Corporate Tax in the UAE
The Ministry of Finance (MoF) has made an announcement regarding the introduction of federal Corporate Tax in UAE which will be levied on an entity’s profits exceeding AED 375,000 at the rate of 9 per cent. The said tax will become effective from the fiscal year beginning on or after June 1, 2023.
The UAE corporate tax rate is the lowest in the GCC Countries and now Bahrain has become the only GCC country that is yet to implement a corporate tax regime.
The businesses operating in the UAE will be required to pay Corporate Tax (CT) on the profits reported in their financials prepared in accordance with the internationally recognized and accepted financial reporting standards. This actually means that businesses must now prepare their financials as well as get them audited by a registered audit firm without any exception or delay as the audited financials will be necessary for the calculation of corporate tax.
What is Corporate Tax?
It is a type of direct tax which is levied on net profit or income of businesses and corporations. It is also referred to as Business Profits Tax or Corporate Income Tax.
Importance of Implementing Corporate Tax in the UAE
Introduction of a CT regime displays UAE’s commitment and efforts towards meeting international standards for tax transparency and preventing illegal tax practices.
The implementation of CT regime will cement UAE’s position as a leading global hub for investment and businesses and accelerate the UAE’s transformation and development to achieve its goals and objectives.
Scope and the Rate of Corporate Tax in UAE
The CT will apply to all the businesses operating in different emirates of the UAE at the standard rate of 9 per cent except for the extraction of natural resources. Any activity undertaken by a registered entity in the UAE will be considered within the scope of CT regime apart from the aforementioned exception.
The taxable income under the CT regime will be the net profit/ income presented by an entity in its financial statements after adjusting it for specific items that will be specified under the CT rules and regulations.
The CT rates as per the latest information provided by the ministry are as follows:
- 0 per cent for a business having net income of AED 375,000 or less;
- 9 per cent for a business having net income of more than AED 375,000; and
- A different CT rate for large multinationals that fulfill a criteria set with reference to Two Pillar Solution.
The CT is not applicable on salary or any other employment income. However, any business income earned by an individual under a commercial license will fall under the scope of CT regime.
Any investment made by an individual in their personal capacity in real estate will not be subject to CT only if that individual is not required to obtain a permit or license to carry any such activity within the UAE. Further, any interest and other income earned by an individual from saving schemes or bank deposits will not be subject to CT.
CT regime will not be applicable on capital gains, dividends and other income earned by individuals from holding shares or other securities in their personal capacity.
Foreign individuals and entities will be subject to the CT regime only if they carry out business operations in a regular manner.
Any income earned by a foreign investor in the form of capital gains, dividends, royalties, interest and other investment returns.
Branches of foreign companies will be considered taxpayers for CT purposes and will thus be subject to CT (unless the free zone tax incentives or other exemptions apply). The treatment of all the branches of foreign entities operating in the UAE needs to be determined based on the laws and regulations applicable in the jurisdiction in which the head office exists. In order to prevent businesses from double taxation, profits earned by a foreign branch will either exempt or foreign taxes paid by the branch on its profits may be credited against tax liability of the head office. It is important to mention here that specific jurisdictions such as the United Kingdom provide a tax exemption to all the branches of an entity that are located in foreign countries. In such a scenario, there wouldn’t be any CT credits available for all the UAE branches of an entity having its head office in the UK and therefore all the UAE branches would only be subject to tax in the UAE.
Businesses involved in the extraction of natural resources will be outside the scope of CT regime instead they will fall under the scope of emirate level corporate taxation.
Capital gains and dividends earned by an entity from its qualifying shareholdings will be exempt from the CT regime. A qualifying shareholding refers to stake in a UAE or foreign entity that meets specific conditions mentioned in the UAE CT rules and regulations.
Intra-group transactions will also not be subject to CT regime provided that specific conditions are fulfilled.
Corporate Tax Period
As per the information published by the MoF, the corporate tax will be applicable for financial periods beginning on or after June 1, 2023. An entity’s CT period will be determined based on its financial year-end. For example, an entity whose financial year-end is September 30 then the entity will be eligible to file its first CT return for the fiscal year ending September 30, 2024.
The CT will be applicable on businesses operating in the free zone but the corporate tax regime will continue to respect and honour the incentives that are being offered to businesses operating in the free zones that comply with the laws and regulations prevalent in the UAE and that don’t conduct any business operations in the mainland UAE.
Any business operating in a free zone will be subject registration under the CT regime as well as be required to file a corporate tax return. More information on compliance requirements and obligations will be provided by the ministry in due time. The CT treatment that will be applicable on businesses in a specific free zone will be the same across all of the free zones.
While businesses operating in the free zones may not be subject to requirements of the CT regime, free zone businesses that are part of a large multinational group may be subject to Global Minimum Tax (GMT) of 15% under Pillar Two. In essence, multinational groups whose ETR in the UAE is less than 15% (as calculated under Pillar Two) may have a top-up tax payable outside of the UAE.
As background, the Organization for Economic Cooperation and Development (OECD) proposed a Two-Pillar solution to address the tax challenges resulting from the digitalization of the economy, namely: Pillar One and Pillar Two. Under Pillar Two, large multinational groups (e.g., those with consolidated revenues of more than AED 3.15 billion or EUR 750 million) must pay at least 15 per cent of tax in each jurisdiction they operate regardless of where they are headquartered. Where the ETR of an entity in a jurisdiction is less than 15 per cent, a top-up tax is calculated and paid to ensure the 15 per cent tax rate is satisfied. The Pillar Two rules are expected to apply in 2023.
A group of companies operating in the UAE can decide to form a CT group and be considered as a single person for CT purposes. All the companies in the group will not be required to separate tax returns instead a tax group will be required to file a single return on behalf of all the members of the tax group.
The CT regime will allow entities to use its losses incurred after (as from the CT effective date) to adjust the taxable net income in subsequent fiscal periods. A loss for CT purposes (tax loss) would arrive when an entity’s total income is less than the total deductions that entity can claim for a relevant fiscal period. Tax losses may either be carried forward or used for adjusting taxable profit in future periods. Further information regarding the loss carry-forward rules and regulations will be provided by the ministry in due time. Tax losses from one company part of a tax group may be used for offsetting another group company’s taxable income provided specific conditions are satisfied. Further details or information on the rules relating to the utilization of group loss will be provided by the ministry in due time.
Tax Credits and Withholding Tax
Tax Credit: Foreign CT paid on taxable income earned in the UAE will be considered as a tax credit when calculating the UAE CT liability.
Withholding Tax: It is a tax which is collected at source by the payer on behalf of the recipient of the income.
Affected UAE businesses will be required to comply with all the Transfer Pricing rules and documentation requirements in accordance to the OECD Transfer Pricing guidelines, which are underpinned by the Arm’s Length Principle’, and seek to replicate pricing among related parties, as if these were unrelated. The Transfer Pricing rules in the UAE will be applicable on intra-group transactions for entities that are subject to UAE CT. Multinational groups having entities or operations in the form of branches in the UAE that are yet to update their policies in relation to Transfer Pricing are recommended to do so at the earliest and certainly before CT regime becomes effective in the UAE.
At this point in time, it is expected that corporate tax returns will be filed electronically through an online portal similar to the ESR and VAT filings. It is important to mention here that currently no information has been provided regarding the supporting documents to be filed. Based on the practices in other jurisdictions, the following documents may be required:
- Entity’s financial statements
- Calculation of taxable income after adjusting it for certain items
- Tax depreciation schedules and worksheets
- Details of related party transactions
- Transfer pricing documentation
- Movement of provisions
Businesses will be required to file a single return per financial period. No advance or provisional CT filings will be required. Further, businesses will not be required to make advance CT payments.
More information on the compliance obligations and the registration process for businesses will be provided by the ministry in due time.
Fines and Penalties
Similar to other taxes applicable in the UAE, businesses will be have to pay fines and penalties for non-compliance with the CT laws and regulations. Further information on the applicable penalties and the CT compliance obligations will be released in due time. The impact of corporate tax can be managed with proper tax planning and appointment of qualified tax accountants or consultants. Companies must take into account the potential fines and penalties if CT regulations are not followed in their true spirit.
TOP 119 CORPORATE TAX FAQS
On January 31, 2022, the Ministry of Finance made announcement that it shall impose a 9% corporate tax in the United Arab Emirates on or after June 1, 2023. With specific conditions and exemptions, the corporate tax shall apply to the income generated by individuals and legal entities engaged in business/ professional/ commercial or any other economic activity for which a business permit or license is required.
The decision of implementing corporate tax in the United Arab Emirates (UAE) signals an end of an era where most business entities in the UAE were not required to pay tax on the income they generated from their business operations. However, the tax rate of 9% with regards to corporate tax is still comparatively low when compared with global standards, ensuring that the United Arab Emirates will continue to be an attractive destination for foreign investors.
In context of the aforementioned announcement, we have decided to answer the most frequently asked questions regarding UAE corporate tax.
A. Corporate Tax – Overview
Q1: What is Corporate Tax (CT)?
It is a type of direct tax that is charged on the profit net income generated by a corporation and other types of businesses.
It is also referred to as “Business Profits Tax” or “Corporate Income Tax” in other jurisdictions.
Q2: Why is corporate tax is being introduced in the UAE?
A Corporate Tax (CT) regime based on the best practices across the globe will not only help the UAE in cementing its position as a leading destination for investment and business activities but will also help it in accelerating its transformation and development to fulfil its strategic goals.
Implementation of corporate tax regime reaffirms the United Arab Emirate’s commitment towards satisfying international benchmarks and standards for preventing harmful and illegal tax practices as well as for ensuring tax transparency.
Q3: When will corporate tax become effective in the UAE?
The corporate tax will take effect in the UAE for fiscal years beginning on or after June 1, 2023.
- A business entity having a fiscal year beginning on July 1, 2023 and ending on June 30, 2024 will be subjected to corporate tax from July 1, 2023 (which is the start of the first fiscal year that begins on or after June 1, 2023).
- A business that has a fiscal year (calendar year) starting on January 1, 2023 and ending on December 31, 2023 will be subjected to corporate tax from January 1, 2024 (which is the starting date for the first fiscal year that begins on or after June 1, 2023).
Q4: Will the businesses operating in each emirate be required to comply with the UAE corporate tax regime?
As per the information available regarding the UAE corporate tax, it seems that it will be applied across each emirate of the UAE as it is a federal tax.
Q5: Will I be required to pay Corporate Income Tax alongside taxes levied at Emirate level?
Businesses involved in extraction of natural resources and in specific non-extractive activities in the UAE will be the subject of taxation at the Emirate level and therefore will not be within the domain of Corporate Tax only if certain conditions are satisfied.
Some of the businesses may require to comply with both the taxation at the Emirate level and the corporate tax. Businesses will not be able to use or adjust the taxes paid at Emirate level against its CT payable.
Q6: Will Corporate Income Tax be replacing VAT in the United Arab Emirates?
No, Corporate Tax will not be replacing VAT in the United Arab Emirates. It is a separate tax and will be levied on businesses alongside VAT in the UAE.
Q7: Will I be required to pay VAT alongside CT within the UAE?
If you qualify as a registered entity for both VAT and CT in the UAE then you’ll be required to pay both the taxes simultaneously. In case, your business doesn’t meet the VAT registration criteria even then you may still be required to comply with CT laws and regulations and therefore pay CT.
Q8: Will CT be replacing Excise tax in the United Arab Emirates?
No, Excise Tax and CT both are fundamentally different from each other and therefore it can be said that CT will not be replacing excise tax in the United Arab Emirates.
Q9: Will I have to pay service charges to Federal and local authorities now that the CT has been introduced in the UAE?
Yes. Service charges will still remain payable to the relevant Federal and Emirate authorities.
Business set up charges as well as renewal charges for business license and other Government charges and fees incurred exclusively during the normal course of business operations will be considered as deductible expenditure for the purposes of CT.
Q10: What role will the Federal Tax Authority (FTA) will play in the context of the UAE CT?
The FTA will be responsible the enforcement and collection of corporate tax together with its overall administration as well.
Q11: What role will the Ministry of Finance (MoF) will play in the context of the UAE CT?
The MoF will act as the ‘competent authority’ for exchange of tax information at international level as well as for providing guidance for purposes of multilateral/ bilateral agreements.
Q12: What should one do to prepare for CT in the UAE?
In order to assess and understand what CT regime applicable in the UAE means with regards to your business entity, you should do the following:
- Read the Laws and regulations relating to UAE CT as well as all the other supporting information that is made available on the websites of the FTA and the MoF.
- Use the information available to determine whether your business operation falls within the scope of CT in the UAE and if so then what will be the effective date.
- Understand all the requirements which your business will have to comply with under the UAE CT regime, including, for example:
- Whether you are required to register your business for UAE Corporate Income Tax
- What will be the Tax Period with reference to Corporate Tax for your business entity
- When your entity would be required to file its first CT return
- What applications or elections can or should your business make solely for the purpose of Corporate Income Tax
- How Corporate Income Tax may impact the liabilities and obligations of your business under contracts with suppliers and customers
- What financial records and information your business will be required to keep for CT purposes
- Regularly visit the websites of the FTA and the MoF for obtaining further guidance and information on the CT regime applicable in the UAE.
Q13: Where one can find the Corporate Tax Law?
Kindly click this link to find the CT law.
Q14: Where one can find the Corporate Tax Law?
Kindly click this link to find the corporate tax law.
B. Scope and Rates
Q15: Who has exemption from CT in the UAE?
The following has been provided with exemption from CT within the UAE:
- Businesses engaged in the extraction of natural resources in the UAE and related non-extractive activities that fall under the scope of Emirate-level taxation after satisfying certain terms and conditions;
- The UAE Emirate and Federal Government, their authorities, departments and other institutions that operate under the umbrella of the Federal and Emirate governments;
- The companies that are wholly owned by the Government and conduct an activity mandated and listed in a Cabinet Decision;
- All the entities that work for Public Benefit and are listed in a Cabinet Decision;
- Investment Funds that satisfy certain terms and conditions;
- Social security or private or public pension that satisfies certain conditions; and
- Juridical persons (within the UAE) that are completely owned as well as controlled by specific exempted entities after satisfying certain conditions.
Q16: Who is resident for CT purposes in the UAE?
Companies incorporated in the UAE such as LLCs, PJSCs, PSCs, and other juridical persons in the UAE will be subject to Corporate Tax as resident persons.
An entity that has been established in the UAE will automatically qualify to be considered a ‘resident’ person for CT purposes in the UAE. On the other hand, any individual who is involved in a business activity in the UAE will also be considered a resident person in the context of CT in the UAE.
A foreign company may also be treated as UAE a resident person CT purposes if it is effectively managed and controlled within the UAE.
Q17: Who is non-resident for CT purposes in the UAE?
As per the CT regime in the UAE, a juridical person is treated as non-resident when it has been established and incorporated outside the boundaries of the UAE in a foreign country and is also being efficiently and effectively controlled and managed from outside the UAE. A natural person is treated as a non-resident for CT purposes in the UAE if that person is not involved in a taxable business activity within the UAE.
Q18: How are tax residents in the UAE are subject to CT in the UAE?
The juridical persons treated as residents in the UAE will be subject to CT on their income earned from both the abroad and the UAE, although specific income from foreign branches and subsidiaries that are taxable in foreign jurisdiction will usually be exempt from CT in the UAE.
Where income earned from abroad is not provided exemption then one can take taxes paid in foreign jurisdiction as a credit against the Corporate Income Tax amount payable in the United Arab Emirates only on the relevant income so that to negate the impact of double taxation.
Q19: How are non-tax residents subject to CT in the UAE?
Persons considered non-resident in the UAE can only be required to comply with the requirements of CT in the UAE in the following two cases:
- income sourced within the United Arab Emirates (subject to no or 0% withholding tax); or
- income from their Permanent Establishment in the UAE.
Q20: How business income or loss can be determined that will be subject to the corporate tax in the UAE?
The accounting/ business net profit or loss subject to corporate tax (also referred as taxable income) will be the net profit of an entity after adjustments made for specific items.
The accounting net profit or loss of a business entity is the figure that is presented in its financials prepared in compliance with the acceptable accounting and reporting standards.
Adjustments to the business income or loss will need to be made with respect to the following items:
- Income that has been given exemption such as capital gains and qualifying dividends;
- Unrealised gains and losses;
- Income arising on transfers happening between group companies;
- Transactions with Related Parties and Connected Persons;
- Deductions that are not allowable in the context of CT;
- Incentives or tax reliefs;
- Transfers of losses within group companies where relevant; and
- Any other adjustments specifically mentioned by the Ministry.
Q21: What will be the CT rates in the UAE?
The CT rates in the UAE are as follows:
For Juridical and Individual persons:
- The taxable income of AED 375,000 or less will be subject to the tax rate of 0%;
- The taxable income above AED 375,000 will be subject to the rate of 9%; and
- a different rate will be applicable for large multinationals that satisfy specific conditions set with regards to ‘Pillar Two’ of the OECDs Base Erosion and Profit Shifting project.
In case of free zone persons:
- 9% on taxable income that fall short to meet the criteria set to be considered as qualifying income definition
- 0% on qualifying income
Q22: What will be the CT amount payable for a business having taxable income of AED 400,000 in a given fiscal year?
The corporate tax liability for a business having AED 400,000 taxable income in a given fiscal year will be as follows:
- Taxable income up to AED 375,000 will be charged corporate tax at 0% = AED 0.
- Taxable income above and over AED 375,000 (i.e. AED 25,000 = AED 400,000 – AED 375,000) will be charged corporate tax at 9% = AED 2,250.
Therefore, the corporate Tax liability for the company will be AED 2,250.
It is important to mention here that the amount of CT payable by the company will be reduced by any taxes paid abroad on relevant income.
Q23: Will small businesses be provided any type of relief in the context of UAE CT?
In addition to a 0% rate for taxable income up to AED 375,000, businesses with income below a specific threshold can apply for the relief for small businesses and be considered as having no taxable income during the course of a Tax Period and may also be subject to simplified compliance requirements. In order to claim the said relief, an entity must made election to the FTA.
Q24: Who can apply for small business relief in the context of UAE CT?
Any resident juridical person or individual in the UAE with revenues below the threshold specified by the Ministry and that meets all the other terms and conditions that may be set, can apply for and claim small business relief.
C. Natural Persons
Q25: Who is a Natural person in the context of CT in the UAE?
It is referred to as an individual in the CT regime.
Q26: Will individual persons be the subject to CT in the UAE?
Only individuals involved in a business activity as per a Cabinet Decision that will be issued in the near future will be subject to the requirements of CT in the UAE. Individuals involved in other activities will not fall within the scope of CT in the UAE.
Q27: What is the Corporate Income Tax treatment of a civil company or sole proprietorship in the UAE?
For specific types of activities, natural persons can form a civil company or sole proprietorship. For the purpose of CT in the UAE, these type of entities will be either classified as a natural person or persons owning them.
Q28: Will an individual be the subject of CT on income from outside the Untied Arab Emirates?
The taxable income of a natural person involved in any business activity within the United Arab Emirates is the income that is generated from that business activity. This will also include income earned from outside the United Arab Emirates insofar as it relates to the activity carried out within the United Arab Emirates.
Q29: What if an individual is involved in any business activity that doesn’t fall within the scope of Corporate Tax?
The individual will be required to file a single Corporate Tax return containing information and figures from all its business activities that fall within the scope of CT in the UAE.
Q30: How the corporate tax will impact an individual’s salary and investment income?
The corporate tax in the UAE will have no impact on an individual’s salary income. In addition, an individual will not be subject to corporate tax with regards to capital gains, dividends and other income earned from investing in real estate or owning shares & securities in personal capacity
Q31: Will corporate tax be applicable on income earned by an individual on bank deposits?
Income earned by an individual on bank/ term deposits or saving schemes will not be fall under the scope of corporate tax.
Q32: Will any business income be exempt from CT?
Capital gains and dividend income of a business from all of its qualifying shareholdings will be considered as exempt from corporate tax.
D. Juridical Persons
Q33: What is a juridical person?
It is an entity that has been set up in accordance with regulations applicable in the United Arab Emirates, or under the regulations of a jurisdiction outside the United Arab Emirates, that has a legal status which separates it from its directors, owners and founders. Examples of a juridical person includes a foundation, a company having limited liability, a private or public joint stock company, an ‘onshore’ trust, and other business entities having separate legal status under the Free Zone regulations or UAE ‘mainland’ regulations.
Q34: What is meant by having a separate legal status?
It means that the entity has its separate liabilities, obligations and rights. As a result, the owners/ founders of the juridical person would usually have limited liability when it comes to the obligations and debts of the entity.
Q35: How do you determine whether a juridical person has a “Business activity” that is within the scope of UAE CT?
Any activity that has been undertaken by a UAE based juridical person will be considered as a business activity and will fall within the domain of Corporate Tax Regime applicable in the United Arab Emirates, unless the said activity has been specifically mentioned as exempted from CT in the UAE.
Q36: Will UAE holding companies be subject to CT in the UAE?
UAE based holding companies will be subject to Corporate Tax (at a 9% Corporate Income Tax rate or the 0% Free Zone Corporate Income Tax rate), depending on whether the company has been set up in the mainland UAE or in the Free Zone, but capital gains and dividends earned from foreign and domestic shareholdings would have exemption from the Corporate Income Tax only if specific conditions are satisfied.
Q37: Will a civil company or sole proprietorship be considered as a juridical person for the purpose of CT in the UAE?
No, but the individuals who carry business operations in the United Arab Emirates through a civil company or a sole proprietorship may be subject to Corporate Income Tax where a relevant activity is undertaken.
Q38: How will the Corporate Tax regime be applicable to partnerships in the UAE?
The laws and regulations applicable to Corporate Tax in the UAE clearly differentiates among partnerships that are incorporated and unincorporated.
Incorporated partnership can be defined as a partnership who is limited by shares and any type of partnership where the partners to the partnership doesn’t have unlimited liability in context of the other partners’ actions or partnership’s obligations as a whole. These type of partnerships are treated for the purposes of a Corporate Tax in the UAE in the same way as a UAE based corporation.
Unincorporated Partnership can be defined as a legal relationship between minimum two or more persons, contrary to being a UAE juridical person that is considered separate from their members/ partners.
Q39: Will each partner in an “unincorporated” partnership be required to register and file a UAE CT return?
Natural persons engaged in a business activity through an unincorporated partnership are individually required to file a CT return and pay CT on their share of the income from the unincorporated partnership. Therefore, each partner would be required to register for VAT as well as comply with all the relevant CT laws and regulations.
However, the partners in an unincorporated partnership can apply to the FTA for this type of partnership to be considered as a separate taxable person for CT purposes in the UAE. If application is approved by the FTA then the aforementioned partnership will be allowed to file a Corporate Income Tax return on behalf of all the partners.
Q40: How will foreign partnerships be considered or treated under the Corporate Tax Law?
Foreign partnership will generally be treated as an Unincorporated Partnership subject to satisfying certain terms and conditions.
Q41: What is a “Family Foundation”?
It is defined as a trust, foundation, or similar entity used for protecting and managing the wealth and assets of a family or an individual.
The principal activity of such an entity would generally be to receive, invest, hold, disburse, or manage assets and funds associated with savings or investment made in the best interests of the individual beneficiaries or to achieve a charitable goal.
Q42: Are Family Foundations subject to UAE CT?
Trusts and Foundations are independent persons with separate legal status, and therefore be subject to CT in the UAE in their own way but these types of entities can submit an application to the FTA to be considered Unincorporated Partnerships for the purposes of CT which will result in the beneficiaries and founder/settlor of the trust to be considered as the assets’ owners that are held by the foundation/ trust. This would help the foundation/ trust to prevent its income from attracting Corporate Tax in the UAE.
Other trusts (such as ADGM or DIFC) can be described as a contract among two or more than two persons (e.g., the settlor, trustee and the beneficiary) and therefore such entities are not considered as having separate legal status. These types of foundations/ trusts will be considered as transparent vehicles for CT purposes in the UAE.
F. Investment Funds and Managers
Q43. Explain an investment fund?
It can be described as an entity having the principal activity of issuing investment interests to generate funds or pool investor funds or set up a joint investor fund with the objective of allowing the holder of such a fund to enjoy benefits arising from the gains or profits from the entity’s holding, management, acquisition, or disposal of investments in compliance with the relevant and applicable laws and regulations.
Q44. Will investment funds be the subject of CT in the UAE?
These funds are usually established or organized as limited liability partnerships to ensure neutrality for tax purposes for the investors as most of the foreign jurisdictions treat these type of partnerships as transparent for the purposes of international and domestic tax, which puts the fund investors in a tax position similar to the one in which they would have founded themselves if they had directly invested in the fund’s assets. Investment funds that are organized as unit trusts and partnerships would generally be considered as Unincorporated Partnerships for CT purposes in the UAE.
Q45. Will an investment fund manager based in the UAE fall within the scope of the Corporate Income Tax?
If the fund manager is considered resident of the UAE, or if it conducts business operations in the United Arab Emirates through a permanent establishment, it will fall within the scope of the Corporate Income Tax on its income.
Q46. For the purpose of benefiting from the CT exemption, are both the fund manager and the investment fund required to be subject to regulatory oversight?
For the investment fund exemption, either the manager or the investment fund is required to be the subject of regulatory oversight.
Q47. Could the activities of an investment manager based in the UAE result in a foreign investment vehicle/ fund to be treated as resident for CT purposes in the UAE?
Where the conditions for the Investment Manager Exemption are met, an investment manager based in the UAE should not create UAE residency for the investment vehicle/ investment fund that it manages for CT purposes.
Q48. Can Special Purpose Vehicles and investment holding companies used by an investment fund benefit from UAE CT exemption?
Completely-owned UAE holding companies as well as Special Purposes Vehicles used by an investment fund for deploying capital and holding investments can apply to the FTA to benefit from the CT exemption that has been given to the investment fund.
Q49. Are branches in the UAE have the status of separate juridical persons?
No. The branch of a foreign or domestic juridical person in the UAE is just considered as an extension of its head office or parent.
Q50. Will the branches of a business based in the UAE be the subject of Corporate Tax in the United Arab Emirates?
A UAE based head office or parent will include all the income of all its branches based in the UAE in its Corporate Income Tax return as taxable income.
Q51. Are the branches based in the UAE of a juridical person in the UAE required by the CT regime to separately file a CT return in the UAE?
All the branches operating in the UAE of a juridical person in the UAE are not required by the CT regime to separately file a CT return in the UAE.
Q52. Will the foreign branches of a business based in the UAE will fall under the scope of CT?
The income of branches based abroad of a UAE business will be made part of the taxable income and presented in the CT return of the head office in the UAE unless the business decides to claim an exemption with regards to the profits of its branch located in a foreign jurisdiction. The exemption is only available profits of foreign branches that have already been taxed in a jurisdiction located outside the UAE.
Q53. Will branches in the UAE of foreign businesses be subject to CT?
Where no election has been made or the income of the permanent establishment or foreign branch is not eligible for exemption from CT, the CT payable on the income from permanent establishment or foreign branch can be reduced by the tax paid on the relevant income in the jurisdiction in which the foreign branch operates.
H. Foreign Entities
Q54. Will foreign entities be subject to Corporate Income Tax?
Entities established in foreign jurisdictions that are operating their business operations in the United Arab Emirates through a permanent establishment or that are treated as residents in the United Arab Emirates will be subject to Corporate Income Tax in the United Arab Emirates. Earning income sourced in the UAE wouldn’t be enough for requiring a foreign entity to get registered for the Corporate Income Tax in the UAE.
Q55. When a person considered as non-resident will have to comply with the Corporate Tax Regime in the UAE?
A person considered as non-resident in the UAE will have to comply with the Corporate Income Tax requirements if that person earns sourced revenue or income at the rate of 0% or has a permanent establishment in the United Arab Emirates.
Q56. When will an entity based outside the UAE be treated as a resident person for the purposes of Corporate Income Tax?
A juridical person located in a foreign jurisdiction may be considered as a resident in the UAE for Corporate Income Tax and subject to Corporate Income Tax on its revenue or income both from abroad (if it is efficiently and effectively controlled and managed in the UAE) and the United Arab Emirates.
Q57. Will the investment in UAE real estate by a foreign person subject UAE CT?
A foreign individual that has stake or ownership in a UAE property in his or her personal capacity would not be subject to Corporate Income Tax and related obligations in the United Arab Emirates.
Q58. How it can be determined that whether an income is a UAE sourced income?
Any Income will be treated as a UAE sourced income, if:
- the income can be associated with a Permanent Establishment in the United Arab Emirates of a non-resident entity;
- the income is derived from a UAE resident; or
- the income is generated from an activity carried out, rights used, capital invested, assets located, or services provided in the United Arab Emirates.
The CT Law includes a list of income that is considered as being sourced in the UAE.
Q59. Will investment income earned by a foreign investor in the UAE be subject to CT?
Income from capital gains, dividends, royalties, interest, and returns from other investments earned by a foreign juridical or natural person will not be required to file CT, unless such income relates to a permanent establishment in the UAE of that same foreign person.
I. Taxable Income
Q60. Explain taxable income?
It can be defined as a business entity’s accounting profit or loss after making necessary adjustments as prescribed in the CT laws and regulations.
Q61. What accounting standards must be used for the preparation of the financial reports?
For the purpose of CT, the accounts of entities based in the United Arab Emirates should be drafted in compliance with the relevant accounting and reporting standards applicable in the United Arab Emirates. IFRS is the most commonly used accounting and reporting standards in the United Arab Emirates.
Q62. Will financials need to be drafted using accruals basis of accounting?
The tax persons should draft their financials, and calculate taxable income using accruals basis of accounting, unless and until they are allowed to use the cash based accounting.
Q63. What Corporate Income Tax adjustments to the accounts will be required to calculate income for CT purposes?
The accounting net loss or profit will have to be adjusted for specific items mentioned in the CT Law, including:
- Exempt income such as dividends
- Unrealized losses/gains
- Unallowable deductions by the CT regime
- Transfers among group entities;
- Any tax reliefs or incentives
- Adjustments relating to transactions that occurred with Connected Persons and Related Parties; and
- Any adjustment other than the ones mentioned above (specified by the Ministry).
J. Income Exempt from CT
Q63. What type of income has exemption from Corporate Income Tax?
The income that has exemption from Corporate Income Tax Regime in the United Arab Emirates is as follows:
- Payments relating to dividends and other business related distributions that have been received from legal persons based in the UAE;
- Payments relating to dividends and other business related distributions that have been received due to having stake in a juridical person based in a foreign jurisdiction;
- Impairment gains or losses, foreign exchange gains / losses and capital gains and from a Participating Interest;
- Income that has been received from a permanent establishment or a branch located in foreign jurisdiction where an election has been made to claim the “Foreign Permanent Establishment” exemption; and
- Income generated by UAE non-residents person from the leasing or operation of ships or aircrafts in international transportation where specific terms and conditions have been satisfied.
Q64. Are all the payments relating to dividends and other business related distributions derived from juridical persons in the UAE exempt from the new Corporate Income Tax regime?
Dividend payments as well as other business related distributions received from the juridical persons based in the United Arab Emirates have been exempted from the new Corporate Tax regime applicable in the United Arab Emirate.
Q65. Does the Corporate Tax Regime in the UAE provide any exemption for capital gains?
As per the exemption regime, all the gains that can be classified as capital gains earned through a Participating Interest have been provided exemption from the Corporate Income Tax. There is also a relief related to capital gains that arise due to transfer made among group companies as well as from other transactions involving restructuring and reorganisation.
Other type of capital gains will be considered as regular income and be subject to the Corporate Income Tax.
Q66. What is meant by participation exemption regime in the Context of Corporate Income Tax in the UAE?
The purpose of this regime is to negate the impact that arises due to double taxation within a group whereby a member of the group (whose ordinary shares are being sold or that makes dividend payments) has already been the subject of tax on its income.
The CT Law completely exempts dividends that are derived from the entities based in the UAE, as well as payments relating to dividends that have been received from subsidiaries based in foreign jurisdictions that satisfies the criteria of a Participation. In other words, a Participation can be described as a juridical person in which the UAE based company has ownership stake of 5% or more (Participating Interest) for minimum one year, and that satisfies all of the terms and conditions of the said exemption regime.
Capital gain arising on the disposal of shares in foreign and local entities would also get exempted from Corporate Income Tax.
Q67 What type of expenses will be considered deductible for determining taxable income for CT purposes?
All business expenditure incurred to generate income considered taxable will be treated as deductible in the context of the calculation of Corporate Income Tax.
Expenditure that serves a dual purpose, for instance, the expenditure that have been incurred for both business and personal purposes, will have to be apportioned in a way that the portion of the expense that solely relates to the business be treated as a deductible expense when calculating taxable income for CT purposes.
Q68. What expenditure will be considered non-deductible for determining taxable income for CT purposes?
The Article 33 of the CT Law lists specific expenses which are non-deductible, such as fines and penalties, bribes as well as all those expenses that were incurred in generating income that is exempt from CT or losses that are not related to or connected with a taxpayer’s business.
Q69. Will the interest payment be considered deductible in the context CT in the UAE?
The laws and regulations relating to CT in the UAE provides for specific restrictions on interest expense being treated as a fully deductible expenditure so that to discourage ﬁnancing of debt, and to make sure that financing of debt arising as a result of specific transactions taking place among group companies will only be treated as a deductible expenditure if there is a justifiable reason for taking the loan.
Q70. Will payment of Dividends made by companies in the UAE be treated as a deductible payment for the purposes of Corporate Income Tax?
All the payments made by companies in the UAE as dividends will not be considered deductible for the purposes of Corporate Income Tax in the UAE.
Q71. Will payment of service charges to Federal and Local Authorities be considered deductible in the context of Corporate Tax in the United Arab Emirates?
The charges incurred for setting up business, renewing license and other types of government fees incurred exclusively in the normal course of business operations are considered deductible for the purposes Corporate Income Tax.
Q72. Will VAT paid be considered deductible in the context of Corporate Tax in the United Arab Emirates?
Only VAT on purchases that is considered irrecoverable may be deductible in the context of Corporate Income Tax in the United Arab Emirates. Otherwise, VAT paid and received on transactions would have no impact on the taxable income calculation for CT purposes.
L. Transfer Pricing
Q73 What are transfer pricing rules?
The main purpose of the rules relating to Transfer pricing is to ensure that business transactions among Related Parties are conducted at an arm’s length terms. In other words, the said rules helps in ensuring that a transaction among related parties is conducted in the same way any transaction would play out among two independent parties. In order to prevent companies from manipulating their financial performance as well as income considered taxable for Corporate Tax purposes, various clauses in the CT Law demand that consideration in transactions with Connected Persons and Related Parties needs to be evaluated and determined with reference to the consideration’s “Market Value”.
Q74. Will the rules pertaining to transfer pricing be applicable to both cross border and local transactions?
Yes. The rules in question apply to businesses operating in the UAE that carry transactions with Connected Persons and/ or Related Parties, irrespective of whether the said parties or persons are located in a Free Zone or the mainland UAE, or in a location outside the UAE.
Q75. Who are Related Parties?
Related Parties in the context of an individual are the relatives of the individual including the companies in which that individual, either alone or with its Related Parties, has an ownership stake which is 50% or more of the company’s shares.
Similarly, parties related to a corporation is any other corporation in which it alone or together with its Related Parties, has an ownership stake of 50% or more of the company’s shares.
If you need more information regarding Related Parties then please consult Article 35 of the Corporate Income Tax laws and regulations.
Q76. Who is a Connected Person?
It can be defined as any person that is connected to any business entity that falls within the domain of the CT in the UAE if that person:
- Owns the business entity;
- Is an officer or director of the business entity; or
- Is considered a party related to any of the aforementioned.
Q77. What Transfer Pricing documentation and records should be kept by an entity?
As per the CT regime in the UAE, businesses should keep supporting documentation relating to their transactions that have taken place with Connected Persons and Related Parties. The FTA or the Ministry may require specific businesses to handover the aforementioned information together with their CT return. Businesses that apply for small business relief will not be required to adhere to the rules associated with documentation of transfer pricing transactions.
Specific businesses may also be required to prepare and keep a local and master file.
Q78. Would transactions among members of a Tax Group need to be carried out in accordance with the rules relating to transfer pricing?
Transactions carried out among members of a Group are excluded when consolidating the Group’s stand-alone accounts and hence there is no need for complying with the rules relating to transfer pricing.
Q79. What are Losses in the context of Corporate Income Tax?
A loss in the context of Corporate Income Tax arises when total income of a business is less than the total deductions or expenditure that business entity can claim during a specific Corporate Tax Period, resulting in taxable income being negative.
Q80. Will the CT regime in the UAE allows prior period losses to reduce taxable Corporate Income?
Losses in the context of corporate income tax, subject to specific conditions, can be adjusted against the future taxable income, up to a maximum of 75% of the taxable corporate income in each of the future Corporate Income tax periods. Any unused loss that can be brought forward and adjusted against income of future Corporate Tax Periods indefinitely.
Q81. What is the criteria for the transfer of tax losses within a tax group?
The companies based in the UAE must satisfy the following terms and conditions in order to transfer tax losses incurred by one entity to another entity in a Corporate Income Tax year or period:
- The companies in the group are considered resident within the United Arab Emirates;
- A member has ownership of 75% or more in the other entity in case the group has only two members, or a third entity that has ownership stake of at least 75% or more in both the companies/ entities if there are more than two companies. In addition, the aforementioned ownership should have existed both at the beginning and closing of the Corporate Tax year or period in which losses were incurred;
- Neither entity is considered as a Qualifying Free Zone entity;
- Neither entity has been provided any Exemption including the one mentioned above; and
- The accounts must be drafted in accordance with the same reporting standards as well as the same fiscal year.
N. Tax Credits
Q82. Explain withholding tax?
It can be described as a tax that is collected at source by the purchaser on behalf of the seller of the goods or services. These taxes are prevalent in multiple tax and accounting systems around the world and are usually applicable on incomes such as cross-border dividend, royalties, interest, etc.
Q83. Is withholding tax included in the Corporate Income Tax regime?
Withholding tax at the rate of 0% may be applicable to specific sourced income in the UAE that are paid to persons considered non-residents for the purposes of Corporate Tax. Due to the rate of 0%, actually, there would be no need to pay withholding tax and therefore there will be no obligations relating to filing and registration of the aforementioned tax in the UAE.
Withholding tax is not applicable to transactions among persons considered resident in the UAE.
O. Free Zones
Q84. What Corporate Income Tax rates will be applicable to Free Zone entities?
Taxable persons in the UAE Free Zones that satisfy the conditions associated with the Free Zone CT regime will be required to pay CT on their income at the rates mentioned as follows:
- 0% on Income meeting the conditions to be classified as Qualifying Income
- 9% on Income that doesn’t satisfy the definition laid out by the Ministry for Qualifying Income
Q85. Is the 0% CT regime for free zones applicable automatically?
A Qualifying Free Zone Person that satisfies the relevant terms and conditions will be allowed to enjoy the benefit associated with the 0% CT regime for free zones automatically.
Q86. What is considered as a Qualifying Free Zone Person?
In order to be considered as a “Qualifying Free Zone Person”, the entity in the free zone must:
- Have adequate substance within the United Arab Emirate;
- Generate “Qualifying Income” as mentioned in a Decision issued by the relevant government authorities;
- Comply with all the rules relating to transfer pricing as well as maintain the relevant documentation relating to transfer pricing transactions; and
- Not made any election to be subject to Corporate Income Tax in full.
Q87. Will any entity operating in a Free Zone be required to file a CT return?
Yes. All the entities in the Free Zone will have to file a corporate tax return. It is irrespective of whether these entities meet the criteria to be considered as a Qualifying Free Zone Person or not.
Q88. Will there be any change in the treatment of CT for entities operating in different free zones?
No. The treatment in the context of Corporate Income tax will be the same for all the entities operating within a Free Zone.
Q89: Will banks be subject to the corporate tax in the UAE?
The UAE corporate tax will be applicable to all the banks operating in the UAE.
Q90: Will business entities operating in the real estate sector be subject to the corporate tax in the UAE?
The corporate tax will be applicable to all the business entities engaged in construction, management of real estate, brokerage, agency and developmental activities.
Q91. Will charities and other organizations that work for public welfare be subject to Corporate Income Tax?
Charitable and other benevolent organizations working for public welfare will be provided with exemption from the Corporate Income Tax only if these entities satisfy specific conditions mentioned in a Decision issued by the government.
Q92. How will shipping and airlines entities operating internationally be taxed?
Income generated by foreign entities engaged in business of operating ships and aircrafts will be given exemption from Corporate Tax with respect to the following:
- Providing services involving transportation of mail, livestock, merchandise, parcels, goods or passengers internationally, either by sea or air;
- Chartering or leasing ships or aircrafts used for transportation internationally; or
- Chartering or leasing equipment which are essential towards ensuring the airworthiness of aircrafts or the seaworthiness of ships used for transportation internationally.
This exemption would be applicable only where the jurisdiction of a foreign shipping or an airline company would allow an exemption of similar nature and stature to operators of ships and aircrafts based in the UAE.
Q. Tax Groups
Q93. Will a group of UAE based entities be allowed to form a Group for CT purposes?
The companies based in the UAE are allowed to form a Group and be treated as one single entity if the parent company based in the UAE holds minimum 95% of the voting rights and shares of each of the other companies.
Q94. Does the Corporate tax regime allows a foreign entity’s subsidiaries operating in the UAE to form a Group for the purposes of Corporate Income Tax?
Being owned by a company operating in a foreign jurisdiction doesn’t mean that its subsidiaries operating within the UAE cannot form a Group for the purposes of Corporate Income Tax, but the subsidiaries of the foreign entity must operate in the UAE under the umbrella of an intermediary parent company that has been established in the UAE and will be considered as parent of the Group for the purposes of Corporate Tax.
Q95. Does the CT regime allows a foreign entity to be included in a Group?
No, unless the entity is controlled and managed in the United Arab Emirates and treated as a resident entity in the country for the purposes of Corporate Tax.
Q96. Does the Corporate Income Tax threshold rate of 0% applicable to the entire Group?
Yes. The threshold rate of 0% of AED 375,000 will be applicable to the whole Group as if it is single entity.
Q97. Will a Group be required to prepare and maintain consolidated financials?
Yes. In order to calculate the income considered taxable for Corporate Tax purposes, the parent company in the group will be required to draft consolidated accounts for the group for a specifc Tax Period by accumulating the figures presented by all the group members in their stand-alone accounts and excluding transaction between group members for the same period as the tax period.
R. Relief for a Group
Q98. What is a Qualifying Group?
It is a group that exists when the following happens:
- All the members of the group meet the definition of a juridical person and in addition are considered either as residents in the United Arab Emirates or are non-residents but have a permanent establishment through which they operate within the United Arab Emirates;
- Either has ownership stake 75% or above in the other entity, or a 3rd party has ownership of 75% or above in both entities;
- Neither of the member of the group is considered or treated as a Qualifying Free Zone Person;
- Neither of the member of the group has been provided with Exemption by the relevant authorities; and
- Members of the group prepare and maintain their own financial reports using the same reporting standards, and also have the same fiscal year.
Q99. Is there any relief in the context of spin-offs, mergers, and other transactions involving restructuring?
The Corporate Income Tax regime in the UAE allows for spin-offs, business mergers, legal mergers and other restructuring and transfer transactions that satisfy the specified conditions to be conducted without the triggering of any kind of loss or gain in the context of Corporate Income Tax in the UAE.
S. Financial Documents and Records
Q100. What records or documents should be kept for CT purposes?
Taxable persons are required to draft and maintain financials records for determining taxable income. In addition, a taxable person should also maintain all the supporting documents that serves evidence for the information presented in the corporate income tax return.
Persons having exemption must maintain all record and documents that serves as supporting for the exemption provided by the relevant authorities.
Q101. How long one should keep records for CT purposes?
Documents and records should at least be maintained for seven years minimum following the end of a specific tax year or period.
Q102. Can I use the group financials to make the Corporate Income Tax return for my business?
This can only be done in a scenario where the group only consists of the taxable persons (considered resident in the UAE) that have applied to be a part of a Group for tax purposes. Otherwise, each entity based in the UAE that is required to comply with CT will not only have to draft but also maintain separate financial records for Corporate Tax purposes.
Q103. Will all the business entities operating in the UAE be required to get their financial records audited?
Only the entities that are mentioned in a decision by the Ministry will have to get their financials audited by a registered auditor in the UAE.
Q104. Should I get my consolidated group financials audited for Corporate Tax purposes in the UAE?
No. Only the taxable persons that are mentioned in a decision that has been issued by the Ministry will be required to have their financials audited by a registered auditor in the UAE.
Q105. Will I be required to submit my accounts to the FTA?
The FTA may request for the accounts together with the Corporate Income Tax return or can also require the accounts to be submitted whenever requested.
Q106. What currency should I use for calculating corporate tax?
The national currency of AED will be used for CT purposes. In case of foreign entities, results will have to be translated into AED.
Q107. What rate of exchange should be used for purposes of CT in the UAE?
For the purposes of Corporate Tax in the UAE, all of the amounts in foreign currencies must be translated into AED using the exchange rates mentioned by the UAE’s Central Bank.
Q108. What is a self-assessment regime?
This is a regime in which taxpayers are required to calculate, report and pay their taxes.
Q109. Who needs to register for CT?
All of the taxpayers, as mentioned by the Ministry, will have to get themselves registered for the CT and also obtain a Registration Number that will be used as an identifying metric for a taxable person when it comes to persons registered for corporate tax in the UAE. The FTA may also require certain persons having exemption to register for CT as well.
Q110. What is the right time to get registered for the new corporate tax in the UAE?
Taxable persons are required to register for the new tax regime before the submission of the first corporate tax return.
Q111. Is there any threshold regarding registration for CT?
No. There is no threshold with regards to registration for CT.
Q112. How do one register itself for CT?
Taxable persons will be allowed to register for CT online through FTA’s website. Further guidance regarding registering for CT will be provided in due course.
Q113. Is a VAT registered person required to register for Corporate tax?
Yes. Taxable persons will have to get themselves registered for corporate tax irrespective of whether they have already been registered for VAT.
Q114. How often the businesses in the UAE will have to file or submit a Corporate Tax return?
Only one Corporate Tax return will need to be submitted to the tax authorities per Tax Period. The return will become due within 9 months after the entity’s Tax Period has ended.
115. Will the Corporate tax return be filed online?
The taxable persons will be required to submit their Corporate Tax returns online. More information regarding this will be made available in due course.
116. When I will be required to make payment relating to my CT liability?
The payment against CT payable will need to be made prior to the end of the 9 months after the end of the entity’s relevant Tax Period.
117. How one can pay its CT payable?
Guidance regarding the methods for payment of corporate tax will be issued by the ministry or the FTA in due course.
118. Are there any fine or penalties in case of any non-compliance of the Corporate Tax laws and regulations?
Just like other taxes in the United Arab Emirates business entities will be required to bear penalties in case of non-compliance with the applicable corporate tax laws and regulations.
U. Pillar 2
119. Will the CT regime tax large corporations at the minimum tax rate?
The United Arab Emirates is a member of the OECD BEPS Inclusive Framework and has committed itself towards addressing the challenges which tax jurisdictions face internationally. The introduction of a CT regime helps in providing the UAE with a framework to adopt the Pillar Two rules.
Until such time as the Pillar Two rules are adopted by the UAE, multinationals will be subject to CT under the regular UAE CT regime.
Further information will be released in due course on the implementation of the Pillar Two rules in the UAE.