Corporate Tax in the UAE

In January 2022, Ministry of Finance proposed the introduction of Corporate Tax (CT) on the net income of businesses. Also referred to as “Corporate Income Tax (CIT)” or “Business Profits Tax” in other jurisdictions. The tax will become applicable either on 1 June 2023 or on 1 January 2024, depending on the financial year followed by the business. CT will be applied across all the emirates in the UAE.

Except Bahrain, the UAE has introduced the lowest corporate income tax rate within the GCC region at a standard rate of 9%. UAE aims to achieve its strategic objectives and accelerate its transformation and development.

Introduction about Corporate tax

Introduction about Corporate tax

What is Corporate tax (CT)?

Corporate tax is a type of direct tax charged on the net income of corporations and other business entities. Corporate tax is governed by Federal Decree-Law No.60 of 2023, amending certain provisions of the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses. 

The CT will be applicable from the financial year that starts on or after 1 June 2023.

Taxable Person

Resident

    • Entity incorporated in the UAE including Free Zone

    • Foreign Company that is managed and controlled in UAE

    • Natural individual who conducts business in the UAE.

Non-Resident

    • Permanent establishment in the UAE.

    • Earns UAE sourced income.

    • Has Nexus in the UAE.

CT Rate

As per Ministry of Finance, CT rates are:

    • 0% for taxable income up to AED 375,000

    • 9% for taxable income above AED 375,000 and

    • All MNEs shall be subject to a different tax rate provided they fall under Pillar 2 of the BEPS2.0 framework.

Taxable Income

The rates are applied on taxable income. Taxable Income for a tax period is determined based on the accounting profit or (loss) after making certain adjustments.

The following adjustments needs to be made to the Accounting Profit or (Loss) for arriving at Taxable Income:

    1. Unrealized Gain/Loss

    1. Exempt Income

    1. Any Incentives/Tax Reliefs

    1. Deductions not allowable

    1. Transfer Pricing Adjustments

    1. Intra-Group Transfers

    1. Any other adjustments specified by Ministry

Scope

The following business entities are exempted from CT (subject to fulfillment of certain requirements):

    1. Government Entity.

    1. Government Controlled Entity.

    1. A person engaged in an Extractive Business (Article (7) of the Decree-Law).

    1. A person engaged in a Non-Extractive Natural Resource Business (Article (8) of the Decree-Law).

    1. A Qualifying Public Benefit Entity (Article (9) of the Decree-Law).

    1. A Qualifying Mutual Fund (Article (10) of the Decree-Law).

    1. A public pension or social security fund, or a private pension or social security fund that is regulated by the competent authority in the State and that meets any other conditions that may be prescribed by the Minister.

    1. Any other person as specified in the decision issued by the Cabinet.

Exempt Income-Article 22

The following income and related expenses shall not be considered in determining the Taxable Income and shall be exempt from UAE Corporate Tax subject to the fulfillment of relevant conditions to the respective article:
1. Dividends and other profit distributions received from a juridical person that is a Resident Person

2. Dividend or profit distribution received from a foreign juridical person in which the recipient has Participating Interest
3. Any other income from an Equity participation as specified in Article (23) of the Decree-Law.
4. Income of a Foreign Permanent Establishment that meets the condition of Article (24) of the Decree-Law.
5. Income derived by a Non-Resident Person from operating aircraft or ships in international transportation that meets the conditions of Article (25) of the Decree-Law. 

Corporate Tax on Free Zone Persons

The Federal Tax Authority (FTA) has issued a guide outlining the application of Corporate Tax to Free Zone Persons in line with the Free Zone Corporate Tax regime, which enables Qualifying Free Zone Persons to benefit from a 0% Corporate Tax rate on Qualifying Income.

According to the guide, if a Free Zone Entity meets the conditions to be identified as Qualifying Free Zone Person, then it will be subject to 0% CT rate on its Qualifying Income. The non-qualifying income will be subjected to 9% CT tax.  To qualify for the Qualifying Free Zone Person, the Free Zone person must:

    • Maintain adequate substance in the UAE.

    • Derive ‘Qualifying Income’.

    • Not have made an election subject to CT at the standard rates and.

    • Comply with the transfer pricing and documentation requirements under the CT Law.

    • Your non-qualifying income should be below 5% of total revenue or AED 5 million, whichever is lower.(De-minimis threshold requirement)

    • Prepare and maintain audited financial statements in accordance with International Financial Report Standards(IFRSs). {The Alchamii Auditing of Accounts specializes in auditing of financial statements in accordance with IFRSs}

    • Any other condition which may be specified by the respective free zone.

According to the UAE Ministry of Finance, qualifying activities are particular company operations that qualify for tax breaks under the country’s corporate tax laws. As per the Ministerial Decision No. (265) of 2023, these undertakings encompass:

    • Manufacturing of goods or materials

    • Processing of goods or materials

    • Trading of Qualifying Commodities

    • Holding of shares and other securities for investment purposes

    • Ownership, management, and operation of Ships

    • Reinsurance services

    • Fund management services

    • Wealth and investment management services

    • Headquarter services to Related Parties

    • Treasury and financing services to Related Parties

    • Financing and leasing of Aircraft

    • Distribution of goods or materials in or from a Designated Zone

    • Logistics services. 

    • Any activities that are ancillary to the above Qualifying Activities 

In addition, the Cabinet Decision lists seven other activities under the heading of “Excluded Activities.” Businesses operating in free zones that engage in certain activities could not be qualified to benefit from the 0% tax rate. Refer to the link (https://rb.gy/qai6nd) for understanding more

Tax Loss

Tax loss can be offset against the Taxable Income up to a maximum of 75% of the Taxable Income in each of the future periods. Any unused tax loss can be carried forward and used against Taxable Income of future tax periods indefinitely.

Groups

UAE entities can apply to form a ‘Tax Group’ and be treated as a single entity for CT purposes provided, they meet certain conditions as follows.

    • The parent company (directly or indirectly):

    • owns at least 95% of share capital in subsidiary,

    • holds at least 95% of voting rights in subsidiary and

    • entitled to at least 95% of the profit and net assets in subsidiary.

    • Both the parent and subsidiary must be a resident juridical person, have the same Financial Year and prepare their financial statements using the same accounting standards.

    • Tax Group cannot include Exempt Person or Qualifying Free Zone Perso

       

       

       

       

Participation Exemption

Introduction

Participating Interest is the long-term ownership in a juridical person which suggest some sort of controlling interest over Participation. CT exemptions are provided on dividends, profit distribution and capital gains from Participating Interest. The overall aim of Participation Exemption is to avoid double taxation on the same amount which would have been taxed before. The Taxable Person must pass certain test to qualify as Participation Exemption, which are as follows:

  1. Ownership Interest Test

The Taxable Person must hold an ownership interest in the shares or capital of a Participation. An ownership interest can be any equity that holds the rights to the profits and liquidation proceeds of the Participation. It must be treated as an equity interest under the Accounting Standards applied by the Taxable Person holding the ownership interest. The ownership interest may include ordinary shares, preference shares, redeemable shares, membership and partner interests and more.

  1. Minimum Ownership Test

A Participation Interest is when there is ownership of 5% and more of the shares or capital of the juridical person. Less than 5% will not be qualified for Participation Exemption unless it meets minimum acquisition cost.

  1. Holding Period Test

A participation Interest must be held or intended to be held for continuous period of at least for 12 months. The main reason for specifying 12 months is to ensure that no Taxable Person who is holding less than 5% of Participating Interest increase their holding just before the income is being received. This ensures that the benefit is available to long-term holdings only.

  1. Minimum Acquisition Cost Test

This is an alternative requirement of minimum ownership test. Participation Exemption will be applicable if the acquisition cost of the ownership interest is equal or greater than AED 4 million. This would generally provide the holder with some degree of control or influence over the entity.

The above threshold is aggregate of:

  • value of the equity interest or capital contribution made or consideration paid in

cash or in kind

  • value of any subsequent equity interest and capital contributions made less the

value of any equity interest or capital repayments made by the Participation to the

Taxable Person.

  • Expenditure (Professional fees, Due diligence costs, Litigation costs, Commissions and brokerage fees, Stamp duty, registration duties and other irrecoverable taxes, Appraisal and valuation costs, Refinancing costs) incurred in relation to the acquisition or transfer of ownership interests that shall be capitalised as part of the acquisition cost of the ownership interest in the Participation.

The acquisition cost of ownership interest in a foreign Participation is determined using the exchange rate on the date of acquisition or formation.

Where an ownership interest is partly sold, transferred, disposed of, the aggregated acquisition cost shall be reduced in proportion to the average acquisition cost attributable to that part.

  1. Subject to Tax Test

The Participation must be subject to a CT or equivalent of at least 9% on profits, income or equity. The 9% condition may be waived if the Participation is a holding company satifies the following:

  • The Participation is directed and manged in its relevant jurisdiction.
  • Comply with all administrative requirements of document submission.
  • Have adequate substance to acquire and hold shares or equitable interest.
  • The Participation does not conduct any other activity other than ancillary withholding of shares.
  1. Entitlement to Profits and Liquidation Proceeds Test

The owner must be entitled to receive at least 5% of the profits and liquidation process. Profit available for distribution are determined by the corporate or the legislation which governs the formation or existence of the Participating Interest, which may either be UAE or foreign jurisdiction. It is usually based on the accumulated realised net profits based on the relevant accounting standard.

  1. Asset Test

A Participating Interest does not qualify for the Participation Exemption if more than 50% of the Participation’s direct or indirect assets or entitlements that by themselves would not qualify for Participation Exemption. The test is intended to prevent the use of the benefit by the Taxable Person that does not qualify for the Participation Exemption.

Exemption from Taxable Income

  • Dividends and other profit distributions received from a foreign Participation that is not a Resident person.
  • Gains or losses on the transfer, sale or other disposals of a Participating Interest derived after expiry of the 12 months.
  • Foreign exchange and impairment gains or losses in relation to a Participating Interest.

Liquidation Proceeds and Losses

For CT purposes, the Participation shall be considered liquidated if it ceases to have legal existence. A liquidation loss shall be calculated as the difference between the cost of acquisition of Participating Interest, adjusted for any disposals and the fair value of the liquidation proceeds received by the Taxable Person.

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