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Corporate tax or corporation tax was formally introduced in the UAE via Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses dated on 09 December 2022.
The introduction and implementation of a Federal Corporate Tax (“Corporate Tax”) in the UAE is a major step in achieving the fiscal objectives including fiscal broadening. The applicability of the CT is for financial years starting on or after 1 June 2023. E.g. if a business has its financial year from July to June, their first tax year will be from 1st July 2023 to June 2024. However, if financial year of a business is January to December, its first tax year will be January 2024 to December 2024.
The UAE has introduced a competitive corporate tax regime vis-à-vis other regional counterparts. The certainty of a competitive Corporate Tax regime that adheres to international standards, together with the UAE’s extensive network of double tax treaties, will cement the UAE’s position as a leading jurisdiction for business and investment.
In next a few paragraphs we will be discussing about the applicability of the UAE CT law in terms of who will be taxed, what income will be taxed, when to start working on tax planning and registration and how to prepare for corporate tax.
Who will be Taxed?
The first and foremost question is who is coming under the ambit of UAE Federal CT Law, is it companies only or individuals as well? is it resident persons or non-resident persons as well? is it mainland entities only or free zone entities as well? There is no straightforward answer to these questions.
All juridical persons established in the UAE or controlled in the UAE will be required to assess the requirements of being falling under the UAE CT Law hence considered taxable persons. It is pertinent to mention here that foreign juridical persons being strategically controlled from the UAE (POEM -Place of Effective Management) also need to consider implications of the UAE CT law.
In case of resident natural persons having business activity and income derived from the UAE, also need to consider the requirements for registering and eventually paying tax as per applicable tax slabs.
UAE CT Law has clear guidelines for non-resident UAE entities like permanent establishments or nexus of foreign companies. In case of PEs of foreign businesses, these need to register and fulfil corporate tax compliance requirements.
Free zone entities will also be coming under the ambit of UAE Federal Corporate tax law. Law, however, has given due consideration to free zone tax holiday status of qualifying free zone persons (s) with certain conditions. QFZPs must have a qualifying business income (Cabinet decision is awaited on the definition of qualifying business income). As per our insight it should be income derived from outside UAE and from another qualifying free zone person. The pre-requisites for a QFZP to avail such tax holiday include 1. Adequate substance in the state 2. Derive qualifying income, 3. No election to be subject to normal tax person i.e. to be taxed @9 percent, 3. Can not form or become part of a tax group & comply transfer pricing requirements as per UAE tax law.
UAE CT law has also comprehensively covered exempt persons and given categories of the exempt persons. There are two kinds of exempt persons, one who do not need to apply and register for corporate tax like Government entities etc. and the other ones which must apply for exemption like qualifying investment managers and have to maintain their exemption status by complying certain requirements. Similarly, there is a small business relief whereby all taxable persons having annual income of AED3 million or less in a tax year and immediately preceding year will be considered exempt for UAE Federal CT. Small Business Relief is intended to support start-ups and other small or micro businesses by reducing their Corporate Tax burden and compliance costs. As per Ministerial Decision to qualify for such relief, the taxable person needs to be 1. a resident taxable persons 2. taxable person is not a qualifying free zone person and 3. Not a member of multinational group having consolidated annual revenue of AED3.150Billion. The AED3 million revenue threshold will apply to tax periods starting on or after 1 June 2023 and will only continue to apply to subsequent tax periods that end before or on 31 December 2026.