Business Tax UAE: Guide To Corporate Income Tax Regulations

Business Tax UAE has recently undergone significant transformations, particularly with the introduction of the Corporate Income Tax targeting large enterprises. As the UAE positions itself as a global business hub, understanding the nuances of this tax regime is crucial for companies looking to thrive in this dynamic environment. This essential guide will navigate you through the intricacies of corporate income tax, ensuring your united enterprises are well-prepared for compliance and growth.

On December 9, the United Arab Emirates (UAE) announced Federal Decree-Law No. (47) of 2022 regarding the taxation of corporations and businesses, known as the ‘CT law.’ The Ministry of Finance (MoF) has made an unofficial translation available on its website, along with a set of FAQs that offer additional clarifications. This CT law is applicable for financial years commencing after June 1, 2023, and was taken effect 15 days following its publication in the official gazette.

Building on the consultation document released in April 2022, the CT law elaborates on several important provisions, though there are still many aspects that will require further clarification through future cabinet and ministerial decisions and tax authority guidance.

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Business Tax UAE

The relatively low corporate tax (CT) rate of up to 9%, along with a lighter compliance burden for businesses, aims to bolster the UAE’s status as a global business and investment hub. Companies operating in the UAE must prepare for the implementation of this federal CT, although some details remain unclear. The federal CT framework signifies a major shift for businesses with existing operations in the UAE, as well as for investors considering expansion or establishing a holding company in the region.

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Exempt Persons

The CT law outlines a list of exempt persons and delineates the criteria that must be fulfilled to qualify for a CT exemption (with additional requirements likely to be issued in the future). It is important to note that eligibility for exemptions on the list is not automatic and requires approval from the tax authority. The exemption list includes:

Entities engaged in the exploration, extraction, removal, or production and exploitation of the UAE’s natural resources (Extractive Businesses).
Entities involved in the separation, treatment, refining, processing, storage, transport, marketing, and distribution of the UAE’s natural resources (Non-Extractive Natural Resource Businesses).
Public and private pension and social security funds.
Qualifying investment funds.
Direct subsidiaries of certain exempt entities.

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Permanent Establishment (PE)

The definition of Permanent Establishment (PE) in the CT law generally aligns with the OECD Model Convention’s definition. The OECD Commentary on the Model Tax Convention serves as a useful reference when determining whether a PE exists in the UAE. The PE definition includes fixed places of business and dependent agent PEs. However, the CT law also refers to “any other form of nexus” within the UAE, though no additional details are provided at this time.

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UAE-sourced Income

As anticipated, the CT law establishes specific criteria for identifying when income is considered UAE-sourced. Income is typically deemed UAE-sourced if it originates from (1) a person residing in the UAE (e.g. if the payer is a resident), (2) a non-resident person attributable to their PE in the UAE, or (3) activities conducted, assets situated, capital invested, rights conferred, or services rendered within the UAE.

The CT law also enumerates particular income types classified as UAE-sourced. This list is consistent with expectations and includes income from the sale of goods within the UAE, the provision of services experienced, utilized or benefited in the UAE, income from real estate in the UAE, and income from the use of intellectual or intangible property within the UAE. Noteworthy points include:

Income resulting from the sale of shares in a resident person may be considered UAE-sourced, meaning capital gains from the sale of shares in a UAE entity by a non-resident could be taxable in the UAE.
Interest from loans secured by movable or immovable property in the UAE, where the borrower is either a resident or a government entity, may be subject to taxation in the UAE.
Insurance and reinsurance premiums related to assets located in the UAE or activities conducted in the UAE with insured persons who are UAE residents are classified as UAE-sourced income.

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Investment Manager Exemption

The CT law incorporates an investment manager exemption regime, serving as a trading safe harbor. To qualify, certain conditions must be fulfilled, including:
The investment manager must be regulated within the UAE.
Transactions should take place in the ordinary course of the investment manager’s business.
The investment manager must operate independently regarding transactions.
The investment manager should transact on an arm’s length basis with non-residents and receive appropriate compensation for its services.

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Treatment of Partnerships

As a general rule, a partnership in the UAE is treated as transparent for CT purposes unless an election is made to consider it taxable. Similarly, a foreign partnership will be regarded as transparent for UAE CT if it is considered transparent for tax purposes in its respective jurisdiction.

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Special Treatment for Free Zone Entities

While the CT law generally implements a rate of up to 9% for all entities registered and operating in the UAE (with certain exceptions), free zone entities receive special consideration.

These entities may enjoy a 0% CT on ‘qualifying income’ throughout the remaining duration of the tax incentive period defined by local free zone legislation. This period may be extended via a Cabinet decision. However, eligibility for the incentive is contingent upon fulfilling certain conditions as outlined in the CT law.

Key among these conditions are the maintenance of adequate substance within the UAE and adherence to the transfer pricing rules specified in the CT law. If a qualifying free zone entity fails to meet any of these criteria during a tax period, it will lose its qualifying status and fall under the standard UAE CT framework starting that tax period.

Any non-qualifying income earned by free zone entities will be taxed at the 9% CT rate. A qualifying free zone entity can choose to be subjected to the regular (UAE CT) for all its income, although the CT law does not clarify whether such an election is irrevocable. Regardless of their tax status, free zone entities will still be required to fulfill standard CT compliance obligations.

Note: Several uncertainties continue to exist, such as the definition of qualifying income (pending a Cabinet decision) and how transactions between free zone entities and related/unrelated entities or branches in mainland UAE will be treated. However, at the very least, the definition of qualifying income may encompass income sourced from outside the UAE or generated within free zones, as indicated in the public consultation document.

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Exempt Income

Income that is exempt from taxation encompasses:

Dividends received from entities based in the UAE, including those in free zones.
Participation exemption: Income derived from participating interests (with a minimum of 5% ownership) is exempt from tax if:
- The interest is maintained, or intended to be maintained, for a continuous period of at least 12 months.
- The interest is subject to a corporate tax rate of at least 9% or an equivalent tax in its home jurisdiction. This requirement is met if:
  - The primary purpose and activity of the participation is to acquire and hold shares that qualify for this exemption, and the income derived during the relevant tax period primarily consists of qualifying income from participating interests.
  - The participation is a qualifying entity based in a UAE free zone or an exempt entity.
  - No more than 50% of the participation’s direct and indirect assets consist of ownership rights that would not qualify for an exemption if directly held. The law includes provisions for clawback within two years in this context.
Foreign branch/PE exemption: Taxpayers may elect to exempt the income of foreign branches or permanent establishments (PEs) from UAE taxation, provided that these foreign entities are subject to a minimum corporate tax rate of 9% or its equivalent in their jurisdiction. This election applies to all foreign branches of the taxpayer that meet the necessary conditions, although the CT law does not clarify whether this election can be revoked.
Income of nonresidents from the operation of aircraft or vessels in international transport, contingent upon certain criteria including tax reciprocity agreements.

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Tax Group

Entities within the UAE may opt to form a tax group if they satisfy all of the following requirements:

The UAE parent entity directly or indirectly owns at least 95% of the (1) share capital, (2) voting rights, and (3) entitlement to profits and net assets.
The entities share the same financial year and prepare their financial statements using identical accounting standards.
Neither the parent entity nor any subsidiaries qualify as exempt persons or qualifying entities in free zones (i.e., those subject to a 0% UAE CT rate).

When a tax group is established, the parent entity assumes the responsibility for administrative tasks, such as submitting a single tax return and settling the overall tax liabilities for the group. Joint and several liabilities may be restricted to specific members of the tax group with prior approval from the tax authority.

Each parent and subsidiary retains individual obligations for complying with withholding tax (WHT) requirements as necessary. Specific regulations govern the processes for joining, departing, and dissolving a tax group, among other aspects.

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Transfer of Assets and Liabilities within a Group

The transfer of assets and liabilities among entities (i.e., those that are not exempt or qualifying free zone persons) that are at least 75% commonly owned, share the same financial year-end, and utilize the same accounting standards can occur on a tax-neutral basis, provided that the transferred assets/liabilities remain within the group. Further, both the transferor and transferee must continue to meet the requisite criteria for a minimum of two years (the clawback period). When relief is claimed, the assets/liabilities involved should be recorded at net book value.

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Business Restructuring Relief

The CT law also offers tax relief for mergers, spin-offs, and other forms of corporate restructuring where a business (whether a complete entity or a distinct part) is transferred in exchange for shares or other ownership interests, assuming specific conditions are met. A two-year clawback period will apply in the event of a later transfer to a third party. When relief is claimed, the assets/liabilities should be documented at net book value. Tax losses that have not been utilized by the transferor may be carried forward by the transferee, subject to conditions that are yet to be specified.

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Interest Deduction Limitation

The deduction for net interest expenses is capped at 30% of EBITDA (excluding any exempt income). Businesses will be eligible for a safe harbor minimum deduction amount, irrespective of the EBITDA limits (details to be announced later). Any disallowed interest expenses under the EBITDA cap can be carried forward for ten years. These restrictions do not pertain to financial services entities or individual taxpayers engaging in business activities.

Interest on related-party loans for certain capital transactions, as delineated in the CT law, remains deductible provided that there is evidence indicating the primary objective of securing the loan and conducting the transactions is not to achieve a CT benefit. This requirement is deemed satisfied if the related-party lender is subject to UAE CT or a similar tax in another jurisdiction with a rate of at least 9% on the earned interest income.

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Transfer Pricing (TP)

The UAE CT law encompasses multiple provisions concerning transfer pricing. The law stipulates that:

Transactions with ‘related parties’ and ‘connected persons’ must adhere to the arm’s length principle.
Transfer pricing methodologies are introduced, broadly aligning with OECD guidelines.
Definitions are provided for ‘related parties’, ‘control’, and ‘connected persons’.
There are principles regarding TP adjustments, including corresponding adjustments and potential mechanisms.
Taxpayers are required to maintain TP documentation (including a disclosure form, master file, and local file), with conditions and formats to be defined in forthcoming ministerial or authority decisions.
Frequently Asked Questions elaborate on additional TP considerations for (i) domestic transactions—addressed; (ii) transactions within a tax group—excluded; and (iii) free zone entities— covered.
Further details on transfer pricing are anticipated through subsequent ministerial or authority decisions.

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Tax Loss Relief

Tax losses can be carried forward indefinitely, with the offset limited to up to 75% of each year’s taxable income, provided there is no change in ownership exceeding 50%. If a change in ownership greater than 50% occurs, tax losses can still be carried forward if the new owner continues to operate the same or a similar business. These conditions do not apply to publicly listed businesses.

Tax losses incurred before the implementation date of the UAE CT or before an entity becomes a UAE taxpayer will not be available for future utilization. Likewise, losses arising from exempt income or income not covered under the CT law will also be unavailable for future periods.

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Transfer of Tax Losses

Companies can mutually transfer tax losses as long as they are at least 75% commonly owned (either directly or indirectly) and meet additional stipulations outlined in the CT law, such as having the same financial year-end and accounting standards. The total offset of transferred losses must not exceed 75% of the taxable income. Transfers of losses will not be permitted from exempt companies or qualifying free zone entities.

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Withholding Tax

A withholding tax rate of 0% will be applied to specific categories of UAE-sourced income earned by nonresidents, provided that this income is not linked to a permanent establishment (PE) of the nonresident. The specific withholding tax rate and the types of income subject to this tax may be outlined in a Cabinet decision. Given the 0% withholding tax rate, there is no requirement for registration or filing obligations.

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Foreign Tax Credit

Foreign tax credits are accessible but cannot exceed the corporate tax (CT) owed on the corresponding income. Any unused tax credits may not be carried forward to future periods or back to prior periods. Taxpayers must maintain adequate records to substantiate their foreign tax credits. While specific guidance isn’t currently available, it is anticipated that the records will need to demonstrate the amount of tax owed in the foreign jurisdiction, the payments made, and the non-refundable nature of the foreign tax.

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General Anti-Abuse Rule

The CT law introduces a general anti-abuse rule (GAAR) that targets transactions that yield a tax benefit without a legitimate commercial justification, particularly where the primary or significant motive behind the transaction is to obtain a tax advantage. To assess whether the GAAR applies to a given transaction or arrangement, a thorough examination of the specific facts and circumstances is necessary.

This evaluation will consider the nature and substance of the transaction, how it was executed, the timing involved, and whether it has established rights or obligations that would not usually arise between parties engaged in an arm’s length transaction.

Observation: As the GAAR is designed to combat abusive tax schemes, taxpayers should ensure their transactions are genuinely motivated by business purposes and that they are well-documented.

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International Agreements

In the event of any discrepancies, the provisions of international agreements may take precedence over the provisions of the CT law.

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Global Minimum Tax

The CT law does not address or provide details regarding Pillar Two or a potential increased tax rate for large multinational corporations (though this was mentioned in the initial announcement). Until the UAE adopts the Pillar Two regulations, UAE entities that belong to multinational groups will continue to be governed by the standard UAE CT framework.

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Conclusion

Business Tax UAE is a crucial topic for any enterprise aiming to navigate the complexities of the financial landscape in the United Arab Emirates. With the newly introduced UAE Corporate Tax, businesses must familiarize themselves with the implications of this significant shift in taxation policy. The headline rate of corporate tax, set at a competitive level, coupled with a progressive rate system, ensures that your taxable income aligns with your business profits, promoting fairness in the tax structure.

Moreover, understanding Emirate-level tax decrees is essential for businesses operating across various regions. Different Emirates may have specific provisions that influence your overall tax strategy. For entities in free zones, incentives can significantly affect taxable income, allowing for unique opportunities to optimize tax liabilities.

Incorporating these insights into your business strategies will enable you to maintain compliance while maximizing financial benefits. By staying informed about the evolving corporate tax landscape, you position your enterprise for sustainable growth in the dynamic market of the United Arab Emirates. Ultimately, embracing the nuances of Business Tax UAE empowers businesses to thrive in a competitive environment.

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Frequently Asked Questions (FAQs)

Who needs to register for UAE corporate tax?

Any taxable entity in the UAE must register with the FTA, regardless of whether its earned revenue eventually exceeds the AED 375,000 limit. Failure to do so can result in a punishment of up to AED 10,000.

What is the tax rate for business income in Dubai?

Barring Bahrain, the UAE has the lowest corporate income tax rate in the GCC area, at 9%. The UAE CT regime was meant to include worldwide best practices while minimizing the compliance load on firms.

What is the 9% corporate tax in the UAE?

On June 1, 2023, the Federal Tax Authority (FTA) issued regulations instituting a 9% corporation tax rate for income over 375,000 dirhams in Dubai and the other Emirates. Income below this threshold will be tax-free, as it has done in the past.

How much is UAE tax?

Individuals in the UAE do not have to pay income tax. However, it imposes a 5% value-added tax on the purchase of goods and services, which is charged at each stage of the supply chain and eventually borne by the end customer.