Corporate Tax in UAE

The Federal Tax Authority of UAE has passed a decree on 09th December 2022 clearing the way for introduction of Tax on Business profits in the region. The decree no. 47 of 2022 covers a total of 67 Articles covering various aspects including applicability of the tax laws and the entities to which the tax laws will apply.

Some of the key pointers of the law is as under:-

• The applicable tax rate is 9% of the taxable income of over AED 375,000 earned on business activities carried out in the region by the residents and the non-residents subject to the benefits available in the Double Taxation Avoidance Agreement (DTAA) entered into by UAE with other countries.

• Government & Goverment controlled entities, Persons engaged in the Crude Extraction business and Investment funds are kept outside the purview of the tax and has been granted immunity from the applicability of Tax laws except when they conduct the activities not covered in their primary business.

• The business income is considered as sourced from the region if it is derived by resident or in case of non-resident it is derived from a Permanent Establishment in the region or from any asset, rights, capital invested, or activities performed in the state. This covers a broad spectrum of incomes and defined widely than most of the International tax treaties and thus, the Foreign businesses needs to obtain a Tax Residency certificate in their home countries to claim the tax exemption.

• The definition of a Permanent Establishment under the law is akin to the definitions in the DTAA's and thus, provides simplified tax positions for the Multinational Entities ("MNEs")

• The decree now requires the Free Zone Entities to satisfy the substance test is order to continue claiming the tax exemption. This put out more thrust on adequate compliance of the Economic Substance Regulation (ESR) which has already been adopted by UAE in FY19.

• Similar to the other countries, the Decree provides a specific mechanism for calculation of taxable income which can be based on the "accrual" method of accounting. This will further push the businesses to get their books audited in UAE to ensure that they are calculating their tax liabilities if any correctly. While the decree explicitily not included application of any specific accounting standards however, we expect more clarity to come in future in relation to applicability of IFRS as a standard in the near future.

• The decree further provides exemption on incomes earned by one entity in an intra-group transaction and allows group based taxation as well. In order to claim the taxation as a group, the parent entity in the group needs to hold atleast 95% of the shares of the group companies. The threshold is on a higher side as compared to the group taxation law in other countries and thus, it is very difficult to implement as of now since historically, major MNE groups having a mainland entity have a local sponsor holding majority share capital and even after relaxation provided under the new Corporate Law, the activities covered are limited.

• The Transfer Pricing Provisions will apply on related party transactions and the businesses will be required to file the documentation with the FTA. The details of the compliance requirement will be rolled out by the FTA shortly. However, important consideration that needs to be taken care of is the interplay of the ESR requirements and the role of Transfer Pricing documentation in that. It is now important for the MNE group to make sure that the Transfer Pricing Documentation is aligned with the ESR declarations filed by the groups since FY19.

• The decree also covers the provision for carry forward of tax losses however, not provided any provision for carry backward. However, the important benefit that the decree has assured is the set off of losses from one group entity to another within the same group.

The proposed tax law in UAE is seen as a breakthrough for a Monarchy based governments to introduce the concept of taxes on income and will further pave a way for the World to introduce the Global Minimum tax regime in near future. While there has been a lot of debate on introduction of the Global Minimum Tax system however, the benefits can only be known once the system is implented by the major economies of the world. Having said so, the steps taken by the UAE governments are commendable and will help the UAE economy to generate an alternative way of income for the Soveriegn which can further use the funds for manifold development in the region.

Read the complete FTA Decree through this link