Update- UAE Corporate Tax (UAECT)
In continuation of the UAE Corporate Tax alerts, we tried to cover the ministry release of public consultation document in which ministry seek inputs from various sector on tax legislation. We will continue sharing the development on UAECT (UAETAX or Corporate Tax in UAE). Before publishing the draft tax law, ministry invited all business sectors to provide their feedback to include in the draft tax law, subsequently a public consultation document has been released by the ministry.
UAECT Effective Date (effective date of UAE Tax):
UAE CT shall be applicable for financial years (FY) commencing on or after June 01, 2023.
Taxable persons:
The following persons shall be subject to UAE corporate tax:
> Individuals carrying on business / commercial activities in UAE.
– > UAE incorporated legal entities.
– > Foreign entities managed and controlled from UAE.
– > Foreign entities having permanent establishments or UAE sourced income.
– > Unlimited liability partnerships, and Unincorporated JVs will be flow through entities for UAE CT purposes and the income will be taxable in the hands of partners / members.
Exemption from CT:
The following persons/entities shall be exempt from the UAE corporate tax:
· Federal and Emirate governments and their departments,
· Companies conducting sovereign activities, (this needs further clarification)
· Companies engaged in the extraction of natural resources,
· Charities,
· Pension funds and investment funds (subject to conditions).
Computation Mechanism:
· To compute the taxable income, accounting profit/loss is the starting point.
· The default tax year would be the Gregorian calendar year.
· Expenses on account:
a) of interest payments will be limited to 30% of EBITDA, and
b) Entertainment expenses will be allowed only to 50% for deduction.
Free Zone Entities and UAECT:
Free zone entities will be taxed at 0% (ZERO%) on the following incomes:
· Income from businesses outside UAE.
· Income from trading with other Free zone entities. (This means if these companies will conduct with mainland activities will be taxed).
· Income from regulated financial services directed at foreign markets.
Free zone entities can carry on following activities with the given conditions as below, still they will enjoy 0% (ZERO%) tax rate on their own income:
· Having branch in mainland, however the profits of the branch will be taxable at 9% if the taxable income threshold meets.
· Earning passive income from mainland entities (e.g., interest, royalties, dividends).
· Transactions with mainland group companies (however payments to Free zone entities will not be deductible for mainland companies). (This needs further clarification)
· Sale of goods to mainland businesses by entities in designated Free zones. (This needs further clarification).
Ø Any other income of free zone entities from mainland will revoke it 0% CT regime facility.
Ø Fee Zone entities will have option to move to CT Regime, however the once moved to CT Regime, it is IRREVOKEABLE action.
Overall, the special status of Free Zone entities with respect to tax incentives is well taken care by the UAECT regime. There is one clarification point here whether the sales of good and passive income will be an exclusion for intergroup transactions.
Set off and carry forward of losses:
Ø Entities will be allowed to CARRYT FORWARD prior period losses to offset the taxable income in current year up to a maximum of 75%.
Ø The prior period losses should belong to the period from the effective date of the UAECT.
Ø Taxable losses can be carried forward for an indefinite period.
Ø In case of change in ownership more than 50%, tax losses will be allowed to carry forward provided the same business is continued.
Exemptions:
Ø Dividends and capital gains earned from qualifying shareholding which mean UAE shareholder must have at least 5% share in the subsidiary company, will be exempt from the UAECT.
Ø Foreign investor’s income from dividends, capital gains, interest, royalties, and other investment returns will remain outside the realm of the UAECT.
Ø UAE based companies can claim a tax credit for the taxes paid in foreign tax regime or they can claim an exemption for their foreign branch profits.
Ø Income earned by non-residents from operating or leasing aircrafts/ships and association equipments used in international transportation will be exempt from UAECT like the exemptions available to UAE companies in foreign tax jurisdictions.
Tax Group in UAECT:
The businesses will be allowed to register as group with UAECT and file a single tax return provided.
Ø Common parent company hold 95% of the share capital in the group companies.
Ø Parent or subsidiary are not exempt person or in free zone availing 0% rate.
Ø All group must have the same financial year.
Ø These are the so far developments on the formation of tax group, it is expected to find more guidance in the UAECT Law.
Transfer of losses:
It is possible to transfer of losses from a loss-making company to a profit-making provided:
Ø Common ownership of at least 75%.
Ø Company transferring the loss is not an entity exempt from CT or a Free zone entity availing 0% CT.
Ø Other conditions as may be mentioned later the UAECT law.
Above arrangements are for the companies which does not opt to register as Group with UAECT. Remember, the transfer of losses is possible in CTGroup only when the common parent company have 95% shareholding in the group companies.
Intragroup transfer of assets and liabilities and CT Relief:
UAECT gives relief to CT Group on intragroup transfer of assets and liabilities (Intragroup means, within the group companies) as follows:
Ø On transfer of assets and liabilities by the Resident group in UAE with common ownership of at least 75% will not be taxed un UAECT provided such assets and liabilities are held by at least 3 years from the date of transfer.
Ø Any gain or loss will be subject to CT in the same year in which transfer happens.
Relief of Restructuring:
In UAECT upon meeting following conditions the tax relief is available on restructuring:
Ø A tax exemption or deferral is available to facilitate mergers and restructuring when a business is transferred in exchange of shares or other ownership interests.
Ø Any such relief will be revoked if the same business is transferred subsequently to third party within the 3 years of the restructuring.
Transfer Pricing (TP):
In UAECT transfer pricing will be deal with the same treatment as it is in the international tax laws, which is an “arm’s length” principle, the TP regulation will be applicable on the related parties and connected persons. This means the transactions between the related parties/connected person will be at a fair value vs. underpricing.
To determine related parties, certain rules will apply such as:
Ø Individuals related to the fourth degree of kinship. (A fourth-degree kinship relationship is a brother, sister, uncle, aunt, first cousin, grandparent, great grandparent, great aunt, great uncle, great-great grandparent, niece, nephew, grandniece, grandnephew, or a stepparent).
Ø Individuals holding directly or indirectly more than 50% or greater share, or control in a legal entity.
Ø Two or more legal entities holding directly or indirectly more than 50% or greater share, or control in a legal entity, branch, or a Permanent Establishment (PE).
Ø Partners in an unincorporated partnership and,
Ø Exempt and non-exempt business activities of the same person.
The objective to include the Connected Person is to avoid excessive charge by following to business:
Ø Owners of the business
Ø Persons connected with owners like
– Individuals directly or indirectly owning the business.
– Directors or officers of the business (taxpayer).
– Individuals related to the owner.
– Partners in an unincorporated partnership, or
– A related party of any of the above.
Taxpayers who are conducting transactions with related parties need to comply with Arm’s Length principle as set out in OECD TP guidelines and the Arm’s Length prince should be determined using internationally recognized TP methods.
Taxpayers who would be carrying TP transactions must submit a disclosure of the transactions with the related parties and connected persons. Also, the taxpayer will be required to maintain a mater and local file if the transactions meet the set criteria. Th e threshold of the TP applicability has not yet announced. More clarity required on the TP transactions between the exempt and nonexempt business of the same taxpayer.
Calculation of the CT Liability:
In UAECT the rates are defined as:
Ø 0% for taxable income not exceeding AED 375,000.
Ø 9% for taxable income exceeding AED 375,000.
Withholding Tax:
UAECT does not require to make any withholding tax as of today on the local and international payment, hence there is not any obligation to file a withholding tax return.
Foreign Tax Credit:
UAE resident companies will be taxed on their worldwide income, therefore, to avoid double taxation, a foreign tax credit will be available which will be lower of:
Ø Tax paid in the foreign country.
Ø UAE CT payable of foreign sourced income.
Worth to note, Utilized Tax Credits cannot be carried forward neither such credits will be available as refund.
Filing and Management:
Ø Businesses must register with UAECT and obtain a Tax Registration Number (TRN).
Ø Filing the tax return within 9 months after the end of the tax period.
Ø The return maybe assessed by the FTA and the same can be challenged by the taxpayer as per the prescribed procedure.
Ø Taxpayer May apply for clarification with FTA on tax treatment of certain transactions.
Ø Taxpayers must maintain following documents:
– Audited financial statements.
– Records and documents to support tax exempt status.
– Free zone entities availing 0% tax regime will be mandatory required to get financial statements audited.
Recommendation and Advice:
Being partners of businesses in UAE, we as Tax Consultants in UAE, highly recommend following:
Ø Study, understand and prepare well in advance on UAE Corporate Tax.
Ø Get business books of account in order and start using a simple accounting software.
Ø Get expenses fully recorded in the business, make proper payroll documentation.
Ø Get business prior years audited, it will reveal various horizon to incorporate improvements/changes.
Ø Contact a Corporate Tax Consultants in UAE to assess your business and seek their advice for preparation.
Contact us
Bens Chartered Accountants are proud partner of businesses in UK, UAE and Pakistan across various industries, helping businesses to plan the corporate tax, optimize tax liability and mitigate tax compliance exposure. Our expert tax consultants are available for initial consultation to plan an appropriate solution and partnering.
Email: info@bensauditors.com
Cell: 00971 52 861 9076 | 00971 4 443 3612
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