Complete Guide to UAE Corporate Tax 2023: Updates, Implications, and Strategies

UAE Corporate Tax – A Basic Starting Guide!

The United Arab Emirates (UAE) Ministry of Finance (Ministry) has recently announced a Federal Corporate Tax on business profits for the first time in the UAE. By consulting with the business community and other interest parties as part of the implementation process, the UAE Government is demonstrating its commitment to implementing a Corporate Tax regime that is compatible with the UAE’s business environment.

In the development of the UAE Corporate Tax regime, the Ministry of Finance has been guided by a set of internationally accepted principles to ensure efficiency, fairness, transparency and predictability in the design and execution of the proposed UAE Corporate Tax regime. However, most countries in the world already have a comprehensive Corporate Tax regime, including most of the GCC Member States.

The information set out in this alert is based on currently available guidance from the Ministry and remains subject to the Corporate Tax Law provisions once issued.

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What is UAE Corporate Tax?

Corporate Tax is a form of direct tax levied on the net income or profit of corporations and other businesses. This is also called Corporate Income Tax or Business Profit Tax.

The Federal Tax Authority will play a crucial role in the administration, collection, and enforcement of UAE Corporate Tax (CT) and other federal taxes. They will be responsible for issuing guidelines, addressing inquiries, and raising awareness regarding CT. On the other hand, the Ministry of Finance will continue to serve as the competent authority for bilateral and multilateral tax agreements, as well as international information exchange for tax purposes. Additionally, the Ministry of Finance holds the authority to provide further guidance and establish implementing regulations for UAE CT and other federal taxes.

The UAE Corporate Tax is a Federal tax and will therefore apply to all UAE business and commercial activities undertaken by entities or individuals across the seven emirates. Introducing the Corporate Tax regime reaffirms the UAE’s commitment to meeting international standards for tax transparency and preventing harmful tax practices. This 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.

UAE entities owned by UAE or GCC nationals will be subject to UAE Corporate Tax (CT). The UAE CT regulations do not distinguish based on nationality or residence. Whether the founders or ultimate owners of the entity are UAE or GCC nationals, if the juridical person is incorporated or resident in the UAE, or has a permanent establishment in the UAE, it will be liable for UAE CT.

Corporate Tax is levied on the Taxable Income earned by a Taxable Person within a specific Tax Period. Corporate Tax in the UAE is imposed on a Taxable Person based on their classification, which determines the applicable basis of taxation. The Corporate Tax Law follows the standard practice found in many countries, where income is taxed on both a residence and source basis.

Who are the residents?

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.

Who are the non-residents?

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).

What is a Permanent Establishment?

A Permanent Establishment refers to a significant presence or fixed business establishment of a foreign person in another country. In the UAE, it determines whether the business profits of a foreign person are subject to Corporate Tax. The definition aligns with international standards, particularly Article 5 of the OECD Model Tax Convention on Income and Capital.

Who is exempt from UAE Corporate Tax?

Certain individuals and entities are exempt from UAE Corporate Tax (CT), either automatically or through a specific application process. These exemptions include:

1. The UAE Federal and Emirate Governments, along with their departments, authorities, and public institutions.
2. Wholly Government-owned companies engaged in mandated activities, as listed in a Cabinet Decision.
3. Businesses involved in the extraction of UAE natural resources and related non-extractive activities, subject to Emirate-level taxation after fulfilling specific conditions.
4. Public Benefit Entities listed in a Cabinet Decision.
5. Investment Funds that meet the prescribed criteria.
6. Public or private pension or social security funds that fulfill certain conditions.
7. UAE juridical persons wholly owned and controlled by exempted entities, subject to meeting specific conditions.

These exemptions provide relief from UAE CT for the mentioned individuals and entities based on their respective circumstances and qualifications.

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Effective Start Date for UAE Corporate Tax

UAE Corporate Tax will come into effect on or after 1st June 2023 and will apply to profits generated during financial years starting on or after 1st June 2023.

If your business has a financial year starting on 1st July 2023 and ending on 30th June 2024 will become subject to UAE Corporate Tax from 1st July 2023 (which is the beginning of the first financial year that starts on or after 1st June 2023)

If your business has a 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).

There is no prescribed requirement to change the financial year to the tax financial year of June – May; however, many entities are likely to change their financial year to be better aligned to the fiscal tax year.

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Who is responsible for paying UAE Corporate Tax?

UAE Corporate Tax will apply to all business and commercial activities alike, except for the extraction of natural resources, which will continue to be subject to Emirate level taxation.

Corporate Tax applies to the following categories of taxable persons in the UAE: 

UAE companies and other legal entities: This includes juridical persons that are incorporated or effectively managed and controlled within the UAE. 

Individuals conducting a business or business activity: Natural persons (individuals) who engage in business activities in the UAE, as defined by a forthcoming Cabinet Decision, are subject to Corporate Tax. 

Non-resident legal entities with a Permanent Establishment: Foreign legal entities that have a Permanent Establishment in the UAE, as explained in Section 8 of the Corporate Tax Law, fall under the scope of Corporate Tax. 

Additionally, juridical persons established in UAE Free Zones are considered taxable persons and are required to comply with the Corporate Tax Law. However, Qualifying Free Zone Persons meeting specific conditions may enjoy a Corporate Tax rate of 0% on their Qualifying Income (as outlined in Section 14). 

Non-resident persons without a Permanent Establishment in the UAE or earning UAE sourced income unrelated to their Permanent Establishment may be subject to Withholding Tax. Withholding Tax is collected at the source by the payer on behalf of the income recipient. It is applied at a rate of 0% and typically pertains to cross-border payments of dividends, interest, royalties, and other similar types of income. 

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UAE Corporate Tax- Juridical Person

A “juridical person” refers to an entity recognized under UAE laws or foreign jurisdictions that possesses a separate legal personality from its founders, owners, and directors. Examples of UAE domestic juridical persons include

• Limited Liability Companies,
• Private Shareholding Companies,
• Public Joint Stock Companies,
• and other entities established under the laws of the UAE that have separate legal personality.

UAE branches of domestic or foreign juridical persons are considered extensions of their parent or head office and do not have separate legal personalities. This separate legal personality grants the entity its own rights, obligations, and liabilities, providing owners with limited liability for the entity’s debts and obligations.

All activities conducted by a juridical person are generally considered business activities and fall within the scope of UAE Corporate Tax (CT), unless specifically exempted. Foreign juridical persons are not subject to UAE CT unless they are effectively managed and controlled in the UAE, making them resident entities for tax purposes.

The determination of effective management and control relies on factors such as the location of key decision-makers, such as directors, who influence the juridical person’s strategic decisions. UAE holding companies are subject to UAE CT at a rate of 9% or the 0% Free Zone CT rate, depending on their establishment in a Free Zone or the mainland UAE.

However, dividends and capital gains earned from domestic and foreign shareholdings are generally exempt from CT, subject to specific conditions. Individuals conducting business in the UAE through sole proprietorships or civil companies may be subject to CT if they engage in relevant business activities.

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UAE Corporate Tax – Branches

UAE branches of a UAE business are subject to UAE Corporate Tax (CT), with their income being included in the taxable income and CT return of their UAE parent or head office, and, therefore, are not considered separate juridical persons.

UAE branches of foreign businesses may be subject to UAE CT unless an exemption is claimed or an election is made, and the CT payable can be reduced by the corporate tax paid in the foreign jurisdiction.

UAE branches, whether domestic or foreign, are not considered separate juridical persons and do not require separate registration or filing for UAE CT. The income of foreign branches of a UAE business is generally included in the CT return of their UAE head office, but an exemption may be available for foreign branch profits already taxed in the foreign jurisdiction.

The determination of whether a UAE branch constitutes a taxable permanent establishment for a foreign business depends on the nature of its activities, and preparatory or auxiliary activities, such as storage or marketing, may be considered. The application of international double taxation agreements should also be considered in determining the existence of a permanent establishment or the nature of activities performed.

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UAE Corporate Tax -Charitable Institutions or Public Benefit Organizations

The UAE actively promotes corporate social responsibility, volunteering activities, and community service, and is the home of many philanthropic and public benefit organizations. These organizations play an important role by taking a shared responsibility with the Government for the promotion of social or public welfare, or communal or group interests.

To support organizations formed for carrying out social, cultural, religious, charitable, or other public benefit activities, they can apply to the Ministry of Finance to be exempt from UAE Corporate Tax. If the application is approved, the organization will be listed in a Cabinet Decision to be issued at the request of the Minister of Finance.

These entities typically prioritize public interest and engage in activities such as philanthropy, community services, and corporate social responsibility. The decision is intended to acknowledge the vital role played by such entities in the UAE, which frequently encompasses religious, charitable, scientific, educational, and cultural values, among others.

To qualify for tax exemption, public benefit entities must meet the conditions under Article 9 of the Corporate Tax Law and continue to comply with all relevant federal and local laws. They must also register with the Federal Tax Authority (FTA) and obtain a tax registration number for Corporate Tax purposes. Reporting obligations apply to ensure that they continue to meet the criteria for approval.

The Cabinet may amend the schedule of Qualifying Public Benefit Entities at the suggestion of the Minister by modifying, adding, or removing entities. Donations and gifts made to a qualifying Public Benefit Entity listed in the Cabinet Decision will be allowed as deductible expenditures for Corporate Tax purposes.

Approved charities and public benefit organizations will need to comply with periodic information reporting obligations throughout their existence.

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UAE Corporate Tax – Individuals or Natural persons or Small Business Owner

The UAE Corporate Tax will be implemented without a parallel tax on the income of natural persons, namely individuals. In order to level the playing field between incorporated businesses and unincorporated businesses owned by individuals, UAE Corporate Tax will also apply to natural persons engaged in a business or commercial activity in the UAE.

This will include sole establishments or proprietorships and individual partners in an unincorporated partnership that conducts business in the UAE. Similar approaches are taken in other jurisdictions without parallel taxes on personal income from a business.

Whether an individual is engaged in a business that is subject to UAE Corporate Tax would generally depend on whether the activity requires the individual to obtain a commercial license or equivalent permit from the relevant competent authority (e.g., the relevant Department of Economic Development or registration authority of a Free Zone) in the UAE.

For a natural person engaged in a business in the UAE, their taxable income includes all income derived from that business, including income earned outside the UAE as long as it is related to the business activities conducted within the UAE. The individual files a single Corporate Tax (CT) return encompassing all eligible business activities within the scope of UAE CT.

However, the UAE CT does not apply to an individual’s salary and employment income, whether received from the public or private sector. Employment income refers to cases where the individual’s income primarily stems from one customer in a continuing service relationship, and it represents compensation for their labor.

Self-employed individuals are subject to UAE CT only if their activity falls under the category of a taxable business or business activity as defined in the forthcoming Cabinet Decision. Even if the self-employed person is engaged in a taxable business or business activity, no CT is payable on the first AED 375,000 of net income/profit earned from the activity. Additional relief, such as small business relief, may be available to self-employed individuals and other individual entrepreneurs.

Income from personal investments, such as interest, savings, and personal investment income, is generally not subject to UAE CT. Both UAE and foreign individuals are not liable for UAE CT on dividends, capital gains, and other income earned from personal ownership of shares or securities.

Income earned by an individual from personal investment in UAE property is typically not subject to UAE CT.

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UAE Corporate Tax – Investment Funds and Investment Managers

The UAE has continued to achieve success and strengthen its position as a leading asset and wealth management hub, and the destination of choice in the region for the financial services sector. The sector is an important pillar of the UAE economy. 

An investment fund is an entity that raises funds from investors and uses them to acquire, manage, and dispose of investments. Investment funds are often structured as limited partnerships to ensure tax neutrality for investors. Limited partnerships are treated as transparent for tax purposes, meaning investors are taxed as if they directly invested in the fund’s assets. Investment funds structured as partnerships or unincorporated vehicles are treated as fiscally transparent “Unincorporated Partnerships” for UAE Corporate Tax (CT) purposes.

However, investment funds structured as corporate entities or partnership funds can apply for exemption from UAE CT if they meet certain requirements. Real Estate Investment Trusts and partnership funds can apply to the Federal Tax Authority for exemption. The exemption is also available to funds that are subject to regulatory oversight or have a UAE-resident investment fund manager or a permanent establishment in the UAE.

Under the “Investment Manager Exemption,” regulated UAE investment managers can provide investment management services to foreign funds and customers without creating a taxable presence in the UAE, as long as certain conditions are met. This exemption ensures that foreign investment funds or vehicles managed by UAE-based investment managers are not deemed residents for CT purposes.

Wholly-owned UAE investment holding companies and Special Purpose Vehicles used by an investment fund to hold investments can also apply for the UAE CT exemption granted to the investment fund.

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UAE Corporate Tax- Partnership

Under the UAE Corporate Tax Law, partnerships are categorized as either unincorporated or incorporated partnerships.

Unincorporated partnerships, which are contractual relationships between individuals without a separate legal identity, are treated as transparent for UAE corporate tax purposes. This means that the partnership itself is not subject to corporate tax, and instead, each partner is individually liable for UAE corporate tax on their respective share of the partnership’s income.

Incorporated partnerships, including limited liability partnerships and partnerships limited by shares, are subject to corporate tax in the UAE, similar to traditional corporations.

Each partner in an unincorporated partnership is required to register for UAE corporate tax, comply with the Corporate Tax Law, and file their own UAE corporate tax return. However, partners in an unincorporated partnership can apply to the Federal Tax Authority to have the partnership treated as a separate taxable entity, allowing the partnership to file a corporate tax return on behalf of the partners.

In the case of foreign partnerships, they are generally treated as unincorporated partnerships for UAE corporate tax purposes, provided they meet specific conditions, including not being subject to tax in the relevant foreign jurisdiction.

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UAE Corporate Tax – Trusts and Family Foundations

Foundation, trust, or similar structure used for managing and safeguarding the assets and wealth of an individual or family. Its primary purpose is typically to hold, invest, disburse, or manage funds and assets for the benefit of individual beneficiaries or to achieve charitable goals. Activities of a Family Foundation that do not constitute a business or business activity are not subject to UAE corporate tax.

While foundations and certain trusts are considered separate legal entities and would generally be subject to UAE corporate tax, Family Foundations can apply to be treated as transparent “Unincorporated Partnerships” for tax purposes. This results in the founder/settlor and beneficiaries being seen as the owners of the trust’s assets, thereby preventing the foundation or trust income from being subject to UAE corporate tax.

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UAE Corporate Tax – Foreign Persons

Foreign entities operating in the UAE through a permanent establishment or considered resident in the UAE for CT purposes are subject to UAE CT. Simply earning income sourced from the UAE does not automatically trigger CT or require registration for UAE CT.

A non-resident person will be subject to UAE CT if they have a permanent establishment in the UAE or earn income sourced from the UAE, subject to 0% taxation. Income is generally considered sourced from the UAE if it comes from a UAE resident, a UAE permanent establishment, or if it is derived from activities, assets, capital, or rights in the UAE.

A foreign juridical person may be treated as a UAE resident for CT purposes and subject to UAE CT on income sourced from both the UAE and abroad if it is effectively managed and controlled in the UAE. A foreign individual engaged in a business or business activity in the UAE will be subject to UAE CT as a “resident person.” This does not automatically make the individual a tax resident for all other taxes or for double tax agreement purposes.

Further details regarding the tax liability of natural persons will be specified in a decision by the Cabinet of Ministers. A foreign individual not engaged in a taxable business or business activity in the UAE is generally not subject to UAE CT for simply earning income sourced from the UAE.

A permanent establishment for a foreign person in the UAE may exist if they have a fixed place of business or if a person with authority habitually conducts business on their behalf. However, certain activities, such as preparatory or auxiliary functions, do not constitute a permanent establishment.

Ownership of property in the UAE by a foreign individual generally does not subject them to UAE CT and related obligations. Investment in UAE real estate by a foreign entity may create a taxable permanent establishment if it represents a fixed place of business in the UAE.

Income is considered sourced from the UAE if it is derived from a UAE resident, attributed to a non-UAE resident’s permanent establishment in the UAE, or connected to activities, assets, capital, rights, or services in the UAE. Certain types of income, such as dividends, capital gains, interest, royalties, and investment returns, earned by foreign entities or individuals are not subject to UAE CT unless they can be attributed to a permanent establishment in the UAE.

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UAE Corporate Tax – Government and Government Owned Companies

While the activities of the Government would typically be non-commercial in nature, the Government may conduct commercial activities either by themselves or in association with third parties. Any business activity carried out directly by the Government under a trade licence will be within the scope of the UAE Corporate Tax regime.  

Wholly Government-owned UAE companies that carry out a sovereign or mandated activity are essentially an extension of the Government, with the relevant activity segregated from those of the Government for management and accountability purposes. Accordingly, these companies will be outside the scope of UAE Corporate Tax insofar of their sovereign or mandated activity.

The UAE Corporate Tax regime will allow UAE subsidiaries of these Government-owned companies that undertake part or whole of the sovereign or mandated activity or ancillary activities to apply for an exemption from UAE Corporate Tax.

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UAE Corporate Tax – Free Zone Companies

Free Zones are an important part of the UAE economy and have been central to achieving the country’s aim of encouraging foreign direct investment and enhancing the ease of doing business.

Whilst companies and branches that are registered in a Free Zone (hereafter referred to as “Free Zone Persons”) will be within the scope of the UAE Corporate Tax and subject to tax return filing requirements, the UAE Corporate Tax will honor the tax incentives currently being offered to Free Zone Persons that maintain adequate substance and comply with all regulatory requirements. 

Free Zone entities in the UAE are subject to different corporate tax (CT) rates based on their qualification as a “Qualifying Free Zone Person.”

Qualifying income is taxed at a 0% rate, while non-qualifying income is taxed at 9%. The 0% Free Zone CT regime is applicable automatically to Qualifying Free Zone Persons, although they have the option to choose the regular CT regime.

To be considered a Qualifying Free Zone Person, the entity must maintain sufficient substance in the UAE, earn qualifying income defined by a Cabinet Decision, comply with transfer pricing rules, and not elect full CT.

All Free Zone entities, regardless of their Qualifying Free Zone status, must register and file a CT return. The treatment of UAE CT will be the same for all Free Zone entities.

However, It is anticipated that Qualifying Free Zone entities within multinational groups will face a different CT rate once the global minimum tax (OECD, BEPS Pillar 2) rules are incorporated into the UAE CT regime.

Key Considerations for UAE Free Zone Businesses Regarding Corporate Tax:

1. Small Business Relief: Evaluate eligibility as a Qualifying Free Zone Person (QFZP) for tax benefits, as the Small Business Relief (SBR) may not be available.
2. Non-Qualifying Income: QFZPs cannot claim a 0% tax rate on non-qualifying income up to Dh375,000, unlike mainland businesses.
3. Proportionate Expenses: Ensure accurate accounting of revenue and proportionate expenses to determine net taxable income.
4. Fenced and Unfenced Areas: The concept of fenced/designated zones may impact the tax rate on sales of goods to mainland customers.
5. VAT Credits: Separate registration and payment for VAT and corporate tax; consider claiming refunds for accumulated input VAT credits.

These considerations help free zone businesses navigate the corporate tax landscape in the UAE.

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UAE Corporate Tax – Tax Groups

UAE companies have the option to form a Tax Group, which allows them to be treated as a single taxable entity. To qualify for a Tax Group, the UAE parent company must directly or indirectly own at least 95% of the share capital and voting rights of each subsidiary company.

To form a Tax Group, neither the parent company nor any of the subsidiaries can be exempt persons or Free Zone entities benefiting from the 0% CT rate. Additionally, all companies within the Tax Group must use the same financial year and prepare their financial statements using the same accounting standards.

Even if the ultimate parent company is foreign-owned, UAE subsidiaries can still form a Tax Group. However, an intermediary UAE parent company must hold the UAE subsidiaries and act as the “parent” of the Tax Group for UAE CT purposes. Foreign entities can’t form or be part of a Tax Group unless they are managed and controlled in the UAE and considered UAE resident entities for UAE CT purposes.

Once formed, the Tax Group is treated as a single taxable entity, and the parent company is responsible for the administration and payment of CT on behalf of the group. The 0% threshold of AED 375,000 (amount to be confirmed in a Cabinet Decision) applies to the Tax Group as a whole, regardless of the number of entities within the group.

The parent company and each subsidiary within the Tax Group have joint and several liability for the UAE CT obligations of the group. However, this liability can be limited to specific members of the Tax Group with approval from the Federal Tax Authority.

To determine the taxable income of the Tax Group, the parent company must consolidate the financial accounts of each subsidiary for the relevant Tax Period and eliminate transactions between the parent company and each subsidiary within the group.

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How does the UAE CT regime support group companies with regards to tax relief?

Group Relief: The UAE CT regime provides relief for transfers between group companies. Companies that form a Qualifying Group can transfer assets and liabilities at their net book value without incurring a gain or loss for CT purposes.

To qualify for group relief provisions in the UAE CT regime, the following criteria must be met:

• the group members must be juridical persons that are either UAE residents or non-residents with a permanent establishment in the UAE;
• there should be at least 75% ownership between the entities or a third party owning 75% or more of both entities;
• neither member should be an Exempt Person or a Qualifying Free Zone Person;
• and the group members must adopt the same accounting standards and have the same financial year.

Additionally, the CT regime allows for tax-neutral treatment of mergers, spin-offs, and other restructuring transactions that meet specific conditions. These provisions aim to facilitate efficient group operations and reorganizations within the UAE tax framework.

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UAE Corporate Tax- Natural Resources (Oil, Gas, Minerals)

Oil, natural gas, water, and deposits of sand and rocks are the primary natural resources in the UAE. These natural resources make up an important part of the UAE economy. Under the Constitution of the UAE, the natural resources belong to the Emirate where the resources are found.

Accordingly, any (share of) income from the extraction and exploitation of natural resources directly earned by the Government, or royalties and other fiscal levies raised by the Government from the extraction or production of natural resources by private sector companies will be outside the scope of the UAE Corporate Tax regime.

The extraction and exploitation of natural resources is often done by companies that are wholly or partially privately owned under long-term concession agreements entered into with the respective Emirate Government. These contracts generally provide that the profits earned by such companies are subject to Emirate-level taxation.

Acknowledging the long-term nature of natural resource contracts and the often significant capital commitments made by the concession holders, the UAE Corporate Tax regime intends to exempt the income earned by companies engaged in the extraction and exploitation of natural resources that are subject to Emirate-level taxation. This exemption from UAE Corporate Tax will not extend to any suppliers, contractors or subcontractors used by the concession holder.

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The UAE Corporate Tax Rate (Percentage of Your Profits)

The UAE will introduce a federal corporate tax on the profit of businesses from the financial year starting on or after June 1, 2023. A standard statutory tax rate of 9 per cent applies for companies, positioning the UAE competitively when compared with other financial centres and developed economies globally.

The proposed UAE Corporate Tax Rates are:

• 0% for taxable income up to AED 375,000; (Businesses with annual net profit of up to AED 375,000 are subject to a 0% tax rate. AED 375,000=0% Tax Rate)
• 9% for taxable income above AED 375,000; (Businesses are subject to a 9% tax rate on annual net profits that exceed AED 375,000)
• a different tax rate for large multinationals that meet specific criteria set with reference to ‘Pillar Two’ of the OECD Base Erosion and Profit Shifting project “large” refers to a multinational corporation that has consolidated global revenues in excess of EUR 750m (c. AED 3.15 bn) Large multinational companies may be subject to a higher tax rate, subject to pillar Two of the Organization for Economic Cooperation and Development (OECD)  base erosion and profit shifting BEPS project Companies with a total global revenue of over EUR 750 million (around AED 3.15 billion) will belong to this category . AED 3.5 billion = Higher Tax Rate

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What is the Withholding Tax rate? Does the UAE Corporate Tax regime have withholding tax?

Withholding tax is a type of tax that is deducted at the source by the payer of income on behalf of the recipient. It is commonly applied to cross-border payments such as dividends, interest, royalties, and other types of income.

The withholding tax rate in the UAE is generally 0%. This means that certain types of income sourced in the UAE and paid to non-residents are not subject to withholding tax. As a result, there are no obligations for UAE businesses or foreign recipients of UAE sourced income to register or file withholding tax-related documents.

It’s important to note that withholding tax does not apply to transactions between UAE resident persons.

In addition, if foreign tax is paid on income that is also subject to UAE Corporate Tax (CT), a foreign tax credit can be claimed. This means that the foreign tax paid can be deducted from the UAE CT payable. However, the maximum foreign tax credit allowed is the lower of the foreign tax paid or the UAE CT payable on the relevant income. Any excess foreign tax credit cannot be carried forward or applied to a different tax period. It’s also worth mentioning that the specific types of foreign taxes that can be credited against UAE CT depend on the provisions of the applicable agreements or treaties between the UAE and the foreign country or territory.

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Understanding Taxable Income and Adjustments in UAE Corporate Tax

Taxable income plays a crucial role in determining the corporate tax liabilities of businesses in the UAE. To ensure compliance with the UAE Corporate Tax Law, it is important to understand how taxable income is calculated and the adjustments required.

Taxable income for a specific Tax Period is derived from the accounting net profit or loss of the business. Certain adjustments are made as defined by the Corporate Tax Law to arrive at the final taxable income amount.

Businesses in the UAE should prepare their financial statements in accordance with accounting standards accepted in the country. The widely used International Financial Reporting Standards (IFRS) is a commonly adopted standard. Generally, financial statements and taxable income are determined on an accruals basis, where income and expenses are recognized when earned or incurred. However, the Minister may allow certain categories of individual entrepreneurs and small businesses to prepare financial statements using the cash basis.

The accounting net profit or loss undergoes specific adjustments outlined in the Corporate Tax Law. These adjustments include :

1. Accounting for unrealized gains or losses based on the chosen application of the realization principle.
2. Excluding income that is exempt from taxation, such as dividends.
3. Making adjustments for intra-group transfers.
4. Disallowing deductions that are not eligible for tax purposes.
5. Considering adjustments for transactions with Related Parties and Connected Persons.
6. Accounting for any incentives or tax reliefs that may be applicable.
7. Making any other adjustments specified by the Minister as per the UAE Corporate Tax Law.

When financial statements are prepared on an accruals basis, businesses have two options regarding the treatment of unrealized gains and losses for UAE corporate tax purposes. They can elect to recognize gains and losses on a realisation basis for all assets and liabilities or only for assets and liabilities held on capital account. Unrealized gains and losses on revenue account assets and liabilities are included in taxable income.

The UAE corporate tax regime follows the realisation principle, similar to other tax systems. Taxable income is determined when a gain or loss is realized, typically through the sale or termination of assets. Gains and losses in respect of assets or liabilities subject to fair value or impairment accounting are excluded until realization occurs. Capital gains are treated similarly to other income from the business, and exemptions may apply to capital gains on the sale of shares based on specific conditions..

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Company Exempted from UAE Corporate Tax

Introducing corporate tax in the UAE will undoubtedly have an impact on business operations, structures, and future mergers and acquisitions activities in the UAE.

It is advisable for all kinds of businesses to assess their existing structures and operations in an effort to apply the most efficient business structures and models in light of the Corporate Tax Law provisions once issued and in effect.

The following persons will be exempt from UAE Corporate Tax, either automatically or by way of application:

• The investment in real estate by individuals 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
• An individual’s salary or income earned through employment (whether received from public or private sector). However, an individual will be subject to corporate tax if his or her income is earned from activities undertaken under a freelance license or permit.
• Interest and other income earned by an individual from bank deposits or saving schemes
• Foreign investor’s income from dividends, capital gains, interest, royalties and other investment returns
• The Federal and Emirate Governments and their departments, authorities and other public institutions
• Wholly Government-owned UAE companies that carry out a sovereign or mandated activity, and that are listed in a Cabinet Decision
• Businesses engaged in the extraction and exploitation of UAE natural resources that are subject to Emirate-level taxation
• Charities and other public benefit organisations that are listed in a Cabinet Decision
• Public and regulated private social security and retirement pension funds;
• Regulated investment funds and Real Estate Investment Trusts can apply to the Federal Tax Authority (FTA) to be exempt from UAE Corporate Tax subject to meeting certain requirements.

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Income Exemptions and the Participation Exemption Regime in UAE Corporate Tax

Certain types of income are exempt from UAE CT:

1. Dividends and other profit distributions received from UAE incorporated or resident legal persons.
2. Dividends and other profit distributions received from a Participating Interest in a foreign juridical person, subject to participation exemption requirements.
3. Certain other income, such as capital gains, foreign exchange gains/losses, and impairment gains or losses, from a Participating Interest.
4. Income from a foreign branch or permanent establishment where the “Foreign Permanent Establishment” exemption is elected.
5. Income earned by non-residents from the operation or leasing of aircraft or ships in international transportation, meeting specific conditions.

The participation exemption regime aims to prevent double taxation within a group. It fully exempts dividends derived from UAE entities and foreign subsidiaries meeting the participation criteria. A Participation refers to a juridical person in which the UAE shareholder company owns a 5% or greater ownership interest for at least 12 months. Capital gains from the sale of shares in domestic and foreign entities also enjoy exemption under this regime, subject to specific conditions.

In cases where a UAE business has made a strategic investment resulting in less than a 5% ownership interest or where ownership falls below the threshold due to uncontrollable events, the Minister may prescribe a minimum acquisition cost/value. This ensures that the ownership interest is deemed a qualifying “Participation,” allowing income from the investment to benefit from the participation exemption.

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Deductions in UAE Corporate Tax

Businesses can deduct legitimate expenses incurred to generate income for UAE Corporate Tax (CT) purposes.

Expenses that serve both personal and business purposes need to be apportioned, with only the portion relevant to the business treated as incurred wholly and exclusively for business purposes.

However, certain expenses are non-deductible, such as bribes, fines, and penalties, and expenses related to exempt income or unrelated losses. Interest expenditure is subject to limitations based on thresholds and commercial reasons for obtaining loans.

Dividends paid by UAE companies are not deductible, while service fees and irrecoverable input Value Added Tax (VAT) may be deductible.

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UAE Corporate Tax Implications of the Transfer Pricing Rules

Transfer pricing rules seek to ensure that transactions between related parties are carried out on arm’s length terms (i.e. as if the transaction was carried out between independent parties).

These rules prevent the manipulation of taxable income and require that transactions with Related Parties and Connected Persons be valued based on their “Market Value,” as specified in the Corporate Tax Law.

Applying Transfer Pricing Rules: Domestic and Cross-Border Transactions

Transfer pricing rules apply to UAE businesses involved in transactions with Related Parties and Connected Persons, regardless of their location within the UAE mainland, Free Zones, or foreign jurisdictions. The goal is to maintain consistency and fairness in pricing arrangements and promote transparency in business dealings.

Related Parties typically include an individual’s relatives and companies where the individual, either alone or with their Related Parties, holds a controlling ownership interest (usually 50% or more of shares). Similarly, for companies, Related Parties encompass other companies where the company, alone or with their Related Parties, holds a controlling ownership interest or shares common ownership exceeding 50%.

Connected Persons are distinct from Related Parties and can be individuals connected to a business subject to UAE CT. This includes business owners, directors, officers, or individuals who are Related Parties to any of the mentioned positions. The concept of Connected Persons broadens the reach of transfer pricing regulations.

All Related Party transactions and transactions with Connected Persons will need to comply with transfer pricing rules and the arm’s length principle as set out in the OECD Transfer Pricing Guidelines. 

Taxpayers typically utilize various methodologies to determine the arm’s length value for transfer pricing purposes. These methods include the comparable uncontrolled price method, resale price method, cost-plus method, transactional net margin method, and transactional profit split method

Transfer pricing rules apply to all transactions with Related Parties and Connected Persons, including intra-group loans. It is essential to ensure that such loans have terms and conditions that are consistent with arm’s length principles, such as appropriate interest rates and durations.

Businesses must maintain information about their transactions with Related Parties and Connected Persons. In certain cases, this information may need to be submitted along with the tax return. Small businesses claiming relief may be exempt from some transfer pricing documentation requirements. Some businesses may also be required to maintain a master file and a local file.

Transactions between members of a Tax Group are generally eliminated during the consolidation of financial results statements. Therefore, they are not subject to transfer pricing rules unless a member of the Tax Group needs to calculate its standalone taxable income for utilizing pre-group Tax Losses or when leaving the Tax Group.

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Understanding Tax Losses and their Utilization in the UAE Corporate Tax Regime

In the UAE Corporate Tax (CT) regime, “Tax Losses” occur when a business’s total deductions exceed its taxable income for a specific Tax Period, resulting in negative taxable income. These tax losses can be utilized in future periods, subject to certain conditions.

The UAE CT regime allows businesses to offset tax losses against future taxable income, up to a maximum of 75% of the taxable income in each of those future periods. Any unused tax losses can be carried forward indefinitely and used against taxable income in subsequent Tax Periods. 

However, a change in ownership of a taxable person may affect the utilization of tax losses. If the same person or persons continue to own at least 50% of the entity with the losses, tax losses can be carried forward without limitation. In cases where there is a greater than 50% change in ownership, tax losses may still be carried forward as long as there is no significant change in the nature or conduct of the entity’s business. 

Moreover, within a group, tax losses from one UAE group company can be used to offset taxable income of another UAE group company if there is 75% or more common ownership and certain conditions are met. It’s important to note that tax loss transfers are not allowed from companies that are exempt or benefit from the 0% Free Zone CT regime. 

To transfer tax losses within a group, the UAE companies must meet specific conditions. Both companies should be UAE resident juridical persons, and either one company owns 75% or more of the other or a third party owns 75% or more of both entities, with this ownership existing at the start and end of the Tax Period in which the loss was incurred. 

Additionally, neither company should be an Exempt Person or a Qualifying Free Zone business, and the financial statements must be prepared using the same accounting standards and the same financial year.

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UAE Corporate Tax Administration (Tax Assessment, Filing, Payment)

Only one Corporate Tax return will need to be filed per financial period. No provisional or advance Corporate Tax filings will be required. The deadline to submit the return will be stated in the Decree-Law and the Executive Regulation.

The Corporate Tax return will need to be filed electronically. Similar to other taxes in the UAE (e.g. VAT), businesses will be subject to penalties for non-compliance with the Corporate Tax regime.

Registration and Deregistration with FTA (Federal Tax Authority):

• A business subject to Corporate Tax will need to register with the FTA and obtain a Tax Registration Number within a prescribed period. The FTA can also automatically register a business for Corporate Tax purposes if the person does not voluntarily do so.
• Where a business ceases to be subject to the Corporate Tax (e.g., due to cessation or liquidation of the business), it will need to apply to the FTA to be deregistered for Corporate Tax purposes within three (3) months from the date of cessation.
• The FTA will only deregister a person where the FTA is satisfied that the person has filed Corporate Tax returns and settled all Corporate Tax liabilities and penalties (if any) due for all periods up to and including the date of cessation.
• Where a person does not apply for deregistration within the time limits or comply with the payment and filing obligations, the FTA may deregister the person based on available information.

Filing, payment and refund

• 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.
• 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.
• 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 below details illustrates the Corporate Tax filing and payment deadlines for businesses with financial year ends of 31 March, 30 June and 31 December:

Assessment

• The UAE Corporate Tax regime will be based on a self-assessment principle. This means that a business is responsible for ensuring that the tax return and any supporting schedules submitted to the FTA are correct, complete and comply with the UAE Corporate Tax law.
• To ensure the integrity of the Corporate Tax regime, the FTA may review a Corporate Tax return filed and may issue an assessment within the timeframe prescribed in the Tax Procedures Law.
• A taxpayer may challenge an amended assessment issued by the FTA via the processes and procedures outlined in the Tax Procedures Law.

Clarification

• Clarity around how to comply with Corporate Tax is essential for a well-functioning Corporate Tax regime. Therefore, where there is uncertainty in relation to a proposed or entered into arrangement or transaction, a business may apply to the FTA for a clarification with regards to the correct or intended Corporate Tax treatment.
• Provided the facts and circumstances outlined in a clarification continue to apply, a clarification would be binding on the FTA.

Documentation requirements

• A business will be required to maintain financial and other records that explain the information contained within the Corporate Tax return and other documents submitted to the FTA. Certain exempted persons will also be required to maintain records to allow the FTA to ascertain the person’s exempt status.
• Whether the financial statements of a business are required to be audited by an accredited audit firm is and will continue to be determined by applicable company laws and regulations. However, the UAE Corporate Tax regime will require a Free Zone Person to have audited financial statements if it wants to benefit from the 0% Corporate Tax regime.

Transitional rules

• The UAE Corporate T regime is not intending to require businesses to restate their balance sheet upon entering into the Corporate Tax regime. Instead, a taxable person’s opening balance sheet for Corporate Tax purposes would generally be their closing balance sheet for financial reporting purposes for the period that ends immediately before their first tax period begins.

Preparing for UAE Corporate Tax

To prepare for Corporate Tax, it is important to follow these steps:

1. Familiarize yourself with the Corporate Tax Law and the relevant information provided on the Ministry of Finance and Federal Tax Authority websites.
2. Determine if your business is subject to Corporate Tax and identify the effective date of taxation.
3. Understand the specific requirements for your business, such as:
   • Registering for Corporate Tax within the designated timeframe.
   • Knowing the accounting or tax period applicable to your business.
   • Meeting the deadlines for filing Corporate Tax returns.
   • Considering any elections or applications that your business should make for Corporate Tax purposes.
   • Maintaining proper financial information and records for Corporate Tax compliance.
4. Stay updated by regularly visiting the Ministry of Finance and Federal Tax Authority websites for additional information and guidance regarding the Corporate Tax regime.

Deadline for UAE Corporate Tax

The corporate tax regime in the UAE provides taxpayers with a generous time frame of up to 21 months from the start of their financial year to prepare for filing corchporate tax returns and making tax payments.

For instance, if a business’s financial year begins on June 1, 2023, and ends on May 31, 2024, they will have from June 1, 2024, to February 28, 2025, to fulfill their tax obligations.

Similarly, for a business with a tax period starting on January 1, 2024, and ending on December 31, 2024, the return and payment should be made between January 1 and September 30, 2025. This timeframe allows businesses ample time to complete their tax-related tasks.

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Key Considerations for Financial Records in UAE Corporate Tax

Taxpayers in the UAE must maintain financial statements and supporting documents to calculate their taxable income. All records should be kept for a minimum of seven years after the relevant Tax Period. 

Stand-alone financial statements are required for each UAE entity subject to Corporate Tax, except for eligible Tax Group formations. Only specific categories of taxable persons, as determined by the Minister, are required to have audited or certified financial statements. 

The Federal Tax Authority may request the submission of financial statements alongside the tax return or upon request. 

All financial amounts should be measured and reported in the national currency (AED), with foreign currency transactions translated at the applicable exchange rate set by the Central Bank of the UAE, unless an alternative rate is authorized by the Federal Tax Authority. 

Maintaining accurate and organized financial records is essential for compliance with UAE CT regulations.

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Note: The information in this article is meant to provide an initial introduction to the proposed UAE Corporate Tax regime and not be used for individual or business decisions as it does not represent the final legislation by the Government. More information on the UAE Corporate Tax regime visit https://mof.gov.ae/corporate-tax/ or https://tax.gov.ae/en/taxes/corporate.tax/corporate.tax.topics/what.is.corporate.tax.aspx

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Frequently Asked Questions FAQs on UAE Corporate Tax: