Simplified Overview of UAE Corporate Taxes
Rule: On 9 December 2022, UAE released Corporate Tax Law to enact a new corporate tax (CT) regime in the UAE. All businesses in the UAE including Free Zone Companies are required to register and file tax returns.
Implication: All Businesses need to register for the UAE CT and file a tax return.
Rule: The new CT regime will become effective for accounting periods beginning on or after 1 June 2023.
Implication: First tax period will be from 1 January 2024 to 31 December 2024 for businesses following the Calendar year as accounting periods.
Rule: Tax Return must be filed, and CT paid no later than (9) nine months from the end of the relevant Tax Period.
Implication: First tax return must be filed, and CT to be paid before 30 September 2025 for businesses following the Calendar year as accounting periods.
Rule: CT is imposed on Taxable Persons
i) Resident in the UAE:
a. Legal entities, including Free zone entities
b. Foreign legal entities effectively managed and controlled in the UAE
c. A natural person who conducts business/business activity in the UAE as listed in the Cabinet Decision (list of activities awaited)
ii) Non-Resident in the UAE
a. Permanent Establishment in the UAE
b. Earns State Sourced Income (subject to 0% withholding taxes)
Implication: CT law will be applicable to Resident Entities, Resident Natural Persons conducting specified business activities, and certain Non-Resident in the UAE.
Rule: Tax Rates
i) 0% for taxable income from AED 0 to AED 375,00
ii) 9% for taxable income exceeding AED 375,000
iii) 0% for total Qualifying income for Qualifying Free Zone Persons as specified in the Cabinet Decision to be released. 9% for non-Qualifying income
Implication: A Qualifying Free Zone Person can avail 0% tax rate. However, the Cabinet Decision specifying the Qualifying Income is still awaited. Qualifying Free Zone Person must fulfil the below requirements to qualify as a Qualifying Free Zone Person:
i) Maintain adequate substance in the UAE (to at least meet the Economic Substance Regulations requirements)
ii) Derive “Qualifying Income” that will be clarified in a Cabinet Decision to be released
iii) Not have made an election to opt out of the Free Zone CT regime
iv) Comply with transfer pricing rules and documentation
v) Meet any other conditions as may be prescribed by the Ministry of Finance
Rule:
i) Related Party transactions:
a. Transactions and arrangements between Related Parties must meet the arm’s length standard
b. Related Party:
i. Directly or indirectly owns a 50%
ii. Directly or indirectly Controls the Company
1. Ability to exercise 50% or more of the voting rights,
2. Ability to determine the composition of 50% or more of the Board of directors,
3. Ability to receive 50% or more of the profits
4. Ability to determine or exercise significant influence over the conduct of the Business and Affairs
ii) Connected Person transactions:
a. Payment to its Connected Person shall be deductible only if and to the extent the payment or benefit corresponds with the Market Value of the service (Arm’s Length Standard) and is incurred wholly and exclusively for the Taxable Person’s Business.
b. Connected Person:
i. Owner
ii. Director or officer
iii. Related Party
iii) Deductible expenses
a. Entertainment-related expenses will be deductible up to 50% of the amount incurred for Meals, Accommodation, Transportation, Admission fees, Facilities, and equipment used in connection with such entertainment.
b. Net interest expenditure will be capped at 30% of the EBITDA
c. There is no interest expense deduction if a loan is obtained from a related party for dividend or profit distribution, redemption, repurchase, reduction or return of share capital, capital contribution, or acquisition of an ownership interest.
Implication: Businesses will have to ensure expenses are analysed to optimise the CT expense