT required to obtain a commercial license or permit to carry out such activity in the UAE
c. Individual’s dividend income, capital gains and other income earned from owning shares or other securities in their personal capacity
d. Individual’s Interest and other income earned from bank deposits or saving schemes
 

D. Income Exempt from CT
 

a. Dividends and Capital Gains earned by a UAE business from its “qualifying shareholdings” will be exempt from CT.
 

Where, a “qualifying shareholding” refers to an ownership interest in a UAE or foreign company that meets certain conditions to be specified in the UAE CT law (information awaited).
 

b. Qualifying intra-group transactions and Reorganizations will NOT be subject to UAE CT provided the necessary conditions are met (information awaited).
 

E. Foreign Persons
 

Foreign entities and individuals will be subject to UAE CT only if they conduct a trade or business in the UAE in an ongoing or regular manner.
 

UAE CT will generally Not be levied on a foreign investor’s income from –
a. dividends,
b. capital gains,
c. interest,
d. royalties, and
e. other investment returns.
 

F. Free Zones
 

Free zone businesses will be subject to CT. The CT treatment that will apply to businesses in free zones will be the same across all free zones.
 

However, the CT regime will continue to honour the CT incentives currently being offered to free zone businesses that comply with all regulatory requirements and that do not conduct business with mainland UAE (information awaited).
 

G. Industry Sectors
 

a. Not subject to CT – Businesses engaged in the Oil & Gas Sector and extraction of natural resources. However, they will continue to be subject to Emirate level corporate taxation.
 

b. Subject to CT – Businesses engaged in the Banking Sector and Real Estate Sector (real estate management, construction, development, agency and brokerage activities).
 

H. Carry forward and Set off of Tax Losses
 

a. A loss for CT purposes (i.e., a tax loss) would arise when the total deductions the businesses can claim are greater than the total income for the relevant financial period.

b. The CT regime will allow a business to carry forward and set off the tax losses (from the CT effective date) against the taxable income in subsequent financial periods (further details awaited).

c. Tax losses from one group company may be used to offset taxable income of another group company, provided certain conditions are met. Further information on the group loss utilisation rules is awaited.
 

I. Tax Group
 

Fiscal Unity for CT purposes –
 

a. A UAE group of companies can elect to form a “Tax Group” and be treated as a “single taxable person”, provided certain conditions are met (information awaited).
b. A UAE Tax Group will only be required to file a single tax return for the entire group.
 

J. Withholding Tax (“WHT”)

a. What is WHT – WHT is tax deducted at source by the payer on behalf of the recipient of the income. WHT exist in many tax systems and are typically used in respect of dividends, interest, royalties and similar payments.
 

b. WHT rate under CT regime – Under the CT regime, WHT will NOT be applicable on domestic and cross-border payments of any nature.
 

K. Foreign Tax Credits (“FTC”)
 

Foreign Taxes paid on UAE taxable income will be allowed as a tax credit against the UAE CT liability.
 

Example –
 

If a business has earned taxable income of AED 400,000 in a given financial year, the CT liability will be calculated as follows:
a. Taxable income of AED 0 to AED 375,000 at 0% = AED 0
b. Portion of taxable income exceeding AED 375,000 (i.e., AED 400,000 – AED 375,000 = AED 25,000) at 9% = AED 2,250
The UAE CT liability for the year will be AED 0 + AED 2,250 = AED 2,250.
 

Further, let us assume foreign taxes paid are AED 250.
 

Hence, on account of the tax credit for the foreign taxes incurred on the relevant income offered to tax, the final UAE CT payable will be AED 2,250 – AED 250 = AED 2,000.
 

L. Transfer Pricing (“TP”)
 

TP rules seek to ensure that transactions between related parties are carried out at an Arm’s Length terms (i.e., as if the transaction was carried out between independent parties)
 

UAE businesses will need to comply with TP rules and documentation requirements set with reference to the OECD Transfer Pricing Guidelines.
 

M. CT Registration
 

Businesses will be required to register for UAE CT purposes. More information on the registration process and ongoing compliance obligations for businesses is awaited.
 

N. CT Compliances
 

a. Annual CT Return – Only one CT return will need to be filed electronically per financial period. No provisional CT filings will be required.
 

b. Advance CT payments & filings – UAE businesses will NOT be required to make advance CT payments. Hence, no advance CT filings will be required.
 

O. Penalties for Non-Compliance under the CT regime – Like other taxes in the UAE (e.g., VAT), businesses will be subject to penalties for non-compliance with the CT regime. Further information on the CT compliance obligations and applicable penalties is awaited.
 

Way Forward
 

Businesses will have time to prepare for the introduction of UAE Corporate Tax, and further information on the UAE Corporate Tax regime is expected in the middle of 2022 to help businesses get ready and be fully compliant.
 

Further information on the technical details and other specifics of the UAE CT regime will be made available in due course.
 

Let’s connect – anand.bathiya@bathiya.com, rima.gandhi@bathiya.com
 

Disclaimer:-
 

The information in this document provides comprehensive summary of the announcements made by the MoF of the proposed UAE CT regime in advance of legislation being finalised and promulgated. It should not be used for individual or business decisions, as it does not represent the final legislation.
 

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