The 2023 UAE Tax Regime – Corporate Tax
The UAE’s Federal Decree-Law No. 47 of 2022 (“Corporate Tax Law” or “CTL”) was published on 9 December 2022, which will become effective on 24 December 2022. Set to apply for tax periods for the relevant subjects of the law on or after 1 June 2023 (“Implementation Date”), the CTL now regulates the implementation of, and the exemption from, a newly introduced fixed corporate tax (“Corporate Tax” or “CT”) on legal and natural persons (making income from non-commercial businesses) (“Taxable Person(s)” or “Person(s)”) in mainland UAE, with special provisions on possible implementation on qualified free-zones Persons. The CTL also expands on the quality of income, the form and activities of a relevant legal person when it comes to the implementation of the law.
The CTL is the next instalment in the new tax regime saga that will be brought to the UAE in 2023. The CTL will be linked in its implementation to Decision No. 85 of 2022 (“Tax Domicile Decision” or “TDD”) and Decree-Law No. 28 of 2022 (“New Tax Procedures Law”).
Summary of Key Provisions:
- The CTL is a new instalment in the 2023 Tax Regime.
- New Corporate Tax brackets are introduced and fixed at 0% and 9%.
- Natural and Legal Persons are subject to Corporate Tax which extends to income derived from non-commercial activities.
- The CTL Applies to Residents and Non-Residents Taxable Persons. This extends to Qualifying Free Zone Persons subject to the conditions set in the CTL.
- Control over subsidiaries, related persons, and tax groups are defined within the CTL.
- Conditions for exemptions from the CTL are recognised, subject to fulfilment to certain conditions for certain types of businesses and Persons.
The Corporate Tax brackets & Persons Subject to the CTL:
Application of Corporate Tax in Mainland & Free Zones:
The CTL introduces taxation brackets for any Person’s taxable income as per the law (“Taxable Income”) that are as follows (“Tax Bracket(s)”):
- A fixed Corporate Tax of 9% on Taxable Income that exceeds the taxable amount set out in any relevant tax decree or law that is issued by the UAE Cabinet (“Tax Instrument”). The current anticipated taxable amount is any Taxable Income exceeding AED 375,000.00.
- A 0% rate for any Taxable Income that does not exceed the taxable amount set in a relevant Tax Instrument.
The CTL further introduces the same Tax Brackets for Persons of a UAE Free Zone (“Free Zone”). Notably, the Free Zone Person fulfilling the following criteria (“Qualifying Free Zone Person” or “QFZP”) will qualify for 0% Corporate Tax:
- The QFZP maintains ‘adequate substance’ in the UAE.
- Derives Taxable Income that is below the taxable amount (“Qualifying Income”) as specified by a Cabinet decree.
- The QFZP has not elected to be subject to Corporate Tax under the CTL.
- The QFZP complies with Articles 34 and 55 of the CTL regarding tax obligations regarding a related person, connected persons, the tax registration requirement, and the tax group provisions.
- The QFZP meets any other conditions as may be prescribed by the UAE Minister of Finance.
Nevertheless, if the QFZP derives more Taxable Income than the amount of the Qualifying Income, or if a Cabinet decree stipulates otherwise, the QFZP shall then be subject to the 9% Corporate Tax.
Persons Subject to CTL:
The CTL will apply to incomes derived by a resident or non-resident Person as its jurisdiction extends to foreign Persons with operations in the UAE or being controlled from within the UAE. These Persons are (“Taxable Person(s)”):
- Any legal persons established in UAE Mainland and UAE Free Zones (as explained above).
- Any legal person that is established in a foreign jurisdiction but is effectively managed and controlled in the UAE.
- Any natural person who conducts business in the UAE, including non-commercial activities.
Resident Persons must have:
- a place of business or another form of presence in the UAE in accordance with the provisions of the CTL (“Permanent Establishment”).
- an income accruing in, or derived from, the UAE (“State Sourced Income”) as specified in the CTL.
- a nexus with the UAE (as will be defined by the Tax Instrument).
Note that the CTL will also apply to any Taxable Income made by a Resident Person realised by the Taxable Person even if it is realised outside the UAE.
Persons exempted from the CTL:
The CTL refers to various types of exemptions from Corporate Tax subject to various conditions and categorisations made under the CTL. On one hand, the implementation of the Corporate Tax, as explained above, starts with certain income ranges. On the other hand, the CTL recognises automatic exemption for various entities such as UAE Federal Government Entities and the entities they control. It also recognises exemption for exemptions for businesses or business activities of exploring, extracting, removing, or otherwise producing and exploiting the natural resources of the UAE (“Extractive Businesses”) and separating, treating, refining, processing, storing, transporting, marketing or distributing natural resources of the UAE (“Non-Extractive Natural Resource Businesses”), should these businesses meet certain conditions and subject to the exclusive notification by such businesses to the Minister of Finance.
Note that the automatically exempted persons and Extractive Businesses and Non-Extractive Natural Resources Businesses may also be exempted from other compliance requirements (tax registration, tax filing, etc.) for the activities or the conditions that they meet. Nevertheless, such exemptions would not apply to the portion of their activities or businesses that are not covered by such an exemption.
Finally, the CTL allows for entities that meet certain requirements to apply directly with the Federal Tax Authority (“FTA”) for exemption from CTL. These entities are (i) public or private pension and social security funds; (ii) entities whose principal activity is the issuing of investment interests to raise funds or pool investor funds or establish a joint investment fund to enable the holder of such an investment interest to benefit from the profits or gains from the entity’s acquisition, holding, management or disposal of investments, under the applicable legislation and when it meets certain conditions (“Qualifying Investment Funds”); and (iii) wholly-owned and controlled UAE subsidiaries of a Government Entity, a Government Controlled Entity, a Qualifying Investment Fund, or a public or private pension or social security fund. An entity that meets certain public benefit requirements may also be exempt under the CTL subject to a Cabinet decree (“Qualifying Public Benefit Entities”).
Furthermore, the CTL allows for certain professions and Persons to be exempted from Corporate Tax subject to meeting specific conditions. These Persons are (i) investment managers providing non-exclusive services to Non-Resident Peron’s Permanent Establishment in the UAE; (ii) partners in an unincorporated partnership, as they are treated as individual taxable Persons with independent Taxable Income; and (iii) Family Foundations, subject to an application to the FTA which will grant them “unincorporated partnership” status.
Taxable Income & Deductible Expenditures:
While the CTL focuses more on the qualifications and categorisation of taxable persons, it vaguely recognises that only certain amounts should be subject to Corporate Tax. At this stage, it is safe to presume that the CTL will operate with consideration of exempted types of income.
Chapter Seven of the CTL recognises various types of income that are exempted from the CTL (“Exempt Income“). Exempt Income includes (i) dividends and other profit distributions received from a legal person that is a Resident Person; (ii) dividends and other profit distributions received as a result of 5% (five per cent) or greater ownership interest in the shares or capital of a legal person (“Participating Interest”) in a foreign legal person; (iii) any other income from a Participating Interest; (iv) income of a foreign Permanent Establishment that meets the conditions set in the CTL; and (v) income derived by a Non-Resident Person from operating aircraft or ships in international transportation.
Deductions of Expenditure:
Specific guidelines are introduced on the full and partial deduction of certain expenditures for the purpose of calculation of Corporate Tax. In general, the deductible expenditures must be business related for them to be subject to deduction. The CTL even allows for a 50% deduction of clients, shareholders, suppliers, and any business partner entertainment expenditures. The CTL does not admit deductions for expenditures that are of a business nature.
Reliefs, Affiliation and Tax Groups:
Subject to meeting certain requirements related to control, the ‘no gain – no loss’ principle is recognised in assessing whether relief from Corporate Tax for transfers within the same group (“Qualifying Group”) or certain restructuring transactions could be granted.
The CTL defines the parameters of control and how it is applied in determining what is a related party (“Related Party”) and if transacting with such then what would the applicable to the arm’s length principle for determination of the applicable Taxable Income.
The provisions of the CTL also determine the deductions on Taxable Income made by a Person to any of its owners, officers, or other types of persons who meet the conditions (“Connected Persons”).
Should two or more Persons meet certain conditions, they could apply to form a tax group (“Tax Group”) and be treated as a single Taxable Person for Corporate Tax purposes. The conditions set in the CTL include the Persons and their Subsidiaries being Resident Persons.
A withholding tax at a rate of 0% (“Withholding Tax”) is imposed on State Sourced Income derived by a Non-Resident Person provided that such an income is not attributable to a Permanent Establishment of the Non-resident Person in the UAE.
Tax Credit and Corporate Tax Refund:
Subject to the provisions of the CTL, the Corporate Tax and Withholding Tax may be reduced subject to the relevant Withholding Tax credit and the foreign Corporate Tax credit. The CTL sets the conditions of the limit and benefits of the tax credits.
The CTL further regulates the payment and refund of Corporate Tax, whether due to the FTA deeming the payable Corporate Tax above the required amount, or if there is a Withholding Tax credit with the FTA.
Tax Registration & Payment:
All Persons will be required to register for Corporate Tax and obtain a Corporate Tax Registration Number. This also extends to exempt Persons, subject to the request and assessment of the FTA. Tax returns are due for filing within 9 months from the end of the relevant tax period as per the provisions of the CTL.
The CTL requires any Person to keep all documents related to their submitted tax return for a period of seven (7) years after the submission of the relevant tax return for the relevant tax period.
Much like the provisions introduced in the New Tax Procedures Law, Corporate Tax shall be subject to tax assessments by the FTA. The FTA will utilize the same penalties prescribed in the New Tax Procedures Law (or its predecessor until the New Tax Procedures Law comes into effect in March 2023) for any Corporate Tax violations.
What does CTL means for standing UAE businesses and new arrivals:
It is apparent that the UAE is attempting to strike a balance between utilising taxation as a major source of income for the country while setting moderate, yet effective, brackets and conditions for taxation. Nevertheless, the taxation landscape will now be ferocious with the new tax regime being fully functioning by 1 June 2023 as explained in the below timeline.
The 2023 UAE Tax Regime Effective Timeline:
How can GLA help:
GLA & Company’s lawyers and consultants have extensive expertise across the region and are without a doubt qualified to advise businesses to efficiently structure its group to be in line with the applicable laws and regulations in the UAE.
Author: Khaled Al Khashab, Associate
For further information, please contact Alex Saleh (firstname.lastname@example.org) and Yousef Al Amly (Yousef.email@example.com).