Federal Corporate Tax in UAE — Published Official CT Legislation
In response to recent developments in the UAE’s tax landscape, including the issuance of Federal Decree-Law №47 of 2022, the introduction of Corporate Tax in the UAE marks a significant shift in its fiscal policies. This article provides an in-depth analysis of the key provisions and implications of the UAE Corporate Tax Law, aiming to offer clarity and guidance to businesses and stakeholders navigating these changes.
Scope and Rates:
The UAE Corporate Tax Law, effective from June 1, 2023, encompasses a broad scope, applying to the adjusted net profits of businesses worldwide. Notably, the law introduces two tax rates: a tax-free rate for deductible earnings up to a specified threshold, and a standard rate of 9%. This competitive tax rate underscores the UAE’s commitment to fostering a favorable business environment.
Global Minimum Tax:
While the Corporate Tax Law does not explicitly address the global minimum tax rate of 15% for multinational enterprises (MNEs), discussions regarding adoption within the UAE framework are ongoing, as outlined in the FAQs accompanying the law.
Impact on Individuals:
Individuals engaging in business activities are subject to corporate taxation in alignment with VAT principles. However, earnings from employment remain exempt from Corporate Tax, with specific guidelines expected to be outlined in future Cabinet decisions.
Free Zones:
Businesses operating in UAE free zones are subject to a distinct regime, contingent upon meeting substance and income criteria. Free zone companies have the option to be taxed at a rate of 9%, provided they fulfill specified requirements, including restrictions on mainland UAE transactions.
Withholding Tax and Foreign Entities:
The Corporate Tax Law outlines provisions for withholding tax exemptions on certain categories of income sourced from the UAE. Additionally, foreign entities may be considered UAE residents if operated and controlled within the country, with further guidance on permanent establishment pending Ministerial decisions.
Exempt Entities and Relief:
Various entities, including government-controlled entities and qualifying public benefit entities, are exempt from Corporate Tax. Moreover, relief measures are extended to small businesses meeting specific revenue thresholds, alleviating tax burdens and promoting entrepreneurship.
Financial Records and Audited Statements:
Taxpayers are required to maintain comprehensive financial records supported by documentation for a minimum of seven years. While all entities must prepare financial statements, auditing requirements will be delineated in subsequent Cabinet decisions.
Deductible Expenses and Exempt Income:
The Corporate Tax Law permits deductions for expenses incurred solely for business purposes, subject to certain limitations. Furthermore, exemptions are granted for capital gains, dividends, and other specified income categories, fostering investment and economic growth.
Transfer Pricing and Administration:
Related party transactions must adhere to arm’s-length principles, with documentation requirements aligned with OECD Transfer Pricing Guidelines. The Ministry of Finance and the Federal Tax Authority oversee administration and enforcement, with fines and penalties governed by the Tax Procedures Law.
Foreign Tax Credits and Tax Grouping:
Businesses can claim tax credits for foreign taxation, with provisions for tax grouping to facilitate compliance. Loss carryforward mechanisms and anti-abuse provisions further enhance the integrity of the tax regime, ensuring fairness and transparency.
Conclusion:
The introduction of Corporate Tax in the UAE represents a pivotal milestone in its fiscal landscape, signaling a commitment to global standards while maintaining competitiveness. As businesses adapt to these changes, comprehensive understanding and compliance with the Corporate Tax Law will be essential for navigating the evolving tax environment effectively.
