The United Arab Emirates is introducing ‘corporate taxes for the first time. It was announced by publication of the Official Gazette on the 3rd of October 2022 and will come into effect on or after 1 June 2023. It is, therefore, imperative that businesses and companies are prepared and it is of vital importance that businesses verify whether they are subject to the newly introduced corporate tax whilst also taking into account and analyzing their additional tax costs. It is best to get started early as it will help in diminishing any additional corporate tax liabilities, therefore you should contact the best lawyers in Dubai.
Introducing the first federal CT scheme in the UAE with the prescribed statutory tax rates of 0% and 9% which will be applicable to taxable income above Dh375,000; a law that is simple for businesses and international investors to understand, and a minimal administrative burden, in our opinion, represents an important change for businesses and enterprises operating in the UAE. Predominantly, the corporate tax will apply to the following ‘Taxable Persons’:
- UAE companies and other juridical persons that are incorporated or effectively managed and controlled in the UAE;
- Natural persons (individuals) who conduct businesses and/or business activities in the UAE as specified in a Cabinet Decision to be issued in due course; and
- Non- resident juridical persons (foreign legal entities) that have permanent legal establishments in the UAE.
Juridical persons formed in a UAE Free Zone shall also be considered ‘Taxable Persons’ for the purposes of this newly introduced tax and therefore must adhere to the guidelines outlined in the corporate tax law. A Free Zone Person who satisfies the requirements to be regarded as a Qualified Free Zone Person, however, can profit from a corporate tax rate of 0% on their Qualifying Income. The following requirements must be met by a Free Zone Person in order to qualify as one:
- Maintain sufficient substance in the UAE,
- Generate ‘Qualifying Income’
- Avoid making an election to be subject to Corporate Tax at the standard rates
- Adhere to the transfer pricing rules set forth in the Corporate Tax Law
Additional conditions may also be prescribed by the Minister that a Qualifying Free Zone Person must meet.
A Qualified Free Zone Person will be liable to the standard rates of Corporate Tax at the start of the Tax Period wherein they fail to satisfy the requirements stated above.
The Corporate Tax Law levies income on a residency and source basis, similar to the tax systems in most other jurisdictions. The classification of the Taxable Person determines the application basis of taxation. Income from both domestic and international sources is subject to taxation for ‘Resident Persons’. However, for ‘Non-Resident Persons’, only their income that is obtained from sources within the UAE will be subject to taxation. For the purposes of corporate tax, the residence is defined by a number of particular elements that are outlined in the Corporate Tax Law, rather than by a person’s place of residence or citizenship.
A Taxable Person must pay corporate tax on any taxable income that they receive during a tax period. Corporate Tax would typically be levied once a year, with the Taxable Person determining their own obligation and liabilities through self-assessments. This implies that the Taxable Person must file a Corporate Tax Return with the Federal Tax Authority in order to calculate and pay the Corporate Tax. The accounting income (i.e. the net profit or loss before the tax) of the Taxable Person as reported in their financial accounts serves as the basis for calculating their Taxable Income. To determine their Taxable Income for the applicable Tax Period, the Taxable Person will then need to make a few modifications.
Therefore, you can contact the Tax lawyers in Dubai for further information.
On the other hand, given their significance and contributions to the communities and economy of the UAE, several types of firms and/or organizations are exempt from the corporate tax. These are referred to as ‘Exempt Persons’ and include:
- Government Entities
- Government Controlled Entities as specified in a Cabinet Decision
- Extractive Businesses
- Non-Extractive Natural Resource Businesses
- Qualifying Public Benefit Entities
- Public or private pension and social security funds
- Qualifying Investment 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 security fund
Government Entities, Government Controlled Entities that are listed in a Cabinet Decision, Extractive Businesses, and Non-Extractive Natural Resource Businesses may all be exempt from being subject to Corporate Tax in addition to being exempt from any registration, filing, and other compliance requirements imposed by the Corporate Tax Law unless they engage or have engaged in activities that are subject to the charge of Corporate Tax. For instance, it could become necessary to make adjustments to accounting income for revenue that is exempt from corporate taxes and for expenses that are entirely or partially non-deductible for corporate tax reasons.
UAE group entities may choose to form a Tax Group in order to be considered as a single Taxable Person for the purposes of Corporate Tax. The main firm (‘Parent Company’) and all of its subsidiaries must be resident juridical entities, share the same financial year, and compile their financial statements in accordance with the same accounting rules in order to constitute as as Tax Group. Furthermore, in order to form the Tax Group, the Parent Company must additionally:
- Own at least 95% of the share capital of the subsidiary;
- Hold at least 95% of the voting rights;
- Be entitled to at least 95% of the subsidiary’s profits and net assets.
The ownership, rights, and entitlement may be held directly or indirectly through subsidiaries, however, an Exempt Person or a Qualified Free Zone Person cannot be a member of a Tax Group.
The parent company must prepare consolidated financial accounts for each subsidiary that is a member of the Tax Group for the applicable Tax Period in order to determine the Taxable Income of a Tax Group. For the purposes of figuring out the Taxable Income of the Tax Group, transactions between each group member and the parent company, as well as between the group members would be disregarded.
It will be necessary for all Taxable Persons to register for Corporate Tax and get a Corporate Tax Registration Number, including Free Zone Persons. Certain Exempt Persons may also be asked by the Federal Tax Authority to register for Corporate Tax. For each Tax Period, Taxable Persons must submit a Corporate Tax return within nine months after the completion of the applicable tax period. The payment of any Corporate Tax owed in relation to the Tax Period for which a return is submitted would generally have to be made within the same application deadline.
We, therefore, urge those who have not yet begun evaluating the impact to be more proactive in order to ensure a smooth transition as the implementation date draws near. Companies must first evaluate the technical implications of the law before considering how well-prepared their operations are to handle the compliance, reporting, and strategy requirements related to corporate taxation. This should involve evaluating the suitability of their accounting policies, legal contracts, cash flow implications, reporting systems, finance, and tax functions, and transfer pricing paperwork.
For more updates and assistance, please reach out to our team of experts (Lawyers in Dubai) that can help you in assessing your position and guide you along the next steps and actions required to help you be ready to comply with the new Corporate Tax law regime once it comes into effect.
All businesses must take this crucial initial step to assess how the adoption of the Corporate Tax will affect them and what changes it would bring moving forward. On the basis of the current legal and administrative framework, we can assist you in conducting a preliminary assessment on a quantifiable and qualitative basis to better understand the upcoming effects of corporate taxation.
Assisting in identifying and amending any uncertainties or grey areas that fall under the new CT regime, identifying any and all alterable and upgrading opportunities, generating business reports, applying and filing for Tax Groups and/or Exemptions, as well as reviewing and implementing necessary transfer policies are all additional services that we can provide.