The UAE Corporate Tax Saga Continues: Cabinet and Minister Decisions to Paint a Vivid Picture of the Corporate Tax Law
In late 2022, the government of the United Arab of Emirates (“UAE”) revealed its plans for a complete overhauling of the current UAE tax regime. With the introduction of the UAE’s Federal Decree-Law No. 47 of 2022 (“Corporate Tax Law” or “CTL”), the Cabinet Decision No. 85 of 2022 on the Determination of Tax Domicile (“Tax Domicile Decision” or “TDD”) and the President of the UAE’s Decree-Law No. 28 of 2022 on Tax Procedures (“New Tax Procedures Law” or “TPL”), the UAE completely altered the current tax landscape with a new regime that was set to become effective in the period of March to June 2023. With the new tax regime being in effect, the Minister of Finance and the UAE Cabinet have been effectively supplementing the CTL with various decisions during the last quarter that paint a more vivid image of what to expect from the Corporate Tax Law and what businesses of the UAE should expect in light of such clarifications and supplementary decisions:
In this article, we will explore some of the latest relevant decisions and updates to the CTL.
Further clarification on exemptions from the application of the CTL:
The CTL has an already comprehensive list of exemptions from its application. Additionally, various decisions that were issued over Q2 and Q3 2023 have elaborated on the text of various articles (such as article 4 of the CTL where various specific cases of exemption from the CTL were mentioned) that include case-by-case exemptions from the application of the CTL. On such exemptions the following decisions were issued:
- Ministerial Decision no. 105 of 2023: elaborating on the timeline for an exempt person to submit and maintain their status as exempt person before they fail to meet such conditions and cease to be an exempt person under the CTL as per articles 4(5) and 4(6);
- Ministerial Decision no. 115 of 2023: setting conditions for private pension funds, and private social security funds to apply from exemption of the application of the CTL under articles 4(1), 4(2), and 4(3) and how their income, as exempt persons, is regulated; and
- Ministerial Decision no. 116 of 2023: clarifying the types of participation interests (ownership interest in the shares or capital of a legal person that qualify for tax exemption under the CTL) and various instruments of the same nature.
A list of Qualifying Public Benefit Entity exempted from the application of the CTL:
As per the Cabinet Decision no. 37 of 2023, the Cabinet finally listed few Qualifying Public Benefit Entities that fit the criterion of article 9 of the CTL where they are deemed of benefit to the public and shall be exempted from the application of the CTL.
The list includes a total of 521 entities that fit the criterion of article 9 of the CTL, ranging from federal-level entities (such as ministries and national health and sports associations), and other emirate-based entities of various backgrounds and benefits such as cultural, religious, artistic, and social cooperation entities.
Determining sources and forms of exempted income of free zone persons from application of the CTL:
The Cabinet also issued Decision No. 55 of 2023 that is solely focused on determining what is a Qualifying Income for a Qualifying Free Zone Person under the CTL. Under the CTL’s article 18, a Qualifying Free Zone Person (“QFZP“) is a natural or a legal person located inside a UAE free zone who may qualify for a 0% tax bracket upon fulfilling article 18’s criterion. Of such criterion, is that the QFZP “Derives Qualifying Income as specified in a decision issued by the Cabinet at the suggestion of the Minister.” The Cabinet decision at hand specifies three forms of income that shall be deemed Qualifying Income that exempts the QFZP from the application of the CTL:
- Income derived from transactions with other free zone persons, except for income derived from Excluded Activities (as determined by a decision issued by the Minister and conducted by a Qualifying Free Zone Person from which non-Qualifying Income is derived).
- Income derived from transactions with a Non-Free Zone Person, but only in respect of Qualifying Activities (as determined by a decision issued by the Minister and conducted by a Qualifying Free Zone Person from which Qualifying Income is derived) that are not Excluded Activities.
- Any other income provided that the Qualifying Free Zone Person satisfies the de minimis requirements under article (4) of this decision (The de minimis requirements shall be considered satisfied where the non-qualifying Revenue derived by the Qualifying Free Zone Person in a Tax Period does not exceed a percentage of the total Revenue of the Qualifying Free Zone Person in that Tax Period as specified by the Minister, or an amount specified by the Minister, whichever is lower).
Nevertheless, this decision deems transacting with Domestic Permanent Establishment or a Foreign Permanent Establishment or the ownership or exploitation of immovable property (in some cases) Taxable income made by the QFZP.
Non-Resident Persons and income from Immovable Property:
It was established that Non-Resident Persons (who do not derive any income from within the UAE) would be exempted from the application of the CTL. However, another Cabinet decision no 56 of 2023 has clarified that non-resident legal entities income derived from immovable property located in the UAE (right in rem, sale, disposal, assignment, direct use, letting, including subletting and any other form of exploitation of an immovable property) shall be taxable and subject to CTL.
SMEs relief under the CTL:
The Ministerial Decision No. 73 of 2023 introduces some clarifications on the Small and Medium Enterprises (“SMEs”) relief referred to under article 21 of the CTL, being the election of being treated as to have not derived any taxable income under the CTL for a tax period. The ministerial decision includes various clarifications that include;
- Setting the taxable income limit at of AED 3M (c.a., USD 817,000) for SMEs relief to apply; and
- Applying the aforementioned taxable income limit for tax periods starting at or after 1 June 2023 till tax periods ending 31 December 2026;
It must be noted that SMEs relief is not applied to QFZPs as per the ministerial decision.
Financial threshold for maintaining files on group transactions:
In line with the requirement for a Taxable Person (a person who is subject to the application of CTL) to maintain master and local files on its group and relevant transaction, the Minister of Finance has issued Decision no. 97 of 2023, setting a financial threshold for the application of article 55(2) of the CTL in relation to the requirements for maintaining transfer pricing documentation as either of;
- Being a member of a multinational group of companies as defined by law no. 44 of 2020 where the unified group income for the relevant tax period is AED 3,150,000,000 (c.a., USD 858,000); or
- If the taxable person’s taxable income exceeds AED 200M (c.a., USD 54,452,000).
It must be noted that the thresholds pertain to transactions with Related Parties and Connected Persons as defined by articles 35(1) and 36(2) of the CTL, respectively. Meaning that article 55(2), and the above-mentioned thresholds, could be applied to intra-group transfers and transfers made between natural persons with up to fourth-degree kinship.
What does that mean for established and new UAE Businesses?
While the ongoing commercial legend of a tax-free UAE may have come to an abrupt end, it remains a very encouraging jurisdiction with relatively easier procedures and more attractive tax brackets. Alas, the new clarifications and elaborations on the CTL will bound all businesses, whether in mainland UAE or its free zones to pay attention to how the dynamics of the CTL work and potentially affect its tax benefits. A question will also arise as to whether the UAE free zones would offer a new experience for new and established UAE businesses.
While the government and the competent minister have been proactively issuing guidelines and decrees to clarify and provide details on the implementation of the new tax regime, practically speaking, there are a lot of unclarity on how the operations will take place.