Over the years, UAE has built reputation to be the most profitable country to form new companies and generate income. In recent years, many companies have been incorporated to reap its benefits. Owing to the ease and convenience associated with doing businesses in the UAE and for the purpose of fund collection and its distribution within UAE, the Corporate Tax has been introduced effective from June 1, 2023.
Ministry of Finance (MoF), UAE released Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses for the enactment of a new corporate tax (CT) regime in the UAE. Simultaneously, the Law been further released 158 Frequently Asked Questions for better understanding and clarity.
Corporate Tax is intended to help UAE achieve its strategic objectives and elevate its economic transformation. However, UAE has exempted companies generating revenue lower than AED 375,000 in order to provide support to small businesses and start-ups
Applicability of the law
Corporate tax shall apply to:
• Businesses which are incorporated otherwise established or recognized in the UAE (including free zones, see below)
• Businesses incorporated otherwise established or recognized outside of the UAE, that is effectively managed and controlled in the UAE
• Natural persons that conducts business activity in the UAE
It shall also apply to foreign business that have a Permanent Establishment in the UAE; or derive State Sourced Income from UAE.
What is a UAE-sourced income?
UAE-sourced income shall include any income earned from activities performed, assets located, or rights used for economic purposes in the UAE. Income produced by a UAE resident person shall also be classified as UAE-sourced income.
Free zones
Corporate tax of 9 % is applicable to only those free zone entities that do not generate qualifying income. Free zone persons that generate qualifying income are given a preferential tax rate of 0% .
What part of the income shall be treated as a qualifying income is yet to be defined through a cabinet resolution. In order to be treated as a “Qualifying free zone person”, the free zone entity should meet the below mentioned criteria:
1. Maintain adequate substance in UAE
2. Derive qualifying income (Qualified income is yet to be defined through a cabinet resolution)
3. Satisfy transfer pricing requirements
4. Meets any other conditions to be prescribed through a Ministerial Decision.
Freezone persons, however, are also required to register irrespective if they are subject to corporate tax.
Corporate Tax Exemptions
Under certain conditions, the persons that shall be exempt from Corporate Tax are those who are engaged in the exploitation of UAE natural resources (both extractive and non-extractive), Government and Government-controlled entities, Qualifying public benefit entities, Charities and public benefit organizations, Pension or social security funds or Qualifying investment funds.
The exemption further extends to entities incorporated in the UAE that is wholly owned and controlled by an exempt person, if it:
• is involved or as whole, takes part in the activity of the exempt person
• Holds assets or invests funds for the benefit of the exempt person
• Carries on ancillary activities to those of the exempt person
Furthermore,
UAE businesses that are bound to Corporate Tax are required to register and seek a Tax Registration Number before the Law becomes effective. To maintain the smooth functioning of UAE businesses, it is advisable that financial statements are in place. There may be a requirement to submit these financial statements to the FTA.
The Corporate Tax Law also mentions a general anti-abuse rules (GAAR). The purpose for this is to make sure that transactions or arrangements are not made for seeking a Corporate Tax advantage. The application of these rules shall be from the date the Law is published in the Official Gazette.
Conclusion
It is advisable that businesses and natural persons start assessing, tracking and restructuring their finances to avoid any ramifications of the new guidelines. As there are further details to be disclosed in the coming months by the way of notices, businesses in UAE must continue to keep track of these developments and brace themselves for any sort of compliance required.
While we covered the main aspects of corporate taxes in UAE, there’s much more to it. To minimize the legal hassles in future and stay compliant with this new tax regime, For any queries or services regarding your tax law related matters in the UAE, you can contact us at (+971) 4 3298711 or send us an email on proconsult@uaeahead.com or reach out to us via our Contact Form Page and our dedicated legal team will be happy to assist you. Also visit our website https://uaeahead.com
Article by ProConsult Advocates & Legal Consultants the Leading Dubai Law Firm providing full legal services & legal representation in UAE courts
