The Federal Tax Authority (the “FTA”) has issued Federal Decree Law No. 47 of 2022 on the Taxation of Corporations and Business (the “CT Law”) on December 9, 2022. The Corporate Tax Law addresses many previously assumed aspects of tax regime, and is the most significant federal tax law issued in the UAE. The CT Law will apply to financial years beginning on or after June 1, 2023. It is based on and includes accredited international tax principles.
Below are key points that are provided in the CT Law:
1. Corporate Tax Rate
- The Corporate Tax is applied on the net income of companies and other commercial entities, as follows:
— Zero percent on business profits up to and including the threshold (to be determined by a Cabinet decision) to support small businesses and start-ups, and
— Nine percent on taxable business profits exceeding the threshold (to be determined by a Cabinet decision) beginning from the first financial year (for existing companies, beginning on June 1, 2023).
2. CT Taxable Persons
- UAE companies and other corporate persons that are established or effectively managed and controlled in the UAE;
- Free zone persons on a non-qualifying income basis;
- Natural persons that conduct a business activity in the UAE as specified by a Cabinet decision to be issued in due course; and
- Non-resident corporate persons (i.e., foreign legal entities) that (i) enjoy a permanent establishment in the UAE (as stipulated in Article 14 of the CT Law), or (ii) earn UAE-sourced income.
3. Exempted Persons
- Government entities;
- Government-controlled entities that are specified by a Cabinet decision to be issued in due course;
- Extractive businesses;
- Non-extractive natural resource businesses;
- Qualifying public benefit entities, as stipulated in Article 9 of the CT Law;
- Public or private pension and social security funds;
- Qualifying investment funds, as stipulated in Article 10 of the CT Law;
- Wholly-owned and controlled UAE subsidiaries of a government entity, a government controlled entity, a qualifying investment fund, or a public or private pension or social security fund; and
- A free zone person on a qualifying income basis (the conditions are stipulated in Article 18 of the CT Law).
4. Qualifying Free Zone Persons
- Qualifying free zone persons are subject to 0% CT on a qualifying income basis. These companies need to meet the conditions and requirements provided in Article 18 of the CT Law to be considered as qualifying free zone persons.
5. Exempt Income
The following expenditures will not be considered when determining the taxable income:
- Dividends and other distributions earned from a resident person and foreign shareholdings.
- Income from a participating interest, as specified in Article 23 of the CT Law;
- Income of a foreign permanent establishment that meets the conditions of Article 24 of the CT Law; and
- Income derived by a non-resident person from operating aircraft or ships in international transportation that satisfies the conditions of Article 25 of the CT Law.
- Deductible expenses include expenditure incurred wholly and exclusively for business purposes;
- Non-deductible expenses include bribes, fines and donations to an entity that is not a qualifying public benefit entity, dividends and other profit distributions, and expenditures in deriving income that is exempt from the CT;
- Partial deduction of 50% of the amount of entertainment expenditure; and
- Partial deduction of 30% of the amount of net interest expenditure (EBITDA, excluding certain activities).
7. Tax Returns
- Filing of a tax return and payment of a corporate tax must be made for each tax period within 9 months from the end of the financial period.
8. Record Keeping
- Records and documents related to the CT must be maintained and kept for (7) years from the end of the tax period to which they relate.
9. Tax Period
- Each tax period must be the twelve (12) month period for which the taxable person prepares financial statements.
- Each tax period can be changed pursuant to an application to be submitted by the taxable person, subject to conditions to be set by the FTA.
10. Withholding Tax Rate
- Non-resident persons that do not have a permanent establishment in the UAE or that earn UAE-sourced income that is not related to their permanent establishment may be subject to withholding tax (at the rate of 0%).
- Withholding tax typically applies to the cross-border payment of dividends, interests, royalties and other types of income.
- Withholding tax does not apply to transactions between UAE resident persons.
11. Tax Groups
- The CT Law provides certain requirements and conditions applicable on the formation of tax groups.
- Two or more taxable persons that meet the conditions and requirements in Article (40)(1) of the CT Law can make an application to the FTA to form a tax group. They are considered as a single taxable person for corporate tax purposes, represented by the parent company.
- The parent company and its subsidiaries must be UAE resident juridical persons, have the same financial year and prepare their financial statements using the same accounting standards.
- A tax group cannot include an exempt person or qualifying free zone person.
12. Taxable Income of a Tax Group
- For the purposes of calculating the taxable income of a tax group, a parent company is required to prepare a consolidated financial account, taking into account any subsidiary that is a member of the tax group for the relevant tax period.
- Transactions between the parent company and each subsidiary that is a member of the tax group are excluded when calculating the taxable income of the tax group.
- Pursuant to the conditions provided in Article (26) of the CT Law, CT relief (no gains and no losses) is granted to business transfers within a qualifying group and business restructuring.
- A resident person may be eligible for small business relief, as stipulated in Article (27) of the CT Law.
- 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.
14. Foreign Tax Credits
- Tax incurred by UAE businesses on income earned outside the UAE permits foreign tax credits, which cannot exceed the amount of UAE corporate income tax due on the relevant income.
15. Transfer Pricing
- The CT Law establishes rules for determining arm’s length standards on transfer pricing, as stipulated in Article (34) of the CT Law.
It is important for all UAE companies (both onshore and free zones) to review their financial accounts, determine whether they will be subject to the CT Law, register for the corporate income tax and obtain a Corporate Tax Registration Number, if required, to comply with the new CT Law. Mayer Brown is pleased to assist with any questions you may have. If you would like further information, please feel free to reach out to one of our team members listed in this update.
A copy of the full English text can be accessed below as follows: Federal-Decree-Law-No.-47-of-2022-EN.pdf (mof.gov.ae)