Self Assessment under the Corporate Tax in UAE
Self assessment must be made in order to understand the extent of the applicability of Corporate Tax provisions to be implemented from 01 June 2023 in UAE, to prepare for the relevant obligatory compliance requirements correctly on time.
As per the UAE Corporate Tax Law Provisions it is imposed the Taxable Person and a Taxable Person could be either a Resident Person or a Non-Resident Person. While as Resident person could be a juridical person, a natural person or as to be specifically specified under the law on the other side a Non Resident person is person who is not a Resident person and could be either who has a permanent establishment in UAE or who derives UAE Sourced income or who has a Nexus in the UAE to be specifically specified under the law.
A Resident person who is a juridical person would be subject to the global income. The Resident person who is a natural person would be subject to the global income as far as it relates to the business activity of the natural person. A non Resident person would be subject to tax on the income attributable to the Permanent establishment, State source income and Income derived from the nexus of such non Resident person in UAE.
Applicable Tax Rates: In general, UAE businesses will be subject to a 9% CT rate. A rate of 0% will apply to taxable income not exceeding a particular threshold to be prescribed by a Ministerial Decision (expected to be AED375,000 based on the FAQs available on the website of the Ministry of Finance UAE). While the Ministry of Finance UAE had previously indicated that a higher rate may apply to large multinationals subject to Pillar Two, the Corporate Tax Law is silent in this respect.
Exemptions: Under certain specified conditions, the following persons will be exempt from Corporate Tax. 01 A person engaged in the exploitation of UAE natural resources (both extractive and non-extractive). 02 Government and Government-controlled entities 03 Qualifying public benefit entities 04 Charities and public benefit organizations 05 Pension or social security funds 06 Qualifying investment funds.
The exemption may extend to an entity incorporated in the UAE that is wholly owned and controlled by an exempt person, if it: 01 Undertakes part or whole of the activity of the exempt person 02 Holds assets or invests funds for the benefit of the exempt person 03 Carries on activities ancillary to those of the exempt person 04. Certain exemptions (including for qualify investment funds) will be subject to an application process to the Federal Tax Authority (FTA).
The exemption may extend to an entity incorporated in the UAE that is wholly owned and controlled by an exempt person, if it: 01 Undertakes part or whole of the activity of the exempt person 02 Holds assets or invests funds for the benefit of the exempt person 03 Carries on activities ancillary to those of the exempt person 04. Certain exemptions (including for qualify investment funds) will be subject to an application process to the Federal Tax Authority (FTA).
Tax Base: UAE businesses will be subject to UAE Corporate Tax on their worldwide income. However, dividend income and capital gains will be exempt, subject to meeting the conditions of the participation exemption. The Law also provides for a foreign branch profits exemption where those profits have been subject to tax overseas at a rate of at least 9%. Foreign tax credit will be available for taxes paid overseas on forms of income that are not exempt from UAE Corporate Tax.
Natural persons that are UAE residents and subject to UAE Corporate Tax will be taxable only on the income earned from business activities undertaken in the UAE and outside UAE.
Nonresidents will be subject to UAE Corporate Tax on any taxable income attributable to a PE or nexus in the UAE or any income that is considered UAE-sourced income.
Natural persons that are UAE residents and subject to UAE Corporate Tax will be taxable only on the income earned from business activities undertaken in the UAE and outside UAE.
Nonresidents will be subject to UAE Corporate Tax on any taxable income attributable to a PE or nexus in the UAE or any income that is considered UAE-sourced income.
Permanent Establishment : Nonresidents will be considered to have a PE in the UAE if they have a fixed place of business or a dependent agent in the country. The language used in the Law to describe these tests seem broadly aligned with Organization for Economic Co-operation and Development (OECD) standards. The Corporate Tax Law states that other forms of nexus in the UAE that could create a PE will be determined through a Ministerial Decision.
UAE-sourced income : The Corporate Tax Law provides several examples of income that will be considered as UAE-sourced income. Generally, income earned by a UAE resident person will qualify as UAE-sourced income. Similarly, UAE-sourced income will also include any income derived from activities performed, assets located, or rights used for economic purposes in the UAE.
Free zones : The Corporate Tax Law introduces the concept of a “Qualifying Free Zone Person” which is broadly defined as a company or branch registered in a free zone based in UAE and which : 01 Maintains adequate substance in the UAE 02 Derives qualifying income (to be specified through a Ministerial Decision) 03. Satisfies transfer pricing requirements 04. Meets any other conditions to be prescribed through a Ministerial Decision
A Qualifying Free Zone Person will still be subject to UAE Corporate Tax but may benefit from a 0% rate on its qualifying income. A Qualifying Free Zone Person can elect to forego this preferential regime and be subject to the standard UAE Corporate Tax rate on it whole income.
A Qualifying Free Zone Person will still be subject to UAE Corporate Tax but may benefit from a 0% rate on its qualifying income. A Qualifying Free Zone Person can elect to forego this preferential regime and be subject to the standard UAE Corporate Tax rate on it whole income.
Taxable income : The accounting income as reported in the standalone financial statements will be the basis to determine the taxable income. This will be subject to adjustments, which include: 01 Unrealized gains or losses which arise in connection to capital items 02 Income and associated expenses derived by an exempt person with respect to its exempt activity 03 Dividend income and other profit distributions from a resident person 04 Dividend income and capital gains under the participation exemption 05 Income from a PE not located in the UAE that has been subject to UAE Corporate Tax at a rate of at least 9% 06 Income derived by a nonresident from the operation or leasing of aircrafts and ships in international transportation 07.Gains or losses from reorganizations or intragroup transfer of assets and/or liabilities subject to certain conditions
Net interest expenditure will be capped at 30% of the EBITDA (earnings before interest, taxes, depreciation, and amortization). With respect to the interest deduction limitation, the Corporate Tax Law indicates that the amount of disallowed expenditure can be carried forward for a period of 10 years. Additional restrictions can apply to related-party debt. Entertainment-related expenses will be deductible up to 50% of the amount incurred.
The Corporate Tax Law also provides an additional list of non-deductible expenses which includes donations, administrative penalties, recoverable value-added tax (VAT), dividends or similar benefits paid to an owner of a taxable person, among others.
Net interest expenditure will be capped at 30% of the EBITDA (earnings before interest, taxes, depreciation, and amortization). With respect to the interest deduction limitation, the Corporate Tax Law indicates that the amount of disallowed expenditure can be carried forward for a period of 10 years. Additional restrictions can apply to related-party debt. Entertainment-related expenses will be deductible up to 50% of the amount incurred.
The Corporate Tax Law also provides an additional list of non-deductible expenses which includes donations, administrative penalties, recoverable value-added tax (VAT), dividends or similar benefits paid to an owner of a taxable person, among others.
Tax loss relief: Businesses will be able to carry forward tax losses indefinitely, subject to certain conditions. These losses can be used to offset up to 75% of the taxable income of future tax periods. Losses incurred before the effective date of UAE Corporate Tax will not be eligible for relief.
Tax groups: A parent entity of a group can make an application to the FTA (Federal Tax Authority, UAE ) to form a tax group with its UAE subsidiaries, subject to meeting certain conditions. These conditions include a 95% ownership requirement and neither the parent nor subsidiary can be an exempt person. Losses can also be transferred between entities outside of a group where a 75% ownership relationship exists, other conditions being met.
Withholding tax: Payments made by UAE businesses to a nonresident earning UAE-sourced income will be subject to withholding tax at a 0% rate, unless the income is attributable to a branch, or a Permanent Establishment located in the UAE. The Law further states that any other rate may apply as would be specified in a decision to be issued by the Cabinet.
Administration: UAE businesses subject to UAE Corporate Tax are required to register and obtain a Tax Registration Number. Generally, the registration application must be submitted to the FTA before the Law becomes effective. Further guidance is expected in this respect.
UAE businesses subject to UAE Corporate Tax, including Qualifying Free Zone Persons, will be required to file a tax return and pay any tax due no later than nine (9) months after the end of the respective financial year. The parent companies of tax groups need to submit only one tax return.
Additionally, UAE business may be requested to submit financial statements to the FTA. Taxpayers may also be requested to maintain audited or certified financial statements
UAE businesses subject to UAE Corporate Tax, including Qualifying Free Zone Persons, will be required to file a tax return and pay any tax due no later than nine (9) months after the end of the respective financial year. The parent companies of tax groups need to submit only one tax return.
Additionally, UAE business may be requested to submit financial statements to the FTA. Taxpayers may also be requested to maintain audited or certified financial statements
Transfer pricing (TP) : Transactions with related parties and connected persons are required to comply with the arm’s-length principle. The language used in the Corporate Tax Law to define the arm’s-length principle and other TP-related aspects is generally similar to OECD standards. However, the definitions of related parties and connected persons are broad, relative to international standards. For instance, under certain conditions, kinship up to the fourth degree may trigger a related party or connected person relationship.
The Corporate Tax Law requires UAE businesses to maintain TP documentation (i.e., master file and local file), subject to certain conditions which will be prescribed under a Ministerial Decision. TP documentation must be submitted to the FTA within 30 days of a request. Further, taxpayers may be required to submit a TP disclosure form along with the UAE Corporate Tax Return. More details in this respect are expected to follow in a Ministerial Decision. Businesses will be able to apply for advanced pricing agreements and more details are also expected to follow in this respect. A more detailed alert regarding the features of the UAE TP regime will follow soon.
The Corporate Tax Law requires UAE businesses to maintain TP documentation (i.e., master file and local file), subject to certain conditions which will be prescribed under a Ministerial Decision. TP documentation must be submitted to the FTA within 30 days of a request. Further, taxpayers may be required to submit a TP disclosure form along with the UAE Corporate Tax Return. More details in this respect are expected to follow in a Ministerial Decision. Businesses will be able to apply for advanced pricing agreements and more details are also expected to follow in this respect. A more detailed alert regarding the features of the UAE TP regime will follow soon.
General anti-abuse and transitional rules: The Corporate Tax Law includes general anti-abuse rules (GAAR) intended to disregard transactions or arrangements undertaken with the main purpose of obtaining a UAE Corporate Tax advantage. These rules apply from the date the Law is published in the Official Gazette.
As part of its transitional rules, the Corporate Tax Law also indicates that the opening balance sheet for UAE Corporate Tax purposes will be the closing accounting balance sheet for the financial year immediately before the first tax year.
Importance of the Self Assessment Under Corporate Tax
Self Assessment under Corporate Tax would answer some of the following relevant questions in relation to the compliance obligations under UAE Corporate Tax
- What is the accounting - tax Period for your business ?
- By when your business would need to file a Corporate Tax Return ?
- What elections or applications your business may or should make for Corporate Tax purposes ?
- What financial information and records your business will need to keep for Corporate Tax purposes ?
- Whether the business based in Free Zone would be considered a Qualifying Free Zone Person for the Corporate Tax Purposes ?
- Whether the business has a permanent establishment out side UAE ?
- Whether the business based outside UAE is being controlled and managed from UAE ?
- If there is a need for the documentation in relation to the transfer pricing in relation to the transaction with the associated companies ?
- Whether the tax planning transaction of the company would attract the general anti abuse rules ?
- Other matters depending and arising our of the review of the legal status of the company, management and control of the company and the Core Income generating activities of the Company.
It should be noted that the UAE Corporate Tax applies to juridical persons incorporated in the UAE and juridical persons effectively managed and controlled in the UAE, as well as to foreign juridical persons that have a permanent establishment in the UAE.
It should also be noted that the Individuals will be subject to UAE Corporate Tax only if they are engaged in a business or business activity in the UAE, either directly or through an unincorporated partnership or sole proprietorship.
Link to the UAE Corporate Tax Law ( Law No. 47 of 2022)
https://mof.gov.ae/wp-content/uploads/2022/12/Federal-Decree-Law-No.-47-of-2022-EN.pdf
Gupta Accountants provide a full range of services in relation to the transfer pricing, country by country reporting, compliance with the corporate tax in UAE, compliance with economic substance regulations in UAE for the entities based in Dubai, Abu Dhabi, Sharjah, RAK, Fujairah, Ajman and UAQ in United Arab Emirates and well as outside United Arab Emirates.
