FTA Publishes Taxation of Corporations and Businesses

12 Dec FTA Publishes Taxation of Corporations and Businesses

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FTA Publishes Taxation of Corporations and Businesses

Federal Decree-Law No. 47 of 2022 – Issued 3 October 2022

The Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses was issued by the United Arab Emirates (“UAE”), on 09 December 2022 and is effective for financial years starting on or after 1 June 2023.

Corporate Tax is a form of direct tax levied on the net income of corporations and other businesses.

Corporate Tax & Rates

1. 1. Corporate tax shall be imposed on the Taxable Income at the following rates:
      • 0% – when taxable income does not exceed AED 375,000/-*
      • 9% – on taxable income that exceeds AED 375,000/-*
   2. Corporate Tax shall be imposed on a Qualifying Free Zone Person at the following rates:
      • 0% – on Qualifying income
      • 9% – for not Qualifying income

*Subject to confirmation in Cabinet Decision

Exempt Person (Exempt from corporate tax)

Certain types of businesses or organizations are exempt from Corporate Tax and known as Exempt Persons:

• Government Entities
• Government Controlled Entities that are specified in a Cabinet Decision
• A Person engaged in an Extractive Business, that meets the conditions of Article 7 of this Decree-Law.
• A Person engaged in a Non-Extractive Natural Resource Business, that meets the conditions of Article 8 of this Decree-Law.
• A Qualifying Investment Fund under Article 10 of this Decree-Law.
• Public or private pension and social security funds
• 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.

 

Taxable Person

Taxable Persons: For the purposes of this Decree-Law, a Taxable Person shall be either a Resident Person or a Non-Resident Person.

1. 1. A Resident Person is any of the following Persons:
   2. A juridical person that is incorporated or otherwise established or recognized under the applicable legislation of the State, including a Free Zone Person.
   3. A juridical person that is incorporated or otherwise established or recognized under the applicable legislation of a foreign jurisdiction that is effectively managed and controlled in the State.
   4. A natural person who conducts a Business or Business Activity in the State.
   5. Any other Person as may be determined in a decision issued by the Cabinet at the suggestion of the Minister.
   6. A Non-Resident Person is a Person who is not considered a Resident Person as above and that either:
   7. Has a Permanent Establishment in the State as under Article 14 of this Decree-Law.
   8. Derives State Sourced Income as under Article 13 of this Decree-Law.
   9. Has a nexus in the State as specified in a decision issued by the Cabinet at the suggestion of the Minister.
   10. A branch in the State of a Person referred to in Clause 3 of this Article, shall be treated as one and the same Taxable Person

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%). Article 45 – Withholding Tax

Withholding Tax

1. 1. The following income shall be subject to Withholding Tax at the rate of 0% (zero percent) or any other rate as specified in a decision issued by the Cabinet at the suggestion of the Minister:
   2. The categories of State Sourced Income derived by a Non-Resident Person as prescribed in the decision issued by the Cabinet pursuant to this Article, insofar such income is not attributable to a Permanent Establishment of the NonResident Person in the State.
   3. Any other income as specified in a decision issued by the Cabinet at the suggestion of the Minister.
   4. The Withholding Tax payable under Clause 1 of this Article shall be deducted from the gross amount of the payment and remitted to the Authority in the form and manner and within the timeline prescribed by the Authority.

 

Corporate Tax Base

In line with the tax laws of most countries, the Corporate Tax Law taxes income on both a residence and source basis. The applicable base of taxation depends on the classification of the Taxable Person.

A Resident Person, which is a juridical person, is subject to Corporate Tax on its Taxable Income derived from the State or from outside the State, in accordance with the provisions of this Decree-Law. (Income derived from both domestic and foreign sources will be taxable)

Resident Person, which is a natural person, is subject to Corporate Tax on its Taxable Income derived from the State or from outside the State insofar as it relates to the Business or Business Activity conducted by the natural person in the State as set out in Clause 6 of Article 11 of this Decree-Law.

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

1.The Taxable Income that is attributable to the Permanent Establishment of the Non-Resident Person in the State.

2.State Sourced Income that is not attributable to a Permanent Establishment of the Non-Resident Person in the State.

3.The Taxable Income that is attributable to the nexus of the Non-Resident Person in the State as determined in a decision issued by the Cabinet pursuant to paragraph (c) of Clause 4 of Article 11 of this Decree-Law.

Permanent Establishment

The purpose of the Permanent Establishment concept in the UAE Corporate Tax Law is to determine taxability of foreign person in the UAE.

The definition of Permanent Establishment in the Corporate Tax Law has been designed on the basis of the definition provided in Article 5 of the OECD Model Tax Convention on Income and Capital and the position adopted by the UAE under the Multilateral Instrument to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting. This allows foreign persons to use the relevant Commentary of Article 5 of the OECD Model Tax Convention when assessing whether they have a Permanent Establishment or not in the UAE. This assessment should consider the provisions of any bilateral tax agreement between the country of residence of the Non-Resident Person and the UAE.

Foreign Permanent Establishment Exemption

A Resident Person can make an election to not take into account the income, and associated expenditure, of its Foreign Permanent Establishments in determining its Taxable Income. Option is available if such Foreign Permanent Establishment is subject to Corporate Tax or a tax of a similar character under the applicable legislation of the relevant foreign jurisdiction at a rate not less than the rate specified in paragraph (b) of Clause 1 of Article 3 of this Decree-Law.

Corporate Tax Applicability for Freezone Persons

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

1. 1. 0% (zero percent) on Qualifying Income.
   2. 9% (nine percent) on Taxable Income that is not Qualifying Income under Article 18 of this Decree-Law and any decision issued by the Cabinet at the suggestion of the Minister in respect thereof.

 

Qualifying Free Zone Person

1. 1. A Qualifying Free Zone Person is a Free Zone Person that meets all of the following conditions:
   2. Maintains adequate substance in the State.
   3. Derives Qualifying Income as specified in a decision issued by the Cabinet at the suggestion of the Minister
   4. Has not elected to be subject to Corporate Tax under Article 19 of this DecreeLaw.
   5. Complies with Articles 34 and 55 of this Decree-Law.
   6. Meets any other conditions as may be prescribed by the Minister.
   7. Qualifying Free Zone Person that fails to meet any of the conditions under Clause 1 of this Article at any particular time during a Tax Period shall cease to be a Qualifying Free Zone Person from the beginning of that Tax Period.
   8. Notwithstanding Clause 2 of this Article, the Minister may prescribe the conditions or circumstances under which a Person may continue to be a Qualifying Free Zone Person or cease to be a Qualifying Free Zone Person from a different date.
   9. The application of paragraph (a) of Clause 2 of Article 3 of this Decree-Law to a Qualifying Free Zone Person shall apply for the remainder of the tax incentive period stipulated in the applicable legislation of the Free Zone in which the Qualifying Free Zone Person is registered, which period may be extended in accordance with any conditions as may be determined in a decision issued by the Cabinet at the suggestion of the Minister, but any one period shall not exceed (50) fifty years.

 

Election to be Subject to Corporate Tax

1. 1. A Qualifying Free Zone Person can make an election to be subject to Corporate Tax at the rates specified under Clause 1 of Article 3 of this Decree-Law.
   2. The election under Clause 1 of this Article shall be effective from either of:
      1. The commencement of the Tax Period in which the election is made.
      2. The commencement of the Tax Period following the Tax Period in which the election was made.

 

General Rules for Determining Taxable Income

Taxable income to be calculated based on adequate, standalone financial statements prepared for each taxable person, in accordance with the accounting standards accepted in UAE. Taxable income shall be accounting income adjusted for certain items such as unrealized gains or loss, exempt income, reliefs, deductions, tax loss relief, any incentives or other adjustments as may be specified etc.

Deductible Expenditure:

Expenditure wholly and exclusively incurred for the purpose of business shall be tax deductible, in the year in which it is incurred. No deduction shall be allowed on expenses which are capital in nature or incurred for deriving exempt income. Further, losses not connected with taxpayers’ business would also not be deductible.

Where an expenditure is incurred for more than one purpose, deduction shall be available on proportionate basis.

Interest Expenditure:

Notwithstanding paragraph (b) of Clause 2 of Article 28 of this Decree-Law, Interest expenditure shall be deductible in the Tax Period in which it is incurred, subject to the other provisions of Article 28 and Articles 30 and 31 of this Decree-Law.

General Interest Deduction Limitation Rule

A Taxable Person’s Net Interest Expenditure shall be deductible up to 30% (thirty percent) of the Taxable Person’s accounting earnings before the deduction of interest, tax, depreciation and amortization (EBITDA) for the relevant Tax Period, excluding any Exempt Income under Article 22 of this Decree-Law.

The amount of Net Interest Expenditure disallowed under Clause 1 of this Article may be carried forward and deducted in the subsequent (10) ten Tax Periods in the order in which the amount was incurred, subject to Clauses 1 and 2 of this Article.

Specific Interest Deduction Limitation Rule

1. 1. No deduction shall be allowed for Interest expenditure incurred on a loan obtained, directly or indirectly, from a Related Party in respect of any of the following transactions:
   2. A dividend or profit distribution to a Related Party.
   3. A redemption, repurchase, reduction or return of share capital to a Related Party.
   4. A capital contribution to a Related Party.
   5. The acquisition of an ownership interest in a Person who is or becomes a Related Party following the acquisition.
   6. Clause 1 of this Article shall not apply where the Taxable Person can demonstrate that the main purpose of obtaining the loan and carrying out the transaction referred to under Clause 1 of this Article is not to gain a Corporate Tax advantage.
   7. For the purposes of Clause 2 of this Article, no Corporate Tax advantage shall be deemed to arise where the Related Party is subject to Corporate Tax or a tax of a similar character under the applicable legislation of a foreign jurisdiction on the Interest at a rate not less than the rate specified in paragraph (b) of Clause 1 of Article 3 of this Decree-Law.

 

Entertainment Expenditure

Entertainment, amusement, and recreational expenses will be deductible only up to 50%. Entertainment expenses includes expenditure in connection with meals, accommodation, transportation, admission fees etc. incurred in relation to the taxpayer’s customers, shareholders, suppliers, or other business partners.

Non-deductible Expenditure

No deduction is allowed for:

1. 1. Donations, grants, or gifts made to an entity that is not a Qualifying Public Benefit Entity.
   2. Fines and penalties, other than amounts awarded as compensation for damages or breach of contract.
   3. Bribes or other illicit payments.
   4. Dividends, profit distributions or benefits of a similar nature paid to an owner of the Taxable Person.
   5. Amounts withdrawn from the Business by a natural person who is a Taxable Person under paragraph (c) of Clause 3 of Article 11 of this Decree-Law or a partner in an Unincorporated Partnership.
   6. Input Value Added Tax incurred by a Taxable Person that is recoverable under Federal Decree-Law No. (8) of 2017 referred to in the preamble and what replaces it.
   7. Such other expenditure as specified in a decision issued by the Cabinet at the suggestion of the Minister.

 

Tax Loss Relief/ Transfer of Tax Loss

1. 1. 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.
   2. 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 at the suggestion of the Minister 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 at the suggestion of the Minister.
   3. A Taxable Person cannot claim Tax Loss relief for:
      1. Losses incurred before the date of commencement of Corporate Tax.
      2. Losses incurred before a Person becomes a Taxable Person under this Decree Law.
      3. Losses incurred from an asset or activity the income of which is exempt, or otherwise not taken into account under this Decree-Law.
   4. A Tax Loss carried forward to a subsequent Tax Period must be set off against the Taxable Income of that subsequent Tax Period, before any remainder can be carried forward to a further subsequent Tax Period, or any Tax Loss transferred under Article 38 of this Decree-Law can be utilized.
   5. Tax losses cannot be carried forward where there is change in shareholding of more than 50% other than when same or similar business is carried out. Tax losses can be transferred between resident juridical persons with common shareholding of at least 75% and subject to other conditions. Such shareholding must exist from the year in which the losses have been incurred to the end of the year in which such losses have been offset.

 

Business Restructuring Relief

No gain or loss needs to be considered in determining Taxable Income in any of the following circumstances: a. A Taxable Person transfers its entire business or an independent part of its Business to another Person who is a Taxable Person or will become a Taxable Person as a result of the transfer in exchange for shares or other ownership interests of the Taxable Person that is the transferee. b. One or more Taxable Persons transfer their entire Business to another Person who is a Taxable Person or will become a Taxable Person as a result of the transfer in exchange for shares or other ownership interests of the Taxable Person that is the transferee, and the Taxable Person or Taxable Persons that are the transferor cease to exist as a result of the transfer.

The provision of this Article shall not apply where, within two years from the date of the transfer, any of the following occurs: a. The shares or other ownership interests in the Taxable Person that is the transferor, or the transferee are sold, transferred, or otherwise disposed of, in whole or part, to a Person that is not a member of the Qualifying Group to which the relevant Taxable Persons belong. b. There is a subsequent transfer or disposal of the Business, or the independent part of the Businesses transferred under Clause 1 of this Article.

Small Business Relief

1. 1. A Taxable Person that is a Resident Person may elect to be treated as not having derived any Taxable Income for a Tax Period where:
   2. the Revenue of the Taxable Person for the relevant Tax Period and previous Tax Periods does not exceed a threshold to be set by the Minister; and
   3. the Taxable Person meets all other conditions prescribed by the Minister.

Once the business is under the small business category, other provisions of exemption, relief, deductions, tax loss relief, etc. shall not be applicable

Exempt Income

The following income and related expenditure shall not be taken into account in determining the Taxable Income:

1. 1. Dividends and other profit distributions received from a juridical person that is a Resident Person.
   2. Dividends and other profit distributions received from a Participating Interest in a foreign juridical person as specified in Article 23 of this Decree-Law.
   3. Any other income from a Participating Interest as specified in Article 23 of this Decree-Law.
   4. Income of a Foreign Permanent Establishment that meets the condition of Article 24 of this Decree-Law.
   5. Income derived by a Non-Resident Person from operating aircraft or ships in international transportation that meets the conditions of Article 25 of this DecreeLaw.

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:

Parent entity holds 95% ownership, voting rights and right to the assets and profit of the group entities

Neither the parent nor the subsidiary is an exempt entity. This condition is relaxed when the subsidiaries are held by a Government Entity

Neither the parent nor the subsidiary is a qualifying free zone

Both the parent and the subsidiary follow the same financial year and prepare their financial statements using the same accounting standards

Tax Groups can be formed by making an application to the FTA by the parent and each subsidiary. The Corporate Tax liability can be a joint and several one or can be restricted to one member. Detailed rules and provisions have been incorporated to deal with how a subsidiary can join and leave the Tax Group and the circumstances under which the Tax Group will cease to exist.

Taxable Income of a Tax Group

Taxable income of the Tax Group shall be determined at a consolidated level, eliminating transactions between the members of the Tax Group.

Any income in relation to a transfer of an asset or liability that was not into account in the income of the Tax Group, shall be considered if the transferor or transferee leaves the Tax Group within 2 years from the date of transaction.

Unutilized tax loss of a newly joining subsidiary to the Tax Group (‘pre-group losses’) can be carried forward and set-off against taxable income of the Tax Group. However, the existing tax loss of the Tax Group cannot be utilised for offsetting Taxable Income attributable to the new joining subsidiary.

When a subsidiary leaves the Tax Group, tax losses shall remain with Tax Group other than the unutilized pre-group losses.

On cessation of a Tax Group, the tax losses shall be available to the parent if it is still a taxable person. Else, the tax losses will lapse other than the unutilized pre-group losses.

Transfer Pricing:

Transfer Pricing regulations to apply on transactions between related parties and / or connected persons. Such transactions should be carried out at an arm’s length basis i.e., at a price which two independent parties would transact. The law enlists certain set of criteria for classifying persons as a “related party” and “connected persons” and provides guidance on methodology for determining arm’s length price/ range.

In case related party transactions are not conducted on an arm’s length basis, then a tax adjustment can be made by the authority. The law also allows for a corresponding adjustment to the taxable income of the other transacting related party. Similarly, payments to connected persons viz, directors, shareholders, owners, and their related persons etc., are also brought under the scope of Transfer Pricing; wherein any excess payment that does not correspond to the market value (to be determined as per Transfer Pricing provisions) shall not be allowed as deductible expense.

Transfer Pricing Compliance Taxpayers on whom Transfer Pricing is applicable will be required to file a disclosure form along with the Corporate Tax returns containing details of related party transactions. The taxpayers are also required to maintain a master file and local file, subject to meeting of certain conditions. The format of the documentation and the conditions for filing/maintenance of the same are yet to be prescribed.

Other Important Points

Foreign Tax Credits: Foreign tax credits cannot exceed the corporate tax due. Unutilized portion of foreign tax credits cannot be carried forward or back. Necessary documentation to be maintained to claim foreign tax credits.

Refunds: Taxpayers will have to file an application with the FTA for tax refunds. Usually, in other nations, refunds are claimed at the time of filing the tax return, however, it appears like a separate application will have to be filed for claiming UAE Corporate Tax refunds.

Tax Registration: Persons covered by the Corporate Tax law are required to register and obtain a Tax Registration Number. The timelines are yet to be prescribed. Certain exempt entities such as qualifying investment funds, pension or social security funds, charities and public benefit organizations may be required to obtain a registration. In case of cessation of business in the future, a tax deregistration application can be filed to discontinue the registration.

Currency: All amounts must be quantified in AED. Any foreign currency must be converted as per the rate set by the Central Bank of UAE subject to conditions to be prescribed by the FTA.

Tax Returns and Payments: The Corporate tax return and settlement of tax payments are due within 9 months from the end of the tax period. It appears that a qualifying free zone person will also be required to file a corporate tax return.

Record-keeping: Documents supporting the information provided by a taxable person in the Corporate Tax return should be maintained for 7 years from the end of the relevant tax period. An exempt person is also required to maintain relevant exempt status records for a 7-year period.

For detail, please refer to the Federal Decree-Law No. 47 of 2022 – Issued 3 October 2022