The UAE has recently released a series of ministerial decisions concerning Corporate Tax, which come into effect just a little over a week before the planned launch on June 1st.
These decisions, issued by the Ministry of Finance, address matters such as exemptions and payment procedures applicable to companies operating in the UAE.
The UAE Ministry of Finance has unveiled three new Ministerial Decisions in accordance with Federal Decree-Law No. 47 of 2022, which pertains to the taxation of corporations and businesses.
The three new Ministerial Decisions include Ministerial Decision No.114 of 2023 on the Accounting Standards and Methods, Ministerial Decision No.115 of 2023 on Pensions and Social Security Funds, and Ministerial Decision No.116 of 2023 on Participation Exemption.
H.E. Younis Haji Al Khouri, Undersecretary of the Ministry of Finance, said: “The three new decisions aim to enhance the flexibility of UAE’s Corporate Tax regime and ensure a supportive business environment for all sectors.”
“The decisions cover several important aspects related to private regulated pension funds and social security funds normally exempt from corporate tax in other countries.”
“Designating International Financial Reporting Standards as the applicable accounting standards and further simplifying accounting processes for SMEs reflects the Ministry of Finance’s commitment to imposing a minimal compliance burden for businesses in scope of the Corporate Tax regime.”
“In addition, the participation exemption will prevent double corporate tax on the profits of one entity and eliminate international double taxation.”
The decision regarding Pensions and Social Security Funds outlines additional requirements for private regulated pension funds and social security funds in the UAE to be exempted from Corporate Tax. The purpose of this decision is to ensure that the UAE’s private pension and social security funds receive international recognition for their tax-exempt status when investing abroad and to enable them to benefit from double tax treaties.
Furthermore, the decision specifies the maximum contributions per beneficiary and mandates an annual confirmation of compliance by a statutory auditor to ensure the integrity of the exemption.
Regarding Accounting Standards and Methods, the decision provides clear guidelines for businesses in the preparation of their Financial Statements. These statements serve as the basis for calculating taxable income for corporate tax purposes.
The decision affirms that International Financial Reporting Standards (IFRS) are the applicable accounting standards in the UAE and must be followed by larger businesses with revenues exceeding AED 50M. Small and medium-sized businesses with revenues below AED 50M have the option to apply IFRS for SMEs.
To simplify compliance, the decision permits businesses with revenues below AED 3M to use cash basis accounting.
Furthermore, the decision offers clarification on the concept of consolidated financial statements for tax grouping purposes. In such cases, the financial statements will combine the standalone financial statements of the parent company and each subsidiary (within the tax group) after eliminating intra-group transactions.
Regarding Participation Exemption, the decision grants Corporate Tax exemptions on dividends, profit distributions, and capital gains from a Participating Interest. A Participating Interest is defined as an ownership interest of 5% or more in another entity’s shares or capital, held for a minimum of 12 months.
The exemption applies if the subsidiary is located in a jurisdiction with a Corporate Tax rate of at least 9%, or if it can demonstrate an effective tax rate of at least 9% on its profits, income, or equity.
Additionally, the decision specifies that the relief will be applicable to various ownership interest types, including preferential shares, ordinary shares, redeemable shares, membership interests, and partner interests, provided that the aggregated acquisition cost of these ownership interests is equal to or exceeds AED 4M.
This decision ensures that UAE-based companies with specific investments in foreign entities meeting the required conditions will not be subject to UAE Corporate Tax on those investments.
