On 9^th December 2022, the Ministry of Finance (MoF) in the United Arab Emirates (UAE) released its long-anticipated Corporate Tax Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses. It is broadly in line with the internationally accepted taxation principles.

The new corporate tax law will become effective for accounting periods starting on or after 1 June 2023 (Article 69).

Post issuing the Consultation Document in April 2022, the corporate tax law clarifies and expands on many key provisions. Here is a detailed summary of the corporate tax law.

Scope of Corporate Tax

Corporate Tax applies to all “Taxable Persons”, including Resident and Non-Resident Persons.

• Resident Person

A resident person covers legal or natural persons and free zone persons that are:

– Incorporated, established or recognised in the UAE; or

– Effectively managed and controlled in the UAE; or

– Conducting a business or business activity in the UAE

• Non-Resident Person

A non-resident person is a person that:

– Has a permanent establishment in the UAE; or

– Derives UAE sourced income; or

– Has a nexus in the UAE as specified in a cabinet decision

• Free Zone Persons

A qualifying free zone person will be subject to a 0% corporate tax rate for the remainder of the tax incentive period set out in the applicable legislation of the qualifying free zone in which it is registered (Article 18(4)).

A qualifying free zone person includes a person that meets the below-mentioned conditions:

– Maintains adequate substance in the UAE;

– Derives qualifying income as specified in a cabinet decision;

– Has not elected to be subject to corporate tax; and

– Complies with arm’s length principle and transfer pricing documentation.

• Unincorporated Partnerships

An unincorporated partnership will not be considered as a taxable person and the partners of an unincorporated partnership will be treated as individual taxable persons. However, an application can be made under Article 16(8) to the FTA to treat an unincorporated partnership as a taxable person for corporate tax purposes.

Exempt Persons from Corporate Tax

The corporate tax law exempts the following persons from the preview of corporate tax:

• Government entity
• Government controlled entity
• A person engaged in an extractive business
• A person engaged in a non-extractive natural resource business
• Qualifying public benefit entity
• Qualifying investment fund
• Public / private pension or social security fund
• Juridical person incorporated in the UAE that is wholly owned and controlled by an exempt person, subject to meeting certain conditions
• Any other person as may be determined by the Cabinet

UAE Corporate Tax Rate and Imposition

The corporate tax shall be imposed on the taxable income of businesses at the following rates:

• 0% on the taxable income not exceeding AED 375,000
• 9% on the taxable income exceeding AED 375,000

The corporate tax shall be imposed on a qualified free zone person at the following rates:

• 0% on qualifying income
• 9% on taxable income that is not qualifying income

Corporate Tax Period and Return Filing Due Date

The financial year to be considered shall be the Gregorian calendar year or the twelve-month period for which the financial statements are being prepared by the taxable person. However, the taxable person may apply to the Authority to change the tax period, subject to meeting conditions set by the FTA.

The corporate tax period would differ depending on the financial year end followed by the entity.

Entities With Financial Year Ending	First Corporate Tax Period	CT Return Filing and Payment Due Date
30 June	1 July 2023 – 30 June 2024	31 March 2025
31 December	1 January 2024 – 31 December 2024	30 September 2025
31 March	1 April 2024 – 31 March 2025	31 December 2025

Note: The Uae Corporate Tax returns must be filed and payment must be made within 9 months of the respective tax period, or by such other date as directed by the FTA.

Calculation of Taxable Income under the UAE Corporate Tax

For the purpose of calculating taxable income for a tax period, adequate standalone financial statements prepared for financial reporting purposes in accordance with accounting standards accepted in the UAE shall be considered.

The taxable income for a particular tax period is the accounting income for that period after making the following adjusting (to the extent applicable) to the accounting net profit:

• Any unrealised gain or loss
• Exempt income
• Relief
• Deductions
• Transactions with related parties and connected persons
• Tax loss relief
• Any incentives or relief for qualifying business activity as specified by the Cabinet
• Any other adjustments

Corporate Tax Base

• Resident Person

– A resident juridical person is subject to corporate tax on their taxable income derived from the UAE or outside the UAE.

– A resident natural person is subject to corporate tax on the income derived from the UAE or outside the UAE insofar as it relates to the business or business activity conducted by the natural person in the UAE.

• Non-Resident Person

A non-resident person is subject to corporate tax if they have:

– Taxable Income attributable to a permanent establishment in the UAE

– UAE sourced income not attributable to a permanent establishment in the UAE

– Taxable Income attributable to the nexus of the person in the UAE, as determined by the Cabinet.

Exemptions under the UAE Corporate Tax

UAE resident companies are subject to UAE corporate tax on their worldwide income, including capital gains. However, to curb instances of double taxation, certain incomes are exempted from the calculation of corporate tax. The following are exempted incomes that are not taken into account in determining taxable income:

• Dividends and Capital Gains
• Dividends and capital gains earned from the sale of shares of a subsidiary.
• Dividends received from foreign companies
• Domestic dividends earned from UAE companies
• Dividends received from UAE free zone companies (even if the income of such companies is subject to nil corporate tax rate).
• Capital gains earned from the sale of shares in both UAE and foreign companies will be exempt subject to meeting the conditions mentioned below:

– The recipient shareholder holds at least 5% of the shares of the subsidiary company, and

– A foreign subsidiary is subject to at least 9% corporate tax.

• Profits from Foreign Branches

UAE companies with one or more foreign branches (i.e. a permanent establishment in a foreign country subject to corporate tax in that foreign country) may remain an attractive tax jurisdiction by choosing either option for their foreign branch profits:

– Claim foreign tax credit for taxes paid in the foreign branch country, or

– Elect to claim an irrevocable exemption for their foreign branch profit (tax rate in the jurisdiction should be equal to or more than UAE corporate tax rate).

• Leasing or Operating Aircraft or Ships

Income earned from leasing or operating aircraft or ships is exempt from the scope of UAE corporate tax on meeting the following conditions:

• Such income is earned by a non-resident
• The leased aircraft or ship or any associate equipment is put to use for international transportation (with a reciprocal arrangement from foreign jurisdiction).

Relief under the UAE Corporate Tax

The corporate tax law offers the following reliefs while calculating taxable income:

• Transfers within a Qualifying Group – Gains and losses need not be taken into consideration in determining the taxable income in relation to the transfer of assets or liabilities between two taxable persons that are members of the same qualifying group.
• Business Restructuring Relief – Gains and losses need not be taken into consideration in determining the taxable income in relation to qualifying business restructuring exercises between two taxable persons.
• Small Business Relief – If the revenue of a resident taxable person does not exceed the threshold determined by the Minister, he is eligible for small business relief.
• Tax Loss Relief – In accordance with the rules of chapter 11, a tax loss can be offset against the taxable income of subsequent tax periods to arrive at the taxable income for those subsequent tax periods.

Deductions under the UAE Corporate Tax

The corporate tax law offers the following deductions while calculating taxable income:

• Deductible Expenditure – Expenditure which is not capital in nature and incurred wholly and exclusively for the taxable person’s business shall be deductible in the tax period in which it is incurred.
• Interest Expenditure – Interest expenditure shall be deductible up to 30% of the taxable person’s EBITA (Earnings Before Interest, Taxes, Depreciation, and Amortization) in the tax period in which it is incurred, subject to exemptions and exclusions.
• Entertainment expenditure – 50% deduction is allowed on any entertainment, amusement, or recreation expenditure incurred during a tax period, subject to exclusions.

Note: Donations, grants, gifts, fines or penalties, bribes or related payments, dividends or profit distribution, taxes including VAT, etc. are non-deductible expenditures as detailed in Article 33.

Transactions with Related Parties and Connected Persons

In accordance with the OECD guidelines, transactions and arrangements between related parties should meet the arm’s length standard, including any conditions that may be prescribed by the FTA.

The said transaction or arrangement meets the arm’s length standard if its results are consistent with the results that would have been realised if unrelated persons would have engaged in a similar transaction or arrangement under similar circumstances.

In case the results do not fall within the arm’s length range, the FTA has the power to make transfer pricing arrangements.

Tax Group Provision

A resident parent company can make an application to form a tax group if it owns at least 95% of the share capital of the subsidiary and it meets the conditions laid out in Article 40(1). The so-formed tax group will be treated as a single taxable person for all corporate tax matters and be represented by the parent company.

The liability of both parent and subsidiary companies shall be joint and several for corporate tax payable by the tax group for those tax periods when they are members of the tax group.

For the calculation of corporate tax payable of the tax group, the financial results, assets and liabilities of each subsidiary shall be consolidated for the relevant tax period. However, transactions between the parent company and each subsidiary that forms part of the tax group shall be eliminated.

Registration, Filing and Paying Corporate Tax 

All taxable persons including free zone persons are required to register for corporate tax and obtain a corporate tax registration number.

All the records and documents supporting tax return must be maintained by the taxable person for a period of 7 years from the end of the tax period.

FTA is empowered to request the taxable person to submit the financial statements used to determine the taxable income for a particular tax period.

Payment and Refund of UAE Corporate Tax

Corporate tax payable must be settled by the taxable person within 9 months from the end of the relevant tax period, or by the date stipulated by the FTA.

The application for a refund can be made to the FTA if the withholding tax credit available exceeds the corporate tax payable or corporate tax is paid in excess of the amount payable.

Anti-Avoidance Rules

Based on the general anti-abuse rules, the FTA has the power to counteract or adjust the taxable basis in cases where the main purpose or one of its main purposes of any transaction or arrangement is to obtain a tax advantage.

Transactional Rules

For corporate tax calculation, the opening balance sheet shall be considered as the closing balance for the financial year ending immediately before the commencement of the first tax period.

The general-anti abuse rule shall apply from the time of publication of the Decree Law in the Official Gazette.

International Agreements

In case of any inconsistency between the terms of the international agreement in force in the UAE and the provisions of the corporate tax law, the terms of the international agreement shall prevail.

Wrapping It Up

Although the Federal Decree Law outlines the broad framework of the Corporate Tax law, taxpayers will have to carefully examine the Cabinet Decisions, Executive Regulations, Public Clarifications, Guides, etc. to assess the final impact of UAE corporate tax on their business.