The below summary is based on the Public Consultation Document released by the Ministry of Finance and the final CT Law and Regulations are still expected to be released soon.
What is the rationale for introducing Corporate Tax (CT) in UAE?
A competitive CT regime based on international best practices will solidify the UAE’s position as a leading global hub for business and investment, as well as accelerate the UAE’s development and transformation to meet its strategic goals. The implementation of a CT regime reaffirms the UAE’s commitment to meeting international tax transparency standards and preventing harmful tax practices. The proposed CT regime will be implemented for financial years beginning on or after June 1, 2023.
Tax rates applicable in Corporate Tax (CT)
• 0% tax rate – for taxable income up to AED 375,000 to support small businesses and startups and for qualifying Free Zone Persons
• 9% tax rate – for taxable income exceeding AED 375,000
Note: There can be different tax rates for large multinationals that meet specific criteria set with reference to ‘Pillar Two’ of the OECD Base Erosion and Profit Shifting project
How will CT impact Free Zones?
Companies and branches established in a Free Zone are subject to UAE CT. Free Zone persons can benefit from a 0% tax rate if they only conduct qualifying transactions within FZ and with the Mainland. Persons doing business in the Free Zone with Mainland companies (except in qualifying transactions) will disqualify the FZ entity from receiving a 0% tax benefit on all of their income. Free zones should be audited, registered for CT, and file CT returns.
Taxable persons and income eligibility in CT
- Natural Person – includes sole establishments, freelancers, etc. Taxable income – Includes commercial activities in UAE, excludes personal income from employment, investment, etc.
- Legal Person (Resident) – includes legal entity established in UAE and foreign entity effectively controlled in UAE is considered Legal Resident Persons. Taxable Income – Worldwide Income, with an exemption on income earned from foreign branches/subsidiaries.
- Non-Resident – Non-Resident Entity will be taxed on business from their Permanent Establishment in UAE and their UAE sourced income.
What effect does CT have on various business groups?
The UAE CT regime will allow tax grouping for essentially wholly-owned groups of companies (common shareholding of at least 95%) and be treated as Single Taxable persons. UAE CT will also allow the transfer of losses between group companies that are 75% or more commonly owned. Certain qualifying intra-group transactions (like the transfer of assets and liabilities) will not attract UAE CT. To facilitate mergers, spin-offs, and other corporate restructuring transactions, the UAE CT regime will provide relief in form of tax exemption or deferral. All above benefits are subject to fulfillment of provided conditions.
How does the UAE CT regime hold transfer pricing?
The UAE CT regime will include transfer pricing rules to ensure that the price of a transaction is not influenced by the relationship between the parties involved. The UAE will apply the internationally recognized “arm’s length” principle to transactions and arrangements involving related parties and connected persons. This will apply to domestic as well as international transactions. UAE businesses must follow transfer pricing rules and keep documentation to support expected reporting.
What is the process for registration, filing, and compliance of CT?
A company must register with the Federal Tax Authority within the timeframes specified. CT returns and supporting schedules must be submitted, and any tax liability (if any) must be paid within 9 months of the end of the applicable tax period. CT returns must be filed once a year. Tax Group has the option of filing a single consolidated tax return.
How can we help you in preparing for Corporate Tax?
- Detailed impact assessment.
- Corporate structure review and potential changes necessary.
- Mapping of the related party transactions and impact of Transfer Pricing on such transactions.
- Identifying Connected Persons and the impact of Transfer Pricing on such transactions.
- Review of the Accounting process, policies, and documentation.
- Evaluate System readiness for data capturing and reporting.
- In the case of Free Zone, mapping transactions to identify eligibility to claim 0% tax benefit.
- Understand the overall impact on business operations and cash flows.
- Have an implementation plan to be ready to be compliant with all reporting requirements.
– Khushboo Agarwal , Partner – Tax and Compliance
Fincirc International Management
Khushboo.agarwal@fincirc.com