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 09 December 2022. The introduction and implementation of Federal Corporate Tax (“Corporate Tax”) in the UAE are major steps in achieving fiscal objectives, including fiscal broadening. The applicability of CT is for financial years starting on or after 1 June 2023. For example, 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 the 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 counterpart. 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 the next few paragraphs, we will be discussing 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 falls under the ambit of the UAE Federal CT Law. Is it companies only, or are individuals included as well? Is it limited to resident persons, or does it also apply to non-resident persons? Does it apply only to mainland entities, or do free zone entities also fall under its scope? 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 whether they fall under the UAE CT Law and, hence, are 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 the implications of the UAE CT law.
Natural Person
In the case of resident natural persons having business activity and income derived from the UAE, they also need to consider the requirements for registering and eventually paying taxes as per applicable tax slabs.
Permanent Establisment
The UAE CT Law provides clear guidelines for non-resident UAE entities like permanent establishments or the nexus of foreign companies. In the case of permanent establishments of foreign businesses, they need to register and fulfil corporate tax compliance requirements.
Free Zone
Free zone entities will also come under the ambit of UAE Federal Corporate tax law. However, the law has given due consideration to the tax holiday status of qualifying free zone persons (QFZPs) with certain conditions. QFZPs must have qualifying business income (the Cabinet decision is awaited on the definition of qualifying business income). According to our insights, it should be income derived from outside the UAE and from another qualifying free zone person. The prerequisites 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 at 9 percent, 4. Cannot form or become part of a tax group and must comply with transfer pricing requirements as per UAE tax law.
Exempt Persons
The UAE CT law has also comprehensively covered exempt persons and provided categories of exempt persons. There are two kinds of exempt persons: those who do not need to apply and register for corporate tax, such as Government entities, and those who must apply for exemption, like qualifying investment managers, and must maintain their exemption status by complying with certain requirements.
Similarly, there is a small business relief whereby all taxable persons having annual income of AED 3 million or less in a tax year and the 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. According to the Ministerial Decision, to qualify for such relief, the taxable person needs to be: 1. a resident taxable person, 2. a taxable person who is not a qualifying free zone person, and 3. not a member of a multinational group having consolidated annual revenue of AED 3.150 billion. The AED 3 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.
Are you looking for expert advice on managing corporate tax in the UAE? Please visit our website millennial.ae. Explore more posts now to discover the latest regulations, tax planning techniques, and compliance guidelines. Stay ahead of the game and ensure your company’s financial success in the dynamic landscape of UAE corporate taxation.