The Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses (hereinafter referred to as the “Corporate Tax Law”) was issued by the United Arab Emirates (“UAE”), on 09 December 2022. They provided FAQs on the MoF website, and these provides clear view about Corporate Tax.

The CT law provides the legislative basis for the introduction and implementation of a Federal CT in the UAE and is effective for financial years starting on or after 1 June 2023.

The introduction of CT is intended to help the UAE achieve its strategic objectives and accelerate its development and transformation. The certainty of a competitive Corporate Tax regime that adheres to international standards, together with the UAE’s extensive network of double tax treaties, will cement the UAE’s position as a leading jurisdiction for business and investment.

Corporate Tax Law Applicability :

The Corporate Tax Law taxes income on both a residence and source basis. The applicable basis of taxation depends on the classification of the Taxable Person.

A taxable person can be either a

Resident Person

• Companies and other juridical persons that are incorporated under the laws of the UAE either mainland legislation or applicable Free Zone regulations will automatically be considered a Resident Person for Corporate Tax purposes.
• Foreign companies and other juridical persons may also be treated as Resident Persons for Corporate Tax purposes where they are effectively managed and controlled in the UAE
• Natural Person who conducts a Business or Business Activity in the State. The Cabinet Decision shall specify the categories of business or business activity conducted by natural person in the UAE.

Non-Resident Person

• Non-Resident Persons will be subject to Corporate Tax on Taxable Income that is attributable to their Permanent Establishment
• Certain UAE sourced income of a Non-Resident Person that is not attributable to a Permanent Establishment in the UAE will be subject to Withholding Tax at the rate of 0%.

Corporate Tax Rates :

Corporate Tax shall be imposed on the Taxable Income at the following rates :

• 0%  on the portion of the Taxable Income not exceeding the amount specified in a decision issued by the Cabinet.
• 9% on Taxable Income that exceeds the amount specified in a decision issued by the Cabinet.

Corporate Tax shall be imposed on a Qualifying Free Zone Person at the following rates :

• 0% on Qualifying Income.
• 9% on Taxable Income that is not Qualifying Income.

Corporate Tax Exempt Persons :

The following Persons shall be exempt from Corporate Tax :

Corporate Tax Taxable Income :

Taxable Income of a Resident Person, which is a natural person, is the income derived from the State or from outside the State insofar as it relates to the Business or Business Activity conducted by him.

A Non-Resident Person is subject to Corporate Tax on the following:

• The Taxable Income that is applicable to the Permanent Establishment of the Non-Resident Person in the State.
• State Sourced Income that is not applicable to a Permanent Establishment of the Non-Resident Person in the State.

State Sourced Income

Income shall be considered State Sourced Income in any of the following instances :

• Where it is derived from a Resident Person.
• Where it is derived from a Non-Resident Person and the income received has been paid or accrued in connection with, and applicable to, a Permanent Establishment of that Non-Resident Person in the State.
• Where it is otherwise accrued in or derived from activities performed, assets located, capital invested, rights used, or services performed or benefitted from in the State.

Permanent Establishment

A Non-Resident Person has a Permanent Establishment in the State in any of the following instances:

• Where it has a fixed or permanent place in the State through which the Business of the Non-Resident Person, or any part thereof, is conducted.
• Where a Person has and habitually exercises an authority to conduct a Business or Business Activity in the State on behalf of the Non-Resident Person.
• Where it has any other form of nexus in the State as specified in a decision issued by the Cabinet at the suggestion of the Minister.

Corporate Tax Exempted Income :

The following incomes which are exempt and shall not be included for computing taxable income:

• Dividends/Profit distributions from a Resident Person in the State.
• Foreign Dividends/Profit distributions/Capital gains from a Participating Interest. Participating interest basically means the ownership interest in shares or capital of a foreign juridical person of 5% or more, where such interest is held or intended to be held for a period of at least 12 months continuously.
• Income of a Foreign Permanent Establishment of a Resident Person subject to prescribed conditions
• Income derived by a Non-resident Person from operating of aircrafts or ships  where the person is engaged in international transportation of passengers or goods by air or by sea, Leasing or Chartering of aircrafts or ships.

Withholding tax

Payments made by UAE businesses to a nonresident earning UAE-sourced income will be subject to withholding tax at a 0% rate, unless the income is attributable to a branch, or a PE located in the UAE. The Law further states that any other rate may apply as would be specified in a decision to be issued by the Cabinet.

Corporate Tax Deductions :

Certain expenses which are deductible under general accounting rules may not be fully deductible for Corporate Tax purposes. These will need to be added back to the Accounting Income for the purposes of determining the Taxable Income.

Deductible Expenditure is expenditure incurred wholly and exclusively for the purposes of the Taxable Person’s Business that is not capital in nature.

Corporate Tax on Tax Losses :

Taxable person can offset their tax loss subject to following conditions:

• A Tax Loss can be offset against the Taxable Income of subsequent Tax Periods to arrive at the Taxable Income for those subsequent Tax Periods.
• The amount of Tax Loss used to reduce the Taxable Income for any subsequent Tax Period cannot exceed 75% (seventy-five percent) or any other percentage as specified in a decision issued by the Cabinet of the Taxable Income for that Tax Period before any Tax Loss relief, except in circumstances that may be prescribed in a decision issued by the Cabinet.
• A Taxable Person cannot claim Tax Loss relief for:

– Losses incurred before the date of commencement of Corporate Tax.

– Losses incurred before a Person becomes a Taxable Person under this Decree-Law.

– Losses incurred from an asset or activity the income of which is exempt, or otherwise not taken into account under this Decree-Law

Transfer of Tax Loss

A Tax Loss or a portion thereof may be offset against the Taxable Income of another Taxable Person where all of the following conditions are met:

• Both Taxable Persons are juridical persons.
• Both Taxable Persons are Resident Persons.
• Either Taxable Person has a direct or indirect ownership interest of at least 75% in the other, or a third Person has a direct or indirect ownership interest of at least 75%  in each of the Taxable Persons.
• None of the Persons are an Exempt Person.
• None of the Persons are a Qualifying Free Zone Person.
• The Financial Year of each of the Taxable Persons ends on the same date.
• Both Taxable Persons prepare their financial statements using the same accounting standards.

Corporate Tax for Free Zones :

Free zones offer 100% exemption from Corporate Taxes and Income taxes, Custom duties. Free Zones have independent laws and regulations.

Qualifying Free Zone Person

A Qualifying Free Zone Person is a Free Zone Person that meets all of the following  conditions:

• Maintains adequate substance in the State.
• Derives Qualifying Income as specified in a decision issued by the Cabinet.
• Has not elected to be subject to Corporate Tax.
• Complies with Arm’s length Principle and Transfer Pricing Documentation.

The Minister may prescribe additional conditions that a Qualifying Free Zone Person must meet.

If a Qualifying Free Zone Person fails to meet any of the conditions, or makes an election to be subject to the regular Corporate Tax regime, they will be subject to the standard rates of Corporate Tax from the beginning of the Tax Period where they failed to meet the conditions.

Corporate Tax on Transactions with Related Parties and Connected Persons : 

Transactions and arrangements between related parties and connected persons must be carried at arm’s length standard by using a prescribed transfer pricing methodology or at a reasonable price which two independent parties would transact.

Related Parties

Related Parties means any of the following:

• Two or more natural persons who are related within the fourth degree of kinship or affiliation, including by way of adoption or guardianship
• A natural person and a juridical person where :

– The natural person, alone or together with its Related Parties directly or indirectly owns a 50% shares or greater ownership interest in the juridical person; or

– The natural person, alone or together with its Related Parties, directly or indirectly Controls the juridical person.

• Two or more juridical persons where :

– one juridical person, alone or together with its Related Parties, directly or indirectly owns a 50% shares or greater ownership interest in the other juridical person;

– one juridical person, alone or together with its Related Parties, directly or indirectly Controls the other juridical person; or

– any Person, alone or together with its Related Parties, directly or indirectly owns a 50% shares or greater ownership interest in or Controls such two or more juridical persons;

• A Person and its Permanent Establishment or Foreign Permanent Establishment.
• Two or more Persons that are partners in the same Unincorporated Partnership.
• A Person who is the trustee, founder, settlor or beneficiary of a trust or foundation, and its Related Parties.

Connected Person 

A Person shall be considered a Connected Person of a Taxable Person if that Person is

• An owner of the Taxable Person.
• A director or officer of the Taxable Person.
• A Related Party of any of the Persons which are referred above

Transfer Pricing Documentation

The Authority may require a Taxable Person to file together with their Tax Return a disclosure containing information regarding the Taxable Person’s transactions and arrangements with its Related Parties and Connected Persons in the form prescribed by the Authority.

If a Taxable Person’s transactions with its Related Parties and Connected Persons for a Tax Period meet the conditions prescribed by the Minister, the Taxable Person must maintain both a master file and a local file in the form prescribed by the Authority. Upon request from the authorities, the documentation must be submitted to the Authority within a period of 30 days.

Corporate Tax on Tax Group : 

A Resident Person, which for the purposes of this Decree-Law shall be referred to as a “Parent Company”, can make an application to the Authority to form a Tax Group with one or more other Resident Persons, each referred to as a “Subsidiary” for the purposes of this Chapter, where all of the following conditions are met:

• The Resident Persons are juridical persons.
• The Parent Company must

– own at least 95%  of the share capital of the Subsidiary;

– hold at least 95%  of the voting rights in the Subsidiary;

– entitled to at least 95% of the Subsidiary’s profits and net assets.

• Neither the Parent Company nor the Subsidiary is an Exempt Person.
• Neither the Parent Company nor the Subsidiary is a Qualifying Free Zone Person.
• The Parent Company and the Subsidiary have the same Financial Year.
• Both the Parent Company and the Subsidiary prepare their financial statements using the same accounting standards.

Exit from a Tax Group

A Subsidiary shall leave the Tax Group in the following circumstances:

• Following approval by the Authority of an application by the Parent Company and the relevant Subsidiary.
• Where the relevant Subsidiary no longer meets the conditions to be a member of the Tax Group as specified.

Cessation of a Tax Group

On cessation of a Tax Group, unutilized Tax Losses of the Tax Group shall be allocated as follows:

• Where the Parent Company continues to be a Taxable Person, all Tax Losses shall remain with the Parent Company.
• Where the Parent Company ceases to be a Taxable Person, Tax Losses of the Tax Group shall not be available for offset against future Taxable Income of individual Subsidiaries, with the exception of any unutilized pre-Grouping Tax Losses of such Subsidiaries.

Replacing the Parent Company

The Parent Company of a Tax Group can make an application to the Authority to be replaced by another Parent Company without a discontinuation of the Tax Group if the new parent company meets the conditions and former parent company ceases to exists.

Corporate Tax on Payment and Refund : 

Payment of Corporate Taxes

A Taxable Person must settle the Corporate Tax Payable under this Decree-Law within 9 months from the end of the relevant Tax Period, or by such other date as determined by the Authority.

The calculation of corporate tax due is settled as per the following order:

• If a taxable person has available Withholding Tax Credit (WHT) ( Currently as per Public Consultation Document this rate is 0% ) then the corporate tax due can be reduced by the amount of WHT credit for that tax period;
• If a taxable person has available Foreign Tax Credit (FTC) then the corporation tax due can be reduced by the amount of foreign tax credit for that tax period under the below conditions;

– The Foreign tax credit cannot exceed the amount of corporate tax due on the relevant income.

– Any Excess / unutilized FT credit cannot be carried forward or carried back

Refund of Corporate Taxes

A Taxable Person may make an application to the Authority for a Corporate Tax refund in the following circumstances :

• The Withholding Tax Credit available to a Taxable Person exceeds the Taxable Person’s Corporate Tax Payable.
• Where the Authority is otherwise satisfied that the Taxable Person has paid Corporate Tax in excess of the Taxable Person’s Corporate Tax.

Corporate Tax Returns and Clarifications : 

Tax Returns

A Taxable Person must file a Tax Return, as applicable, to the Authority in the form and manner prescribed by the Authority no later than 9 months from the end of the relevant Tax Period, or by such other date as directed by the Authority.

The Tax Return shall include at least the following information, as applicable:

• The Tax Period to which the Tax Return relates.
• The name, address and Tax Registration Number of the Taxable Person.
• The date of submission of the Tax Return.
• The accounting basis used in the financial statements.
• The Taxable Income for the Tax Period.
• The amount of Tax Loss relief claimed.
• The amount of Tax Loss transferred.
• The available tax credits claimed.
• The Corporate Tax Payable for the Tax Period.

Financial Statements

The Authority may request a Taxable Person to submit the financial statements used to determine the Taxable Income for a Tax Period in the form and manner and within the timeline prescribed by the Authority. The Minister may issue a decision requiring categories of Taxable Persons to prepare and maintain audited or certified financial statements.

Record Keeping

A Taxable Person and exempted person shall maintain all records and documents for a period of 7 years following the end of the Tax Period.

Tax Period

• A Taxable Person’s Tax Period is the Financial Year or part thereof for which a Tax Return is required to be filed.
• The Financial Year of a Taxable Person shall be the Gregorian calendar year, or the (12) twelve-month period for which the Taxable Person prepares financial statements.
• Taxable Person can make an application to the Authority to change the start and end date of its Tax Period, or use a different Tax Period, subject to conditions to be set by the Authority.

Clarifications

A Person may make an application to the Authority for a clarification regarding the application of this Decree-Law or the conclusion of an advance pricing agreement with respect to a transaction or an arrangement proposed or entered into by the Person.

Corporate Tax Penalties and Provisions : 

Penalties

Corporate Tax assessment and penalties shall be in accordance with the Tax Procedures Law and the decisions issued in the implementation of its provisions.

Transitional Provisions

A Taxable Person’s opening balance sheet for Corporate Tax purposes shall be the closing balance sheet prepared for financial reporting purposes under accounting standards applied in the State on the last day of the Financial Year that ends immediately before their first Tax Period commences, subject to any conditions or adjustments.

Closing Provisions

Delegation of power, administrative policies and procedures, revenue sharing, international agreements, implementing decisions and cancellation of conflicting provisions are broadly provided.