INTRODUCTION TO CORPORATE TAX
The Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses was issued by the United Arab Emirates on 09 December 2022.
The Corporate Tax Law provides the legislative basis for the introduction and implementation of a Federal Corporate Tax in the UAE and is effective for financial years starting on or after 1 June 2023.
WHAT IS CORPORATE TAX?
Corporate Tax is a form of direct tax levied on the net income of corporations and other businesses.
Corporate Tax is sometimes also referred to as “Corporate Income Tax” or “Business Profits Tax” in other jurisdictions.
WHO IS SUBJECT TO CORPORATE TAX?
Broadly, Corporate Tax applies to the following “Taxable Persons”:
●UAE companies and other juridical persons 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 in due course; and
●Non-resident juridical persons (foreign legal entities) that have a Permanent Establishment in the UAE.
Juridical persons established in a UAE Free Zone are also within the scope of Corporate Tax as “Taxable Persons” and will 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 a Qualifying Free Zone Person can benefit from a Corporate Tax rate of 0% on their Qualifying Income.
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%). Withholding tax is a form of Corporate Tax collected at source by the payer on behalf of the recipient of the income. Withholding taxes exist in many tax systems and typically apply to the cross-border payment of dividends, interest, royalties and other types of income.
WHO IS EXEMPT FROM CORPORATE TAX?
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Automatically exempt |
· Government entities · Government controlled entities that are specified in a cabinet decision |
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Exempt if notified to the ministry of finance |
· Extractive business · Non-extractive natural resources business |
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Exempt if listed in a cabinet decision |
· Qualifying public benefit entities |
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Exempt if applied to and approved by the FTA |
· Public or private pension and social security finds · Qualifying investment funds · Wholly-owned and controlled UAE subsidiaries of a government entity, a government-controlled entity, a qualifying investment fund, or a public or private pension or social security fund |
WHAT EXPENSES ARE DEDUCTIBLE?
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· Bribes · Fines and penalties(other than amounts awarded as compensation for damages or breach of contract) · Donation, grants or gifts made to an entity that is not a qualifying public benefit entity · Dividends and other profits distributions · Corporate tax imposed under the corporate tax law · Expenditure not incurred wholly and exclusively for the purposes of the taxable person’s business · Expenditure incurred in deriving income that is exempt from corporate tax |
No deduction |
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· Client entertainment expenditure |
Partial deduction of 50% of the amount of the expenditure |
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· interest expenditure |
Deduction of net interest expenditure exceeding a certain de minimis (The de minimis limit is the threshold below which the exempt input tax is regarded as insignificant) threshold up to 30% of the amount of earnings before the deduction of interest, tax, depreciation and amortisation |
WHAT IS CORPORATE TAX RATE?
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Resident Taxable Persons |
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Taxable income not exceeding AED 375,000 (this amount is to be confirmed in a Cabinet Decision) |
0% |
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Taxable income exceeding AED 375,000 |
9% |
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Qualifying Free Zone Persons |
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Qualifying income |
0% |
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Taxable income that does not meet the qualifying income definition |
9% |
HOW TO CALCULATE THE TAXABLE INCOME OF A TAX GROUP?
To determine the Taxable Income of a Tax Group, the parent company must prepare consolidated financial accounts covering each subsidiary that is a member of the Tax Group for the relevant Tax Period. Transactions between the parent company and each group member and transactions between the group members would be eliminated for the purposes of calculating the Taxable Income of the Tax Group.
CORPORATE TAX TIMELINE
