UAE, the Tax-Free Heaven is changing colors and now the Federal Tax Authority (the FTA) issued Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Business (the CT Law) on December 9, 2022. According to this law, businesses will become subject to UAE Corporate tax from the beginning of their first financial year that starts on and after 1^st June 2023. 

The Corporate Tax Law addresses many previously assumed aspects of the tax regime and is the most significant federal tax law issued in the UAE. The law provides the legislative basis for the introduction and implementation of a Federal Corporate Tax in the UAE.

Why is UAE using Corporate Tax?

UAE has emerged as the world capital of late and is becoming the hub for big corporates to shift their headquarters and operate globally. The introduction of corporate tax is a step towards globalization and falling in line of the world trade practices to: 

• Cement its position as a leading global hub for business and investment.
• Accelerate its development and transformation to achieve its strategic objectives. 
• Reaffirm its commitment to meeting international standards for tax transparency and preventing harmful tax practices. 

Who will be subject to the UAE Corporate Tax?

The corporate tax is applicable on “Taxable persons”. Taxable persons mean one of the following:

• UAE Companies and other Juridical persons (non-person legal entities) that are incorporated or effectively managed and controlled in the UAE. 
• Natural persons (Individuals) who conduct a business or business activity in the UAE [as specified in a Cabinet Decision, to be issued later].
• Non-resident Juridical persons (Foreign Legal Entities) that have a ‘Permanent Establishment’ in the UAE. 
• Juridical persons established in a UAE Free Zone. They need to comply with the requirements set out in the Corporate Tax law.  

However, a free zone person that meets the conditions to be considered as Qualifying Free Zone Person can benefit from a corporate tax rate of 0% on their qualifying income. [The UAE corporate tax will continue to honor the corporate tax incentives currently being offered to free zone businesses that comply with all regulatory requirements and that do not conduct business set up in the UAE’s mainland].

How is a taxable person subject to Corporate Tax?

1. Residence Person

A ‘Residence Person’ is taxed on income derived from both domestic and foreign sources. These incudes companies and juridical persons that are incorporated or otherwise formed or recognized under the laws of the UAE. 

This also covers juridical persons incorporated in the UAE under either mainland legislation or applicable Free Zone regulations and juridical persons created by a specific statute. 

Foreign companies can be considered as residence persons if they are effectively managed and controlled in the UAE. This shall be determined with regard to the specific circumstances of the entity and its activities, i.e., the determining factor would be – where key management and commercial decisions are in substance made. 

Natural persons would be subject to tax as residence person on domestic and foreign sources BUT only in so far as such income derived from a business or business activity conducted by the natural person in the UAE.

2. Non-Residence Person

Non-residence person will be taxed only on income derived from sources within UAE. 

Juridical persons who have a permanent establishment in the UAE and who derive state sourced income will be taxed. 

Therefore, Non-residence persons will be subject to Corporate Tax on taxable income that is attributable to their permanent establishment.   

Certain UAE sourced income of a Non-Resident Person that is not attributable to a Permanent Establishment in the UAE will be subject to Withholding Tax at the rate of 0%.

What is a Permanent Establishment? 

The main purpose of the Permanent Establishment concept in the UAE Corporate Tax Law is to determine if and when a foreign person has established sufficient presence in the UAE to warrant the business profits of that foreign person to be subject to Corporate Tax.

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.

Article 5, OECD Model Tax Convention, thereby states that – 

Permanent Establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on. This includes:

• A place of management 
• A branch
• An office
• A factory
• A workshop
• A mine – oil or gas, quarry or any other place of extraction of natural resources. 

It DOES NOT include:

• Use of facilities solely for storage, display or delivery of goods and merchandise of the enterprise. 
• Maintenance of a stock of goods or merchandise for storage, display or delivery purposes. 
• Maintenance of a stock of goods or merchandise for the purpose of processing by another enterprise.
• Maintenance of a fixed place of business solely for the purposes of purchasing goods/merchandise or of collecting information
• Fixed place solely for the purposes of carrying on, for the enterprise any other activity of a preparatory or auxiliary character. 

What is the scope of UAE Corporate Tax law?

The corporate tax will apply to the following:

• All businesses and individuals conducting business activities under a commercial license in the UAE.
• Foreign entities and individuals only if they conduct a trade or business in the UAE in an ongoing or regular manner.
• Banking operations.
• Businesses engaged in real estate management, construction, development, agency, and brokerage activities.

Who are exempted from Corporate Tax?

• Government entities and government-controlled entities [as specified in a Cabinet decision].
• Extractive Business and non-extractive natural resource businesses [Subject to meeting certain conditions & exempted if notified to the Ministry of Finance]. 

Businesses engaged in the extraction of natural resources are exempt from CT as these businesses will remain subject to the current Emirate level corporate taxation.

• Entities qualifying for Public Benefit [Exempted if listed in a Cabinet decision].
• Public or Private persons; social security funds; funds qualifying for investment; wholly owned and controlled subsidiaries of a government entity; a government-controlled entity; [exempted if applied to and approved by the ‘Federal Tax Authority’; subject to meeting certain conditions].
• Qualifying intra-group transactions and reorganizations will not be subject to CT, provided the necessary conditions are met.

What income of the entities / businesses is exempted?

The main purpose of certain income being exempt from corporate tax is to prevent ‘Double Taxation’ on certain types of income. 

• Dividends, Capital gains, royalties and other investment returns earned from domestic and foreign shareholdings. 
• An individual earnings salary and other employment income, whether received from the public or the private sector
• Interest and other income earned by an individual from bank deposits or saving schemes
• Investment in real estate by individuals in their personal capacity
• Dividends, capital gains and other income earned by individuals from owning shares or other securities in their personal capacity.

What expenses are Deductibles?

All legitimate business expenses incurred wholly and exclusively for the purposes of deriving Taxable Income will be deductible, although the timing of the deduction may vary for different types of expenses and the accounting method applied. For example, for capital assets, expenditure would generally be recognized by way of depreciation or amortization deductions over the economic life of the asset or benefit.

Furthermore, expenditure that has a dual purpose, such as expenses incurred for both personal and business purposes, will need to be apportioned with the relevant portion of the expenditure treated as deductible if incurred wholly and exclusively for the purpose of the taxable person’s business.

Certain expenses which are deductible under general accounting rules may not be fully deductible for Corporate Tax purposes. These will need to be added back to the Accounting Income for the purposes of determining the Taxable Income. 

Examples of expenditure that is or may not be deductible (partially or in full) include:

What is the rate of Corporate Tax?

The Corporate Tax is applied to the net income of companies and other commercial entities, as follows:

• Zero percent on business profits up to and including the threshold of AED 375,000 to support small businesses and start-ups, and
• Nine percent on taxable business profits exceeding the threshold of AED 375,000 beginning from the first financial year (for existing companies, beginning on June 1, 2023).

What is the 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.

How to calculate the Corporate Tax?

The calculation and payment of corporate tax is done through the filing of a corporate tax return with the Federal Tax Authority by the taxable person. 

The starting point for calculating taxable income is the Taxable person’s accounting income (i.e., Net profit or loss before tax) as per their financial statements (Minus Exemptions and deductibles).

Provision regarding Withholding Tax in the Corporate Tax Law?

• Withholding tax is an amount that is directly deducted from the employee’s earnings by the employer and paid to the government as part of individual’s tax liability. Withholding taxes exist in many tax systems and typically apply to the cross-border payment of dividends, interest, royalties and other types of income. 
• Under the UAE corporate tax, 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%).

Provision regarding 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. 

Provision regarding 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.

Will corporate tax apply to a freelance?

Individuals holding the freelance permit under the self-sponsorship and earning income in excess of the threshold will be subject to Corporate Tax. 

ADMINISTRATION OF CORPORATE TAX

Who should register for UAE Corporate Tax?

All taxpayers, as prescribed by the Minister, will be required to register for UAE corporate tax and obtain a Corporate Tax Registration Number. Furthermore, tax payers who are already registered for VAT are also required to register for UAE corporate tax (and update their details, if required). 

The Federal Tax Authority may also request certain Exempt persons to register for UAE corporate Tax. 

When to register for UAE Corporate Tax?

Taxpayers are required to register before they file their first corporate tax return.

Is there a registration threshold for UAE Corporate Tax?

There is NO registration threshold for UAE corporate tax. 

How to register for UAE Corporate Tax?

Taxpayers will be able to electronically register for UAE CT through the website of the Federal Tax Authority. 

Do doormat companies and companies with no profit need to complete a UAE Corporate Tax return?

Taxpayers are required to file a corporate tax return, irrespective of the level of income or the status of the company. Therefore, every taxpayer is required to file a corporate tax return irrespective of whether they have made a profit or not. 

It is also suggested for the taxpayers to file a corporate tax return with tax losses in order to ensure that these losses can be used to reduce taxable income of future years. 

How to file a Corporate Tax return?

UAE corporate tax return will need to be filed electronically.

NEW INTEGRATION PLATFORM “EMARATAX” – UAE FEDERAL TAX AUTHORITY

Now live, EmaraTax was launder by the Federal Tax Authority of the UAE with a aim to enhance the way the taxpayers can access the FTA’s services, pay their taxes and obtain refunds. The new platform also greatly enhances the ability of the FTA to administer taxes in the UAE, enables better, faster decision-making and earlier engagement with taxpayers that need support. 

Individual taxpayers, tax agents, legal representatives, foreign missions and diplomats, custom bodies and verification agencies – all benefit from the range of new developments that Emaratax brings to life. 

The Federal Tax Authority has launched early registration for corporate tax through this platform for digital tax services. The early registration period is available from January to May for certain categories of companies operating in the UAE to whom FTA will be sending invitations to register early. 

Afterwards, the FTA will announce when registration will be open for other companies and businesses – however, priority will be given to companies and businesses that have a financial year starting on June 1, 2023. 

How to register to EMARATAX?

If you already have an account with the FTA (Federal Tax Authory), you will need to reset your password before you can login to EmaraTax for the first time. 

Afterwards, you can successfully login into EmaraTax with your new credentials.