On 9 December 2022, the UAE released the long-awaited Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (“Corporate Tax Law” or “CT Law”).
A number of the basic aspects of the CT Law were already publicised through the public consultation document issued by the Ministry of Finance on 28 April 2022 (the “PCD”).The CT Law is largely consistent with the PCD but several areas are yet to be clarified. This client alert summarizes the key issues of the new CT Law.
The CT Law will be effective for financial years commencing on or after 1 June 2023. This means that businesses with a calendar year as the financial year will have their first tax year from 1 January 2024 onwards. Tax will be due nine months after the end of the financial year.
Taxation Rate and Calculation of Taxable Income
Corporate tax will be charged on the annual taxable income of a business as follows:
- 0% if the taxable income does not exceed the threshold (to be specified by the Cabinet);
- 9% if the taxable income exceeds the threshold.
Though the Cabinet is yet to officially prescribe the taxation threshold, it is widely understood that the threshold will remain at AED 375,000 as indicated in the PCD.
Taxable income will be determined based on the net profit or loss as per a company’s financial statements prepared in accordance with accounting standards that are accepted in the UAE.
The CT Law applies wide sourcing rules for taxable income, where, for example, income may be taxed irrespective of whether it is derived from inside or outside of the UAE.
Scope of Application
Corporate income tax will be applicable for “Taxable Persons”:
- Resident Persons that are incorporated or managed and controlled in the UAE (including free zone companies).
- Non-Resident Persons that have a permanent establishment in the UAE, derive income from sources in the UAE, or that otherwise have a nexus in the UAE.
- Individuals who conduct business activities in the UAE; including, where applicable, through an unincorporated partnership.
Notably, Free Zone companies, branches of foreign companies, and unincorporated partnerships are included within the definition of Taxable Persons.
Corporate Tax in Free Zones
Most Free Zone companies operate under a “tax free guarantee” provided by the Emirate in which it is registered, but this guarantee does not extend to the federal tax law of the UAE. CT Law will apply to free zone companies except for free zone companies that can meet the criteria of a “Qualifying Free Zone Person,” and under the CT Law can benefit from 0% taxation on their “Qualifying Income” only. The requirements to be a Qualifying Free Zone Person are as follows:
- Maintain adequate substance in the UAE;
- Derive Qualifying Income;
- Not have elected to be subject to corporate tax at the standard rates;
- Comply with Arm’s Length Principles (relating to transactions between related and connected parties) and transfer pricing requirements under the CT Law.
Qualifying Income is yet to be defined in future regulations.
If a free zone company does not meet all of the prescribed criteria, it will be subject to the standard taxation rates.
There are exemptions provided under the CT Law where corporate income tax will not apply, either automatically or by way of an application.
Article 4 of the CT Law defines “Exempt Persons” to include, amongst others:
- Government and government-controlled entities unless conducting any business or business activity under a license.
- Persons engaged in extractive business (these are subject to separate Emirate level taxation) and certain non-extractive natural resources business that meet the prescribed conditions under the CT Law.
- Certain qualifying investment funds, pension or social security funds, charities and public benefit organizations that are granted exemptions upon application to the competent authorities.
- Companies owned by an ‘Exempt Person.’
All Taxable Persons, irrespective of income thresholds, must register with the Federal Tax Authority to obtain a Corporate Tax Registration Number. Timelines for registration are not yet announced. Corporate income tax returns must be filed electronically.
Several aspects of the CT Law require clarification, particularly regarding the classification of Qualifying Income.
Implementing regulations, which will clarify uncertainties, are expected for release across three competent bodies, being the Cabinet of Ministers, Ministry of Finance, and the Federal Tax Authority.