12 Pointers to Know Corporate Tax in UAE

DEEPAK ARYADEEPAK ARYA    25 August 2022
12 Pointers to Know Corporate Tax in UAE

About introduction of Corporate Tax in UAE?

As announced on 31 January 2022, the United Arab Emirates (UAE) will introduce a federal Corporate Tax (CT) on business profits at the rate of 9% that will be effective for financial years starting on or after 1 June 2023. The introduction of a federal CT regime is intended to help the UAE achieve its strategic ambitions and incentivise businesses to establish and expand their activities in the UAE.

Who Is Required to Pay Corporate Tax?

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

 

Which income shall be taxed under CT?

The UAE CT shall be levied on Business Profits earned by Natural person or legal person mentioned in point no. 2. Other incomes like Employment Income, personal income like Dividend income shall not be taxed provided it is earned in the personal capacity.

 

What shall be the tax period in UAE CT Law?

As per consultation paper, the law shall be effective for financial year starting from 01 June 2022. Accordingly, any person having financial year ending 31 May, then the first tax period shall be      01 June 2022 to 31 May 2023.

 

What will be the frequency of payment of UAE CT and filing of Tax Returns?

Each tax return and related supporting schedules will need to be submitted to the FTA within 9 months of the end of the relevant Tax Period. Payments to settle a taxpayer’s CT liability for a Tax Period will need to be made within 9 months of the end of the relevant Tax Period.

 

Who is Exempted from Corporate Tax?

  1. The Federal and Emirate Governments and their departments, authorities and other public institutions.
  2. Wholly Government-owned UAE companies that carry out a sovereign or mandated activity, and that are listed in a Cabinet Decision.
  3. Businesses engaged in the extraction and exploitation of UAE natural resources that are subject to Emirate-level taxation.
  4. Charities and other public benefit organizations that are listed in a Cabinet Decision.
  5. Public and regulated private social security and retirement pension funds.
  6. Investment funds, subject to meeting the conditions:
    1. The investment fund is regulated by a regulatory authority in the UAE that is recognized by the Ministry of Finance (e.g., the Securities and Commodities Authority, the Financial Services Regulatory Authority, the Dubai Financial Services Authority).
    2. No group of five (5) or fewer investors (and their Related Parties1) has a 50% or greater economic interest in the investment fund.
    3. No single investor (and their Related Parties1) has a 20% or greater economic interest in the investment fund.
    4. Interests in the investment fund can be freely traded on a stock exchange in the UAE (or a recognized foreign stock exchange) or are widely marketed and made available to the intended categories of investors.

 

What is the Impact on Free Zones?

 

Instances of Taxability on transactions as given below

S.No.

Income generated by

Income generated from

Taxability on UAE CT

1

Free Zone Entity

ROW (Rest of the World)

The income generated by FZ entity should be allowed for 0% rate of CT.

The income generated by FZ entity should be allowed for 0% rate of CT.

2

Free Zone Entity

Free Zone Entity

(Same or any other)

3

Free Zone Entity

Mainland Branch (Branch of FZ)

The income generated by FZ entity should be taxed at 9% CT on income derived from Mainland branch of FZ entity.

4

Free Zone Entity

Mainland Entities

The “passive” income generated through Mainland entity shall be taxed at 0% CT.

 

The passive income includes interest, royalties, dividend and capital gains on sale of shares held in the mainland companies.

 

Withholding tax at 0% to be applied as well.

 

5

Free Zone Entity in Designated Zone for VAT

Mainland UAE

Benefit of 0% CT if the import on record is Mainland UAE entity.

6

Free Zone Entity

Group Companies located in Mainland UAE

Benefit of 0% CT to FZ Entity.

 

No deduction benefit to Group Companies located in Mainland while computing the business income.

The Free Zone Entity shall be disqualified from the benefit of 0% CT if:

 

Where a FZ Entity is having a Mainland Source Income (other than the incomes considered to be treated as 0% CT), then the FZ Entity shall be disqualified from the benefit of 0% CT on all other income.

 

How to Compute Corporate Tax?

Accounting profit/loss would be the starting point for computation of taxable income on which CT shall be calculated.

 

The financial statements should be prepared using accounting standards and principles that are acceptable in the UAE, and businesses will use their financial accounting period as their (annual) tax period. Where a business does not have a financial accounting period, their default tax period will be the Gregorian calendar year.

 

Whether all expenses shall be allowed?

Expenses on account of interest payments have been limited to 30% of EBITDA and only 50% of entertainment expenses would be allowed as deduction.

 

Whether Losses shall be allowed to be Carried Forward?

Yes. As per the Consultation paper, it is provided to carry forward the losses up to 75% of the taxable income in each of those periods subject to fulfillment of other conditions.

 

What about withholding taxes?

      1. 0% (zero percent) withholding tax will apply on domestic and cross-border payments made by UAE businesses.
      2. 0% withholding tax rate shall apply on UAE sourced income earned by a foreign company that is not attributable to a PE,
      3. Mainland UAE sourced income earned by a Free Zone Person that benefits from the 0% CT regime provided the income is not attributable to mainland branch of Free Zone person, and
      4. Dividends and other profit distributions made by a Free Zone Person those benefits from the 0% CT regime to a mainland UAE shareholder in the Free Zone Person.

 

Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.

You can access Law including Guidelines, Cabinet & FTA Decisions, Public Clarifications, Forms, Business Bulletins for all taxes (Vat, Excise, Customs, Corporate Tax, Transfer Pricing) for all GCC Countries in the Law Section of GCC FinTax

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