Updates on the UAE’s New 9% Corporate Income Tax Charges and Applicability

The UAE is undergoing some tax changes this year, with the introduction of a 9% corporate income tax rate from June 2023 for the first time. There are some allowances however, and some of these apply to businesses registered in Free Trade Zones. These though are awaiting clarification as concern ’qualifying income’ for ‘free zone persons’.

The UAE Federal Decree Law stipulates free zone persons could benefit from a 0 per cent UAE Corporate Tax on the qualifying income. The qualifying income is to be defined in a separate Cabinet decision.

Based on available guidance from the UAE Ministry of Finance, the qualifying income should include offshore as well as onshore sources of income of free zone persons subject to strict conditions. Detailed guidance is forthcoming on this aspect.

Under the current UAE CT Law, free zone persons without an onshore base can transact with companies operating on the UAE mainland and benefit from 0 percent tax rate in scenarios to be specified. Such income could include ‘passive income’.

The countdown has started on the process that will eventually lead to businesses in the UAE coming under a 9 per cent corporate tax regime from mid-2023. The tax rate, announced last year, ensures the UAE has one of the lowest CT regimes in the world, thus providing more incentives for businesses based here and those wanting to come in and launch.

Understanding UAE Corporate Tax

The UAE’s Corporate Tax is highly competitive and with has a high degree of compliance, but foreign invested businesses have some early preparations to do

The timeline for the first tax payments under the UAE Corporate Tax is on or before February 28, 2025, i.e., within nine months of the end of the first tax year from June 1, 2023 to May 31, 2024.

Who Is exempt From 9% CT?

Apart from businesses engaged in extracting natural resources, government and government-controlled entities could also enjoy exemptions under the UAE Decree, but subject to eligibility criteria and conditions. The ‘Free Zone Person’ incentive is a substantial tax break for eligible businesses.

Khalid Ali Al Bustani, Director-General at Federal Tax Authority, has said that “Since the announcement of corporate tax in the UAE, the Federal Tax Authority has intensified its efforts, in collaboration with the competent authorities, to develop procedures to implement it in accordance with the highest standards. To ensure the efficiency, accuracy, and seamlessness of administrative procedures, in a way that will not impact business operations and flow. The Authority prioritizes supporting all business sectors to comply with tax regulations and procedures through flexible mechanisms that align with international best practices.”

Qualifying as a ‘Free Zone Person’

Free zone enterprises are waiting for the ministry’s guidance on who qualifies for the 0 per cent regime – and who doesn’t. According to the Ministry of Finance’s website, to be treated as a ‘qualifying free zone person’, the entity must:

• Maintain adequate ‘substance’ in the UAE;
• Derive ‘qualifying income’ as specified in the upcoming Cabinet Decision;
• Comply with ‘transfer pricing’ rules and maintain the relevant transfer pricing documentation; and
• Not already have made an election to be subject to CT in full.

Free zone entities that meet conditions to benefit from the free zone CT regime – qualifying free zone persons – will have to pay at these rates:

• 0 per cent on qualifying income;
• 9 per cent on taxable income that does not meet the qualifying income definition.

What should businesses do?

It should be noted that any new and substantive legislation requires UAE businesses to take responsibility of its applicability and plan for efficient change management. This means that businesses should consider undertaking a deep review and documentation of revenue operations, assessing the impact of the UAE Corporate Tax, and complete requisite changes well in time of the effective date of the tax. This may mean taking local compliance advise.

Apart from the qualifying income for free zone persons, businesses in the UAE are keenly anticipating further guidance on the definition of business activities for natural persons, and the de-minimis threshold for interest capping rules.

The UAE Decree on Corporate Tax provides for a resident group of companies to form a ‘tax group’ subject to prescribed conditions. If such a tax group is set up, there would be a single tax return for the group. As the net income/loss position of the tax group would be considered for computing UAE Corporate Tax Liability, thereby offsetting the losses of one group company with taxable income of other tax group member.

In case the tax grouping option is not available or opted for by group of companies, there is also a provision for transfer of tax losses between group companies where there is a common ownership interest of at least 75% and other ancillary conditions are fulfilled.

Incentives for small businesses

The CT is pegged at 0 per cent for taxable income up to and including Dh375,000 (US$102,000) for small businesses.

The federal decree does contain relief for small businesses wherein a resident taxable person generating revenue up to a threshold – to be decided by the UAE Minister of Finance – may elect to be regarded as not having derived any taxable income for the relevant tax period. Accordingly, there will not be any tax cost for such small businesses.

Carry forward of interest rate expenditure

The Federal Decree Law clarifies that net interest expenditure disallowed for a taxable person may be carried forward and deducted in subsequent ten tax periods in the order in which such amount was incurred.

It should be noted that the UAE government has been quite generous in this regard. The de-minimis threshold for the net interest expenditure deduction is yet to be specified by the Minister of Finance, which could further benefit businesses.

Early Registration For UAE CT

The UAE Federal Tax Authority confirmed an early registration period is available from January to May 2023 for certain categories of companies operating in the UAE. These companies will be receiving invitations from the FTA by email and SMS, allowing them to register via the EmaraTax platform.

Following this, the FTA will announce when registration will be open for others. “When registration opens, priority will be given to companies and businesses that have a financial year starting on 1 June 2023,” the FTA had said in a statement. For assistance with preparing for UAE 2023 tax compliance, please contact Dezan Shira & Associates at dubai@dezshira.com

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