Understanding the UAE’s Corporate Tax System: Key Concepts and Regulations
The UAE has long been known as a tax-free regime, attracting businesses and investors from around the world. However, in alignment with the global push for a minimum effective tax rate, the UAE government announced the implementation of federal Corporate Tax (CT) on business profits, effective from June 1, 2023. This move is aimed at adopting international best practices and ensuring compliance with the recommendations of the OECD Pillar Two of the Base Erosion and Profit Shifting (BEPS) Project. This blog will provide a comprehensive understanding of the UAE’s corporate tax system, including key concepts, regulations, and implications for businesses.
The Implementation of Corporate Tax
On January 31, 2022, the UAE government announced its decision to introduce federal corporate tax, setting the rate at 9% on taxable income. However, to support small businesses and startups, a 0% corporate tax rate is applicable to taxable income up to AED 375,000. The Federal Tax Authority (FTA), under the Ministry of Finance, is responsible for administering and implementing corporate tax in the UAE.
Legislation and Public Consultation
To ensure transparency and stakeholder participation, the UAE government released a Public Consultation Document on April 28, 2022, seeking input from businesses and individuals. Subsequently, the Corporate Tax law was promulgated through Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, issued on December 9, 2022. The legislation incorporates internationally recognized principles and aims to provide clarity and familiarity to corporates operating in the UAE.
Imposition of Corporate Tax
Under the Corporate Tax law, taxable income is subject to a 0% tax rate for amounts up to AED 375,000 and a 9% tax rate for taxable income exceeding this threshold. Free zone establishments that qualify as Qualified Free Zone Persons are subject to a 0% corporate tax rate for qualifying income and 9% for taxable income that does not qualify as such.
Tax Period and Taxable Persons
The tax period for corporate tax purposes is either the Georgian calendar year or a twelve-month period as per the financial statements prepared by the taxable person. The Corporate Tax law classifies taxable persons into two categories: Resident Persons and Non-Resident Persons.
Resident Persons include juridical persons incorporated or recognized under UAE legislation, natural persons conducting business activities in the UAE, and other persons as determined by the Cabinet. Non-Resident Persons are subject to corporate tax if they have a permanent establishment in the UAE, derive state-sourced income, or have a nexus in the UAE.
Certain entities and individuals are exempt from corporate tax in the UAE. These include Government Entities, Government Controlled Entities, businesses engaged in Extractive Business subject to emirate-level taxation, Non-Extractive Natural Resources Businesses subject to emirate-level taxation, Qualifying Public Benefit Entities, and Qualifying Investment Funds. However, certain conditions and criteria need to be fulfilled to qualify for these exemptions.
Basis of Taxation
For resident persons, corporate tax is levied on taxable income derived from the UAE or from outside the UAE if it relates to business or business activity conducted in the UAE. Non-resident persons are subject to corporate tax on UAE-sourced income, income attributable to a permanent establishment in the UAE, or income attributed to their nexus in the UAE.
Loss Relief and Deductions
The UAE CT allows businesses to carry forward losses indefinitely, subject to specific conditions. Losses can be set off against future profits, up to 75% of the taxable income in a tax period. Deductions are allowed for expenditures incurred exclusively for business purposes, subject to certain limits and restrictions. For example, the deduction for net interest expense is limited to 30% of EBITDA, with exceptions for certain businesses.
Related Parties and Connected Persons
Transactions and arrangements between related parties and connected persons must meet the arm’s length standard. The law requires transfer pricing documentation, and the Authority may request disclosure of information related to such transactions and arrangements. The UAE CT Act includes provisions to ensure that transactions carried out for valid commercial reasons and reflecting economic reality are not misused for tax avoidance purposes.
Tax Groups and Calculating CT Liability
UAE Group Companies can form a tax group and be treated as a single taxable person if the parent company holds at least 95% of the share capital and voting rights of its subsidiaries. CT liability is calculated based on annual taxable income after adjustments for deductions, reliefs, and losses. The applicable tax rates are 0% for taxable income up to AED 375,000 and 9% for taxable income exceeding that threshold.
Withholding Tax, Foreign Tax Credit, and Corporate Tax Payment
Although withholding tax is applicable on UAE-sourced income derived by non-resident persons, the prescribed rate is currently set at zero. The UAE CT law allows for foreign tax credits when income from overseas operations is subject to UAE CT. Corporate tax must be settled within nine months from the end of the relevant tax period, and refund claims can be made for excess tax payments.
Registration, Filing, and Assessments
Every taxable person is required to register with the Authority and obtain a Tax Registration Number within the specified period. Tax returns must be filed within nine months of the end of the tax period, accompanied by the payment of the tax due. The Authority may require financial statements and transfer pricing documentation to be submitted along with the tax return. Assessments may be conducted by the Authority in accordance with the Tax Procedure Law.
The introduction of corporate tax in the UAE marks a significant shift in the country’s taxation landscape. By aligning with international tax standards, the UAE aims to promote transparency, sustainability, and fairness in its tax system. Understanding the key concepts and regulations of the UAE’s corporate tax system is crucial for businesses operating in the country. By complying with the tax laws, businesses can optimise their tax position while contributing to the economic growth and development of the UAE.
At Trust Accounts Management, we are dedicated to providing comprehensive assistance to businesses in understanding and navigating the UAE’s corporate tax system. With our expertise and knowledge, we can guide businesses through the key concepts and regulations associated with corporate taxation in the UAE. Here’s how we can support your organisation:
- Expertise and Knowledge: Our team of professionals possesses extensive knowledge of the UAE’s corporate tax system. We stay up to date with the latest laws, regulations, and procedures related to corporate taxation, ensuring that we provide accurate and current advice to businesses.
- Compliance Assistance: We can assist your business in ensuring compliance with the UAE’s corporate tax regulations. Our experts can help you with tax registration, obtaining a Tax Registration Number (TRN), and understanding the filing requirements and deadlines. By guiding you through the compliance process, we aim to prevent penalties and ensure that your tax filings are timely and accurate.
- Tax Planning and Minimization: Our services include strategic tax planning to help minimize your corporate tax liabilities. Through a thorough analysis of your business structure, income sources, and expenses, we can identify opportunities for tax optimization, deductions, and credits. We work with you to make informed decisions that reduce your tax burden while remaining fully compliant with the regulations.
- Transfer Pricing Documentation: The UAE’s corporate tax system requires businesses to maintain comprehensive transfer pricing documentation for transactions with related parties and connected persons. We can assist you in preparing and organizing the necessary documentation, ensuring compliance with the regulations. Our experts will analyze your intercompany transactions, determine arm’s length pricing, and help you establish transfer pricing policies that align with the regulations.
- Financial Statement Preparation: Our team can assist in preparing financial statements that adhere to the accepted accounting standards in the UAE. These financial statements play a crucial role in determining taxable income. By ensuring accurate financial reporting, we help you calculate your taxable income in accordance with the regulations.
- Record-Keeping and Documentation: We provide guidance on record-keeping requirements for corporate tax purposes. Our experts will advise you on the types of records and documentation that need to be maintained, such as invoices, receipts, contracts, and other relevant financial documents. Proper record-keeping ensures that you have the necessary documentation to support your tax filings and effectively respond to any queries or audits from the tax authorities.
- Audits and Assessments Support: In the event of a tax audit or assessment by the tax authorities, we can provide support and representation for your business. Our team will assist you in gathering the required information, responding to queries, and resolving any issues that may arise during the audit or assessment process. With our expertise and understanding of the tax system, we aim to help you navigate the audit smoothly.
- Ongoing Tax Compliance: We offer ongoing support to ensure your continued compliance with the UAE’s corporate tax system. Our services include annual tax return filings, calculation of tax liabilities, and meeting all filing and payment deadlines. By monitoring changes in tax laws and regulations, we can help you adapt your tax strategies accordingly.
By partnering with Trust Accounts Management, you can rely on our expertise to guide you through the complexities of the UAE’s corporate tax system. We enable you to focus on your core operations while ensuring that your tax obligations are met efficiently and accurately. With our assistance, you can optimise your tax position, minimise liabilities, and ensure compliance with the laws and regulations.