The UAE has long been known for being one of the few countries with no tax on corporate income, attracting businesses from all around the world to its shores. However, a groundbreaking shift was introduced in December when the UAE Ministry of Finance issued The Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses on December 9, 2023, coming into effect for financial years starting on or after June 1, 2023. This new law entails a Federal Corporate Tax (CT) of 9% which will affect every company in the UAE and foreign businesses established within the territory, including freezones. Although this marks a significant shift in the UAE’s tax landscape, the nation remains the GCC country with the lowest tax rate in the region. Here is everything you need to know about the long-awaited law:
Under the new Corporate Tax Law, businesses will fall under one of three categories: Taxable Person, Exempt Person, or Qualifying Free Zone Persons (QFZP).
A Taxable Person is either a Resident Person or a Non-Resident Person.
Resident Person:
Non-Resident Person:
A branch in UAE of a Person shall be treated as one and the same taxable person.
The following Persons shall be exempt from the CT:
The exemption may extend to an entity incorporated in the UAE that is wholly owned and controlled by an exempt person, if it:
Certain exemptions (including for qualifying investment funds) will be subject to an application process to the Federal Tax Authority (FTA)
The Corporate Tax Law introduces a “Qualifying Free Zone Person” (QFZP).
A QFZP is a company or branch registered in a free zone that maintains adequate substance in the UAE, which is broadly defined as a company or branch registered in a free zone that:
The taxable income for a Tax Period will be the accounting net profit (or loss) of the business, after making adjustments for certain items specified in the Corporate Tax Law.
The accounting net profit (or loss) of a business is the amount reported in its financial statements prepared in accordance with internationally acceptable accounting standards.
Adjustments to the accounting net profit (or loss) will need to be made for the following items
The Financial Year of a Taxable Person shall be the Gregorian calendar year, or the (12) twelve- month period for which the Taxable Person prepares financial statements.
Any income derived by a Qualifying Free Zone Person that is subject to CT. CT shall be imposed on a Qualifying Free Zone Person at the following rates:
CT will be charged on the annual taxable income of a business as follows:
The UAE’s corporate tax system requires UAE entities and other businesses to prepare their financial statements using accounting standards that are accepted in the country. The most commonly used accounting standard in the UAE for this purpose is the International Financial Reporting Standards (IFRS).
The following income is exempt from UAE CT:
The UAE’s corporate tax system has a participation exemption regime that exempts capital gains earned from a Participating Interest from being subject to taxation. Additionally, there are provisions for tax relief on capital gains that may arise from intra-group transfers, reorganization, and restructuring transactions.
However, any other capital gains that do not fall under these exemptions would be considered ordinary income and would be subject to corporate taxation in the UAE.
The participation exemption regime in the UAE’s Corporate Tax Law aims to prevent double taxation within a group by exempting dividends and capital gains that have already been taxed at the underlying group company level.
Under this regime, dividends received from UAE entities and foreign subsidiaries that qualify as a “Participation” are fully exempt from taxation, provided that the UAE shareholder company owns a 5% or greater ownership interest (i.e., a “Participating Interest”) for at least 12 months and meets the participation exemption regime’s conditions.
Likewise, capital gains on the sale of shares in domestic and foreign entities are also exempt from corporate taxation if they meet the same minimum ownership threshold, duration, and other conditions mentioned above.
A Tax Loss occurs when a business’s total deductions are more than its total taxable income, resulting in negative taxable income. Such losses can be used to reduce the taxable income of future periods, up to a limit of 75% of the taxable income in each future period. Any unused losses can be carried forward and used to offset future taxable income indefinitely.
For instance, suppose a company has taxable income of AED 50,000 and tax losses carried forward from previous years of AED 70,000. It can utilize 75% of its losses carried forward, which is AED 52,500, to lower its taxable income to AED 22,500 in the current Tax Period. As a result, the company’s unused tax losses will decrease to AED 17,500 (AED 70,000 – AED 52,500), which it can carry forward to offset taxable income in future Tax Periods.
Similar to other taxes in the UAE (e.g. VAT), businesses will be subject to penalties for non- compliance with the UAE CT regime.
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