The provided text is a transcript from a workshop on the general principles of corporate taxation for businesses in the UAE. Senior tax policy experts from the Ministry of Finance and the Federal Tax Authority (FTA) explain the introduction of corporate tax, its legal framework, and the roles of the involved authorities. The presentation covers fundamental aspects such as taxable persons (residents and non-residents), the determination of taxable income, available exemptions, small business relief, tax rates, and tax periods. Furthermore, it explores specific topics like free zone regulations, tax loss relief, business restructuring, Tax Group provisions, transfer pricing, and compliance requirements, including registration, tax returns, record-keeping, and potential penalties.
Corporate Taxation Study Guide
Quiz
Answer the following questions in 2-3 sentences each.
- What are the two main entities involved in enacting and implementing UAE corporate tax law, and what are their primary responsibilities?
- Explain the difference between a resident person and a non-resident person for UAE corporate tax purposes.
- What are the conditions under which a natural person is considered a taxable person under UAE corporate tax law?
- Describe the standard corporate tax rates applicable to resident taxable persons in the UAE.
- What is the significance of a “qualifying free zone person” and what is the standard corporate tax rate applicable to their qualifying income?
- Outline the general rule regarding the deductibility of expenses for corporate tax purposes.
- What is the participation exemption, and what is one key requirement for a parent company to benefit from it regarding dividends received from a foreign subsidiary?
- What is the basic principle of transfer pricing, and why is it important in the context of related party transactions?
- What are the general timelines for filing the corporate tax return and making the tax payment?
- What is the standard record-keeping period for corporate tax-related documents in the UAE?
Quiz Answer Key
- The two main entities are the Ministry of Finance, which is responsible for drafting tax policy and the law, and the Federal Tax Authority (FTA), which is the implementing body responsible for the administration, collection, and enforcement of taxes. The Ministry of Finance sets the legislative framework, while the FTA executes and manages the tax system.
- A resident person is either a juridical person incorporated in the UAE or effectively managed and controlled in the UAE, or a natural person conducting taxable business activities in the UAE. A non-resident person is a juridical or natural person who does not meet the residency criteria but may have a permanent establishment or Nexus in the UAE or derive state-source income.
- A natural person is considered a taxable person if they conduct a business or business activity in the UAE and their total turnover from such activities exceeds one million Dirhams within a calendar year. Certain income sources like wages, personal investment income (without a license), and real estate investment income (without a license) are excluded from this threshold calculation.
- The standard corporate tax rate for resident taxable persons is 0% on taxable income up to AED 375,000 and 9% on taxable income exceeding this threshold. This applies to both natural and juridical resident persons, as well as non-residents with a permanent establishment or Nexus in the UAE.
- A qualifying free zone person is a juridical person in a UAE free zone that meets specific conditions, including maintaining adequate substance, deriving qualifying income, and complying with transfer pricing rules. Their qualifying income is subject to a 0% corporate tax rate, while non-qualifying income is taxed at 9%.
- Generally, any expense incurred wholly and exclusively for the purposes of the taxable person’s business and to generate taxable income is deductible for corporate tax purposes. However, there are specific rules outlining non-deductible expenses and limitations on certain deductions, such as interest expenditure and entertainment expenses.
- The participation exemption aims to avoid double taxation on income derived from subsidiaries. One key requirement for a UAE-based parent company to exempt dividends received from a foreign subsidiary is holding at least 5% or greater ownership interest in the subsidiary for an uninterrupted period of 12 months (or intending to hold for 12 months).
- Transfer pricing is the principle that transactions between related parties should be carried out at arm’s length, meaning the terms and conditions should be comparable to those that would exist between independent parties. This is important to prevent the artificial shifting of profits to reduce tax liability.
- The standard deadline for filing the corporate tax return is nine months from the end of the tax period. The corporate tax payment is also due within nine months from the end of the tax period, aligning with the filing deadline.
- The standard record-keeping period for all relevant documents and information related to corporate tax in the UAE is seven years from the end of the tax period to which the records relate.
Essay Format Questions
- Discuss the policy drivers behind the introduction of corporate tax in the UAE. How do these drivers aim to shape the UAE’s economic landscape and international standing?
- Analyze the criteria and implications of being classified as a “qualifying free zone person” under UAE corporate tax law. What are the benefits and potential drawbacks of this classification for businesses operating in free zones?
- Evaluate the significance of the participation exemption rules for UAE-based holding companies with foreign subsidiaries. What are the key requirements for benefiting from this exemption, and how does it contribute to the UAE’s attractiveness as a global investment hub?
- Explain the concept of “tax loss relief” under UAE corporate tax law. What are the conditions and limitations associated with carrying forward and utilizing tax losses? How does this provision support businesses experiencing financial setbacks?
- Compare and contrast the “Tax Group” and “qualifying group” provisions under UAE corporate tax law. What are the key differences in their eligibility criteria and the tax reliefs they offer to member entities?
Glossary of Key Terms
- Corporate Tax (CT): A direct tax levied on the profit of companies and other juridical persons.
- Ministry of Finance (MoF): The UAE government entity responsible for drafting tax policies and legislation.
- Federal Tax Authority (FTA): The UAE government entity responsible for the implementation, administration, collection, and enforcement of federal taxes, including corporate tax.
- Taxable Person: Any individual or entity subject to corporate tax under the UAE law.
- Resident Person: For juridical persons, those incorporated in the UAE or effectively managed and controlled within the UAE. For natural persons, those conducting taxable business activities in the UAE.
- Non-Resident Person: Juridical or natural persons who do not meet the residency criteria but may have taxable presence or income from the UAE.
- Permanent Establishment (PE): A fixed place of business through which the business of a non-resident person is wholly or partly carried on in the UAE.
- Nexus: For a non-resident juridical person, a connection to the UAE, specifically through immovable property from which income is derived.
- Taxable Income: The net profit of a taxable person after allowing for permissible deductions and reliefs, on which corporate tax is calculated.
- Exempt Person: Certain categories of entities, such as government entities and qualifying public benefit entities, that may be exempt from corporate tax under specific conditions.
- Qualifying Free Zone Person (QFZP): A juridical person incorporated in a UAE free zone that meets specific substance and income criteria and is eligible for a 0% tax rate on qualifying income.
- Qualifying Income: Specific categories of income derived by a QFZP that are eligible for the 0% corporate tax rate.
- Non-Qualifying Income: Income derived by a QFZP that does not meet the criteria for qualifying income and is subject to the standard 9% corporate tax rate.
- Participation Exemption: A provision that exempts certain income (like dividends and capital gains) derived by a UAE resident company from its qualifying shareholdings in other companies, subject to specific conditions.
- Transfer Pricing: The setting of prices for transactions between related parties. UAE corporate tax law requires these transactions to be conducted at arm’s length.
- Related Party: Persons who are under common control or ownership, as defined under the corporate tax law.
- Tax Group: A group of related UAE resident companies that can elect to be treated as a single taxable person for corporate tax purposes, subject to meeting specific ownership and other conditions.
- Qualifying Group: A broader group of related persons (including non-residents with a PE in the UAE) that can benefit from reliefs on the transfer of assets and liabilities, subject to meeting specific ownership and other conditions.
- Tax Loss Relief: Provisions allowing taxable persons to carry forward tax losses from previous tax periods to offset future taxable income, subject to certain limitations.
- Tax Period: Generally a 12-month period corresponding to the financial year of the taxable person.
- Tax Return: A formal document filed with the FTA by a taxable person, reporting their taxable income and corporate tax liability for a specific tax period.
- Audited Financial Statements: Financial statements that have been examined and reported on by an independent auditor. Required for certain taxable persons, such as QFZPs and businesses exceeding a certain revenue threshold.
- Emirates Tax Portal: The online platform used for registration, filing of tax returns, and other corporate tax-related procedures.
Briefing Document: UAE Corporate Tax – General Principles Workshop
Attendees: Individuals and representatives of businesses potentially subject to UAE Corporate Tax.
Presenters:
- Hamzawi (Senior Tax Policy Expert)
- Christina Rawati (Tax Policy Expert)
- Saida Khadumi (Senior Tax Policy Expert)
- Mr. Riba (Tax Policy Expert)
- Christine Rider (Tax Policy Expert – likely the same as Christina Rawati, name variation in transcript)
Purpose of the Workshop: To provide an introduction to the general principles of the UAE Corporate Tax (CT) law, covering basic elements, taxable income determination, exemptions, free zones, tax reliefs, compliance requirements, and to answer pre-submitted questions.
Key Themes and Important Ideas/Facts:
1. Introduction and Legal Framework:
- Two Main Entities: The Ministry of Finance (MoF) for policy drafting and law creation, and the Federal Tax Authority (FTA) for implementation, administration, collection, enforcement, and taxpayer support.
- MoF Policy Drivers:Introduction of a competitive tax regime based on international best practices.
- Cementing the UAE’s position as a leading global hub for business and investment.
- Accelerating UAE’s development and transformation.
- Reaffirming commitment to international standards for tax transparency and preventing harmful tax practices.
- FTA Mandate: Administration (registration, returns), collection (taxes and refunds), and enforcement (audits, compliance).
- Taxpayer Support: Providing guidance (guides to be issued for CT), and tax technical support (clarification requests now available on Emirates Tax for registration queries from August 1st, and other matters from registered taxpayers from September 1st).
- Legal Framework: Unlike VAT, there is no GCC treaty for Corporate Tax. The framework consists of:
- Federal Decree-Law (issued in 2022, effective June 1, 2023).
- Implementing Decisions:
- Cabinet Decisions (issued by the UAE Cabinet/Council of Ministers).
- Ministerial Decisions (issued by the Minister of Finance).
- FTA Decisions (issued by the FTA Board of Directors).
- Timeline of Implementation:Announcement: January 31, 2022.
- Law Issued: October 2022 (Law No. 47 of 2022).
- Registration Opened (by invitation): Earlier in 2023.
- Official Registration Open (private & public joint companies): May 15, 2023. “if you haven’t registered yet please register because the registration is open don’t leave it until the last minute register as soon as possible.”
- First Tax Period Started: June 1, 2023.
- First Tax Period End (most businesses with Jan-Dec financial year): December 31, 2024.
- First Tax Return Due (most businesses with Jan-Dec financial year): September 30, 2025. “for most businesses the tax period did not start yet… most businesses will have a tax Financial year starting first of January 24… the first tax return will be due on the 30th of September 2025.”
2. Taxable Person:
- Two Main Categories: Resident Person and Non-Resident Person.
- Resident Person:Natural Person: Tax resident if they conduct taxable business or business activities in the UAE and their turnover exceeds AED 1 million (excluding wages, personal investment income, and non-licensed real estate investment income).
- Juridical Person: Resident if:
- Incorporated, established, organized, or recognized under UAE law (including free zone persons).
- Incorporated in a foreign country but effectively managed and controlled in the UAE. “if this entity is effectively managed and controlled in the uiee is going to be considered as tax resident in the United Arab Emirates.” Key element for effective management and control is where key management and commercial decisions are made.
- Non-Resident Person:Non-resident entities with a Permanent Establishment (PE) in the UAE.
- Non-resident juridical persons with a Nexus in the UAE (immovable property deriving income).
- Non-resident persons deriving UAE State Source income without a PE or Nexus.
- Permanent Establishment (PE): Defined based on international tax models (OECD, UN). Two key components:
- Fixed Place of Business: Place of management, branch, office, factory, building site (construction lasting > 6 months). Excludes preparatory and auxiliary activities (negative list), with delivery per se not excluded if conducted as an activity.
- Agency PE (Dependent Agent): Person habitually concluding contracts on behalf of the non-resident, or negotiating all elements of contracts concluded by the non-resident without substantial modification. Dependent agent required to be tax resident in the UAE. Independent agents (acting non-exclusively and not economically/legally dependent) do not create a PE.
- Natural Person in Exceptional Circumstances: May not create a PE for their foreign employer if conditions in Ministerial Decision 83 of 2023 are met (e.g., no core income-generating activities).
- Taxation Basis:Resident Natural Person: Income attributable to UAE activity and income connected to UAE business activity worldwide.
- Resident Juridical Person: Worldwide income (UAE and foreign source). Foreign tax credit available if foreign income taxed in UAE and foreign tax paid, not exceeding UAE CT on that income.
- Non-Resident Natural Person: Income attributable to UAE PE or fixed base; if no PE, then UAE state source income (subject to withholding tax).
- Non-Resident Juridical Person: Income attributable to UAE PE or Nexus (immovable property income). UAE state source income without PE/Nexus subject to withholding tax (currently 0%).
- Registration Requirements: Resident juridical persons must register regardless of income. Resident natural persons register if turnover > AED 1 million. Non-resident with UAE PE or Nexus must register. Non-resident with only UAE state source income do not need to register.
3. Exempt Persons:
- Nine Categories (Article 4):Automatically Exempt: Government entities (Ministries, departments, agencies, public institutions), unless conducting licensed business activities.
- Exempt Upon Notification to MoF: Extractive businesses (exploration, exploitation) and non-extractive businesses (refining, processing, etc.) of natural resources. May be taxable if > 5% of activities are ancillary/incidental.
- Exempt by Cabinet Decision:Government-controlled entities (wholly owned/controlled by government, mandated activities). Taxable if acting outside mandate.
- Qualifying Public Benefit Entities (listed in Cabinet Decision, e.g., religious, charitable, humanitarian, healthcare, education, animal protection, professional bodies, Chambers of Commerce). Cabinet decision number 37 of 2023 which includes about 500 600 entities.
- Exempt Upon Application to FTA:Qualifying Investment Funds.
- Public or Private Pension or Social Security Funds.
- Wholly owned and controlled UAE entities owned by the above exempt categories.
- Registration for Exempt Persons: Government entities and extractive/non-extractive businesses do not need to register unless taxable activities. Qualifying Public Benefit Entities must register (registration opens Oct 1, 2023). Entities exempt upon application must register (registration opens June 1, 2024).
- Failure to Meet Exemption Conditions: Generally taxable from the start of the tax period. Special rule for deemed exemption until failure day (if no tax avoidance). Exception for liquidation, termination, or temporary failure.
4. Small Business Relief:
- Eligibility: Any resident person (natural or juridical) can apply per tax period.
- Conditions: Revenue of AED 3 million or less for the current and previous tax periods.
- Relief: Not treated as having derived taxable income; no transfer pricing documentation required.
- Limitations: Cannot benefit from certain reliefs (loss relief, deductions, etc.).
- Ineligible Entities: Qualifying Free Zone Persons and members of multinational groups with consolidated revenue > EUR 750 million (approximately AED 3.15 billion). “a member of a multinational group with Consolidated group revenue of more than 3.15 billion germs.”
- Example: Failure to meet AED 3 million revenue in the previous year disqualifies for the current year’s relief.
5. Corporate Tax Rate:
- General Rates (Natural and Juridical Residents, Non-Residents with PE/Nexus):0% on taxable income up to AED 375,000.
- 9% on taxable income above AED 375,000. “here you still need to register if your taxable income is below 375 the only difference is you do not pay on the first 375 000 you do not pay the tax but you pay on the um taxable income after 375 000.”
- Qualifying Free Zone Persons: 0% on Qualifying Income, 9% on Non-Qualifying Income (no threshold).
- Non-Residents Deriving UAE Sourced Income (no PE/Nexus): 0% withholding tax (current rate).
6. Tax Period:
- Generally equivalent to the financial year (usually 12 months, often Gregorian calendar year).
- Taxable person can elect for a different tax period with FTA approval (e.g., changing year-end, aligning with group). Can be up to 18 months or a shortened period (6-12 months).
- Reasons for changing tax period: liquidation, aligning with group, financial reporting, tax relief (state/abroad), commercial/economic/legal reasons.
- First tax period for those with June 1 financial year: June 1, 2023 – May 31, 2024 (return due Feb 28, 2025).
- First tax period for those with Jan 1 financial year: Jan 1, 2024 – Dec 31, 2024 (return due Sep 30, 2025).
7. Determination of Taxable Income:
- Starting Point: Accounting net profit or loss calculated under applicable accounting standards (IFRS or IFRS for SMEs if taxable income < AED 50 million).
- Financial Statements: Must be prepared using accrual basis (cash basis allowed if income < AED 3 million or exceptional FTA approval). Election to use realization basis for gains/losses.
- Adjustments to Accounting Profit/Loss:Add back exempt income (e.g., certain dividends).
- Add back non-deductible expenses.
- Adjust for non-arm’s length transactions with related parties/connected persons.
- Adjust for reliefs claimed (qualifying group transactions, business restructuring).
- Add back unrealized gains/losses (if realization basis elected).
- Non-Deductible Expenses (examples):Expenses not wholly and exclusively for business purpose.
- Capital expenditures.
- Expenses generating exempt income.
- Disallowed interest expenditure (capped at 30% of adjusted EBITDA or AED 12 million, excess carried forward 10 years; exceptions for banks, insurers, natural persons conducting business).
- 50% of entertainment expenses. “entertainment expenses you can actually claim 50 of the entertainment expense so 50 will be deductible 50 will be non-deductible.”
- Penalties and fines (except for breach of contract damages).
- Donations/gifts (except to qualifying public benefit entities).
- Bribes.
- Dividends and profit distributions.
- Corporate tax paid.
- Input VAT recovered (if blocked recovery, then deductible).
- Tax Losses: Carry forward indefinitely subject to >50% ownership continuity (exceptions apply), same/similar business activity, and offset limited to 75% of taxable income. Losses before CT effective date, before becoming taxable, or from exempt income/activities cannot be carried forward.
- Taxable Income Before Tax Losses: Calculated after the above adjustments.
- Application of Tax Losses: Reduce taxable income (capped at 75%).
- Taxable Income: After applying tax losses.
- Corporate Tax Liability: Calculated by applying the relevant tax rate.
- Tax Credits: Withholding tax credits and foreign tax credits (subject to conditions) reduce the tax liability.
- Corporate Tax Payable: Final amount due to the FTA.
8. Exempt Income and Losses (Article 22 & 23):
- Exempt Income Categories:Dividends and other profit distributions from resident companies (always exempt).
- Dividends from foreign subsidiaries (exempt if Participation Exemption rules met).
- Capital gains/losses, foreign exchange gains/losses, impairment gains/losses (exempt if Participation Exemption rules met).
- Income from operating international air transport and international shipping (subject to reciprocity).
- Foreign Permanent Establishment (PE) income (exempt upon election, covering all eligible foreign PEs).
- Participation Exemption (Article 23, Ministerial Decision 116): Relevant for UAE parent/holding companies. Exempts dividends, profit distributions, capital gains/losses, foreign exchange gains/losses, impairment gains/losses from participating interests (subsidiaries) if:
- Parent company holds at least 5% ownership interest.
- Ownership held (or intended to be held) for an uninterrupted period of 12 months.
- Subsidiary subject to a minimum level of taxation (headline rate ≥ 9%). Effective tax rate can be considered. “if you compute the effective tax rate you will see that the effective tax rate in that situation of subsidiary is 11 so you will consider that the subject to tax requirement at the level of the foreign subsidiary is met.”
- Ownership entitles holder to at least 5% of profits and liquidation proceeds.
- Asset test for the subsidiary (at least 50% of assets meet participation exemption requirements).
- Alternative: Historical cost of acquisition ≥ AED 4 million (even if < 5% ownership).
- Ownership rights include ordinary/preferred/redeemable shares, membership/partners’ interests, other securities, Islamic financial instruments (if equity).
- Aggregation of ownership interests within a qualifying group allowed for meeting the 5% threshold and AED 4 million cost.
- Exemption may be recaptured if 12-month holding period not met.
- Participation exemption not applicable if dividend is deductible at the level of the participating interest (anti-abuse).
- Domestic dividends exempt without needing to meet participation exemption. Domestic capital gains on disposal of shares require meeting participation exemption for exemption. Cross-border dividends and capital gains always subject to participation exemption rules for exemption.
9. Free Zones (Cabinet Decision 55, Ministerial Decision 139):
- Special CT regime for free zones due to their economic significance.
- Free Zone: Designated and defined geographic area in the UAE (not solely VAT Designated Zones, though some overlap exists).
- Free Zone Person: Juridical person incorporated, established, or registered in a free zone (including branches of non-resident persons). Does not apply to natural persons, sole establishments, unincorporated partnerships.
- Qualifying Free Zone Person: Free Zone Person meeting specific criteria:
- Maintains adequate substance in the free zone (core income-generating activities, sufficient assets, adequate staff, operating expenses).
- Derives Qualifying Income.
- Complies with transfer pricing rules and maintains documentation.
- Has not elected to be subject to standard 9% CT rate.
- Prepares audited financial statements.
- Meets de minimis requirements.
- Qualifying Income:Income from transactions with other Free Zone Persons (unless Excluded Activities).
- Income from transactions with any other person (natural, mainland, foreign) in respect of Qualifying Activities (unless Excluded Activities).
- Other non-qualifying income that is incidental or meets a de minimis test.
- Qualifying Activities (Ministerial Decision): Manufacturing/processing, holding shares/securities, ship ownership/management/operation, reinsurance fund management, wealth/investment management (regulated), headquartered/treasury/financing (related parties), aircraft financing/leasing, distribution of goods from a Designated Zone (to be resold/used for resale – “if you are Distributing Goods or materials from a designated zone…designated zone is the same as what’s considered to be a designated for that purposes.”), logistics services, ancillary activities to qualifying activities.
- Excluded Activities: Transactions with natural persons (except for specific qualifying activities), banking/certain insurance/finance/leasing (regulated), ownership/exploitation of immovable property (other than commercial property in free zone with other FZPs), ownership/exploitation of IP assets, ancillary activities to the above.
- De Minimis Test: Non-qualifying income < 5% of total revenue OR < AED 5 million; if met, all income treated as Qualifying Income. If not met, all income treated as Non-Qualifying Income.
- Taxation of Qualifying Free Zone Persons: 0% CT on Qualifying Income, 9% CT on Non-Qualifying Income (including income from domestic/foreign PE, certain immovable property transactions in free zone). Failure to meet conditions results in 9% tax and potential disqualification for current + 4 subsequent tax periods.
- Election to be Subject to 9% CT: Can be made to access reliefs unavailable to QFZPs (small business relief, qualifying group transfers, business restructuring, loss transfer, Tax Group membership). Election is irrevocable for current + 4 subsequent tax periods.
- Administration for QFZPs: Registration, tax returns, transfer pricing compliance/documentation, audited financial statements.
- Example: Company in JAFZA with qualifying substance, distributing to FZPs and non-FZPs (qualifying activity). Incidental sales to natural persons. If de minimis test met, all income is Qualifying Income at 0% tax.
10. Tax Reliefs:
- Tax Loss Relief: (Covered under “Determination of Taxable Income” section above).
- Business Restructuring Relief (Article 27): Subject to conditions (UAE legislation compliance, resident/non-resident with UAE PE, no exempt/QFZP persons involved, same financial year/accounting standards, valid commercial reason, not tax avoidance). Allows transfer of independent business unit/whole business in exchange for shares/ownership interests at net book value (asset deal). Share deal also covered. Relief upon election. Assets/shares to remain within same group/company for at least 2 years. Monetary consideration limited to 10% of nominal share/asset value. Losses incurred by transferred business can be carried forward.
- Tax Group (Article 40): Allows eligible resident juridical persons to form a single taxable entity if:
- All members are resident juridical persons (under UAE law and applicable Double Tax Agreements).
- Parent holds ≥ 95% share capital/voting rights, profit/asset entitlement (direct/indirect).
- Neither parent nor any member is exempt/QFZP.
- All members have same financial year and accounting standards.
- Parent company represents the Tax Group (filing, administration), but subsidiaries remain jointly and severally liable.
- Taxable income computed on consolidated basis. Application to FTA required before end of specific tax period.
- Example shows permissible group perimeter excluding exempt, QFZP, and non-resident subsidiaries (even if 100% owned).
- Transfer Within a Qualifying Group: Requires juridical person resident in UAE or non-resident with UAE PE. Common control ≥ 75%. Excludes exempt/QFZP. Same financial year/accounting standards. Allows exempting gains/losses on transfer of assets/liabilities between members (treated at net book value). Election at tax return filing. Assets to be maintained within the group for 2 years. Consideration can be cash or in kind.
- Transfer of Tax Losses: Losses can be transferred and offset if both persons are resident juridical persons, one has ≥ 75% direct/indirect ownership in the other, or a single person owns ≥ 75% in both. Excludes exempt/QFZP. Same financial year/accounting standards. 75% offset cap applies.
- Transfer Pricing (Articles 35, 36, 37): Taxable income based on arm’s length principle. FTA can adjust non-arm’s length transactions. Purpose is to ensure pricing not affected by related party relationships.
- Corresponding Adjustment: Systematic in domestic situations if FTA adjusts one party. In cross-border, subject to FTA approval upon application if foreign TP adjustment occurs.
- Related Parties (definition): ≥ 50% ownership, person and their PE/foreign PE, partners in unincorporated partnership.
- Connected Person (definition): Director, owner of business. Remuneration to owner/director must be at arm’s length.
11. Taxable Person Compliance Requirements:
- Registration: Mandatory for all juridical persons upon establishment, regardless of income. Natural persons if turnover > AED 1 million. Deregistration within 3 months of business cessation (effective after all returns filed and taxes paid).
- Registration Timelines: Private/public companies (now open since May 15, 2023). Natural persons/Partnerships (to be announced, hopefully August). Qualifying Public Benefit Entities (opens Oct 1, 2023). Exempt entities (opens June 1, 2024).
- Tax Return Filing: Annually, within 9 months from the end of the tax period (via Emirates Tax portal). Minimum information required (business name, TRN, submission date pre-populated, accounting basis, financial statements, taxable income, loss relief/transfer claimed, foreign/withholding tax credit, payable CT). Tax Groups: parent company files for the group.
- Record Keeping: Maintain financial statements for all businesses/activities. Taxable persons with annual revenue > AED 50 million and all Qualifying Free Zone Persons must maintain audited financial statements. Transfer pricing general documentation required (disclosure of related party/connected person transactions, especially for QFZPs, government entities with licenses, government-controlled entities with non-mandated activities). Master/Local File required if taxpayer’s revenue ≥ AED 200 million or group consolidated revenue ≥ AED 3.1 billion (to be provided within 30 days of FTA request). Retention period for records: 7 years (as per Corporate Tax Law, superseding 5 years in Tax Procedures Law).
- Transitional Rules: Closing balance sheet before first tax period is the opening balance. Potential adjustments for gains on immovable property, intangible assets, financial assets/liabilities held before tax.
- Payment of Corporate Tax: Due 9 months after the end of the tax period (same deadline as return filing).
- Refunds: Limited to cases where withholding tax credit exceeds payable CT (currently nil withholding tax) or FTA satisfied of overpayment.
- Administrative Penalties: Applied for non-compliance (failure to maintain/submit data, file returns, register, settle tax, submit voluntary disclosure, incorrect return, hindering tax officer). Penalty cap under Tax Procedures Law (recent amendment No. 28 of 2022 effective March 1st) is up to 200% of the tax due. “The previous tax procedures law had mentioned that a penalty can be up to three times the tax or 300 percent the changes that were made for their tax procedures law um the recent one number 28 of 2022 which became effective from the 1st of March stated that it is up to 200 percent.” FTA emphasizes preferring compliance over imposing penalties.
12. Q&A Highlights:
- CT registration is mandatory for all juridical persons in the UAE, regardless of taxable income. Natural persons register if turnover exceeds AED 1 million.
- Corporate Tax TRN is different from VAT TRN (last digit will likely vary). Separate registration required for CT even if VAT registered.
- A single juridical person with multiple branches (domestic and overseas) registers as one entity. Branches do not register separately.
- Companies planning to terminate in 2023 still need to register if their tax period started before liquidation.
- Taxable income calculated based on accounting standards (IFRS or IFRS for SMEs), adjusted for CT law. Audited financial statements only required for QFZPs and businesses with revenue > AED 50 million.
- IFRS adoption is generally mandatory (with SME exception). Non-resident with UAE PE still needs to prepare financial statements as per IFRS for CT purposes.
- Taxable persons with income below AED 375,000 are still required to file a tax return.
- Natural persons with turnover exceeding AED 1 million must register and file, even if taxable income is lower. Turnover calculation excludes specific income types (wages, non-licensed real estate/personal investment income).
- Excessively high salary to owner/director (connected person) to avoid profit will be subject to transfer pricing rules and arm’s length principle.
- Taxable income must be computed and reported in UAE Dirhams (using Central Bank rates).
- Depreciation of assets deductible based on accounting standards, subject to general deductibility conditions. No separate CT depreciation rates.
- Tax losses can be carried forward indefinitely, subject to 75% annual offset cap and >50% ownership continuity (or same/similar business activity).
- Tax losses must be fully utilized in the year claimed; partial utilization below AED 375,000 threshold is not allowed.
- Tax Group composition can change, effective from the beginning of the tax period of application.
- Subsidiary can apply to join Tax Group, effective from the beginning of the tax period of application.
- A juridical person can be part of both a Tax Group and a Qualifying Group simultaneously if all conditions for both are met.
Next Steps/Reminders for Attendees:
- Register for Corporate Tax immediately via the Emirates Tax portal if your entity is already liable or will be soon.
- Familiarize yourselves with the legal framework (Federal Decree-Law and Implementing Decisions).
- Determine your tax residency status.
- Assess if you qualify for any exemptions or the Small Business Relief.
- Understand the rules for Free Zone Persons and Qualifying Free Zone Persons.
- Start planning for taxable income calculation and required adjustments.
- Be aware of the record-keeping requirements and timelines for tax return filing and payment.
- Consult the FTA website and social media for further guidance, FAQs, and upcoming awareness sessions.
- Utilize the FTA information desk for immediate queries.
Frequently Asked Questions: UAE Corporate Tax
1. Is corporate tax registration mandatory even if taxable income is less than AED 375,000? Yes, for juridical persons established in the UAE, corporate tax registration is mandatory regardless of their taxable income. The AED 375,000 threshold relates to the amount of taxable income that is subject to the 0% tax rate; registration is a separate requirement based on the legal form and establishment in the UAE. For natural persons, registration is required if their turnover from business activities exceeds AED 1 million in a calendar year.
2. Is the Corporate Tax TRN different from the VAT TRN? Yes, the Corporate Tax TRN (Tax Registration Number) is different from the VAT TRN, although it will have a similar 15-digit structure. Typically, the last digit of the Corporate Tax TRN will be different from the VAT TRN. Even if a business is already registered for VAT, a separate registration for Corporate Tax is required.
3. If a single juridical person has multiple branches in different Emirates within the UAE and also in overseas jurisdictions, does each branch need to register separately for corporate tax? No, a single juridical person with multiple branches (both within the UAE and overseas) does not need to register each branch separately. The registration is for the juridical person as a whole. The branches are considered extensions of the main legal entity and do not have separate corporate tax registration obligations.
4. For companies planning to terminate their activities by the end of 2023, are they still required to register for corporate tax? Yes, companies with a tax period that commenced before their liquidation in 2023 are still required to register for corporate tax. They will also need to file a final tax return covering the period up to their termination and settle any corporate tax liabilities.
5. Should taxable income be calculated based on audited financial statements only? No, taxable income should be calculated based on financial statements prepared in accordance with IFRS (International Financial Reporting Standards) or IFRS for SMEs, with adjustments made as per the UAE Corporate Tax Law. Audited financial statements are specifically required for taxable persons with annual revenue exceeding AED 50 million and for all qualifying free zone persons. Other taxable persons are required to maintain financial statements, but they may not necessarily need to be audited.
6. Is the adoption of IFRS mandatory for corporate tax purposes? If a non-resident, for example, having a PE in the UAE, is required to prepare financial statements as per IFRS for corporate tax purposes even if it otherwise follows a different accounting standard in its home jurisdiction? Yes, the adoption of IFRS (or IFRS for SMEs for entities with revenue below AED 50 million) is mandatory for preparing financial statements for UAE corporate tax purposes. This requirement applies even to non-resident persons with a permanent establishment (PE) in the UAE, regardless of the accounting standards they follow in their home jurisdiction. The financial statements for the UAE PE must be prepared in accordance with IFRS for corporate tax compliance.
7. If taxable income does not exceed AED 375,000, is such a taxable person required to file a tax return? Yes, if an entity is a taxable person (which for juridical persons in the UAE is generally upon establishment, regardless of income level), it is required to file a corporate tax return annually, even if its taxable income does not exceed the AED 375,000 threshold. The 0% tax rate applies to the taxable income up to this amount, but the obligation to file a return remains.
8. If a natural person’s taxable income does not exceed AED 1 million, are they required to register and file a tax return? The registration and filing requirement for natural persons is based on their turnover (revenue) from business activities, not their taxable income. If a natural person’s turnover from their business or business activities exceeds AED 1 million in a calendar year, they are considered a taxable person and are required to register and file a tax return. Certain types of income, such as wages, personal investment income (not requiring a license and not considered a business under commercial transaction law), and real estate investment income (not conducted through a license), are excluded when assessing the AED 1 million turnover threshold.
UAE Corporate Tax Regime: An Overview
The UAE has introduced a corporate tax regime, with the main entities involved in its enactment and implementation being the Ministry of Finance, responsible for drafting the policy and the law, and the Federal Tax Authority (FTA), responsible for implementing the tax law.
Policy Drivers for the Corporate Tax Law
The Ministry of Finance’s policy drivers for introducing corporate tax include:
- Introducing a competitive tax regime based on international best practices.
- Cementing the UAE’s position as a leading global hub for business and investment.
- Accelerating the UAE’s development and transformation.
- Reaffirming the UAE’s commitment to meeting international standards for tax transparency and preventing harmful tax practices.
Role of the Federal Tax Authority (FTA)
The FTA’s mandate, established by Law No. 13 of 2016, covers the administration, collection, and enforcement of taxes. This includes:
- Receiving registration applications.
- Receiving tax returns.
- Collecting taxes and processing refunds.
- Conducting audits and ensuring compliance.
- Providing support for tax compliance through guidance and technical support. Clarification requests on registration queries can be submitted to the FTA from August 1st, and on matters other than registration from September 1st, provided the entity is registered.
Legal Framework and Timeline
The UAE corporate tax is governed by Federal Decree-Law No. 47 of 2022, effective from June 1, 2023. Unlike VAT, there is no GCC treaty for corporate tax. The law refers to several implementing decisions, which can be cabinet decisions, ministerial decisions issued by the Minister of Finance, or FTA decisions.
Key dates in the timeline include:
- Announcement of introduction: January 31, 2022.
- Law issued: October 2022.
- Registration opened (private and public joint companies): May 15, 2023.
- First tax period started: June 1, 2023.
- First tax period end (for those starting June 1, 2023): May 31, 2024.
- First tax return due (for those with the above period): February 28, 2025.
- First tax period end (for most businesses with financial year starting January 1, 2024): December 31, 2024.
- First tax return due (for most businesses with the above period): September 30, 2025.
Taxable Persons
Under the corporate tax law, taxable persons are divided into resident persons and non-resident persons.
- Resident persons include:
- Natural persons conducting taxable business or business activities in the UAE where the turnover exceeds AED 1 million per calendar year, excluding income from employment, personal investments (not requiring a license), and real estate investments (not requiring a license).
- Juridical persons (basic corporate entities) that are:
- Incorporated, established, organized, or recognized under the laws of the UAE, including free zone persons.
- Incorporated in a foreign country but effectively managed and controlled in the UAE. The effective management and control test is based on where key management and commercial decisions are made.
- Non-resident persons include:
- Entities with a permanent establishment (PE) in the UAE. A PE includes a fixed place of business through which the business is wholly or partly conducted (e.g., place of management, branch, office, construction site lasting more than six months). Certain preparatory and auxiliary activities are excluded from creating a PE, and special rules apply to natural persons temporarily in the UAE due to exceptional circumstances. A PE can also be created through a dependent agent who habitually concludes or negotiates contracts on behalf of the non-resident person.
- Non-resident juridical persons with a Nexus in the UAE, which is currently defined as immovable property from which the person derives income.
- Non-resident persons without a PE or Nexus in the UAE but deriving State Source income from the UAE.
Taxable Base
- For resident natural persons, the taxable base is all income attributable to their business activity in the UAE and income derived outside the UAE connected to their UAE business.
- For resident juridical persons, the taxable base is their worldwide income (income from the UAE and foreign sources). Mechanisms exist to relieve double taxation on foreign-sourced income subject to tax abroad, such as foreign tax credits.
- For non-resident natural persons, the taxable base is income attributable to their PE or fixed base in the UAE. If no taxable presence exists, it’s the State Source income, potentially subject to withholding tax (currently 0%).
- For non-resident juridical persons, the taxable base is income attributable to their PE or Nexus in the UAE. For UAE State Source income without a PE, the withholding tax rate is currently 0%, and they are not required to register.
Calculation of Taxable Income
The starting point for calculating taxable income is the accounting net profit or loss, prepared according to International Financial Reporting Standards (IFRS) or IFRS for Small and Medium-sized Entities (SMEs) if taxable income is below AED 50 million. Financial statements must be prepared using the accrual basis of accounting, with an exception for those with income below AED 3 million or in exceptional circumstances (with FTA approval), who can use the cash basis. An election can be made to account for gains and losses on a realization basis.
Adjustments are made to the accounting profit or loss to arrive at taxable income, including:
- Adding back non-deductible expenses such as disallowed interest expenditure (capped at 30% of adjusted EBITDA), entertainment expenses (50%), penalties and fines (excluding contractual breach compensation), non-qualifying donations, bribes, corporate tax paid, and blocked VAT recovery.
- Adjusting for non-arm’s length transactions with related parties or connected persons.
- Adjusting for unrealized gains or losses if the realization basis election is made.
- Subtracting exempt income, such as dividends from resident companies and qualifying dividends from foreign subsidiaries under the participation exemption rules. Expenses related to exempt income are non-deductible.
- Applying tax loss relief (carry forward losses, capped at 75% of taxable income).
- Utilizing reliefs like transactions within a qualifying group or business restructuring relief.
Tax Rates
The standard corporate tax rates are:
- 0% on taxable income up to AED 375,000.
- 9% on taxable income exceeding AED 375,000.
Qualifying Free Zone Persons are subject to:
- 0% on qualifying income.
- 9% on non-qualifying income.
Non-residents with a PE or Nexus in the UAE are taxed similarly to resident persons, with the 0%/9% threshold. Non-residents deriving UAE sourced income not attributable to a PE have a 0% withholding tax rate.
Exempt Persons
Article 4 of the Federal Decree-Law lists several categories of exempt persons:
- Government entities are automatically exempt, unless they engage in activities requiring a license.
- Extractive and non-extractive businesses related to natural resources are exempt if they notify the Ministry of Finance, but may be taxable if more than 5% of their activities are ancillary.
- Government-controlled entities wholly owned and controlled by a government entity with mandated activities are exempt when acting within their mandate.
- Qualifying public benefit entities listed in a Cabinet Decision (e.g., those established for religious, charitable, humanitarian, healthcare, education purposes) are exempt. They are required to register from October 1, 2023.
- Certain entities can apply to the FTA for exemption, including qualifying investment funds, public or private pension or Social Security funds, and wholly-owned UAE entities owned by exempt persons. Registration for these opens on June 1, 2024.
Exempt persons required to register must do so within 60 days of the end of their tax period. Failure to meet exemption conditions may result in tax liability from the start of the tax period.
Exempt Income and Losses
Article 22 of the corporate tax law provides for several categories of exempt income:
- Dividends and other profit distributions received from resident companies are always exempt. Dividends from foreign subsidiaries may be exempt under the participation exemption rules.
- Capital gains and losses, foreign exchange gains and losses, and impairment gains and losses are exempt subject to meeting the participation exemption rules.
- Income from the operation of international air transport and international shipping is exempt subject to reciprocity.
- Foreign permanent establishment (PE) exemption is available on an elective basis, covering all eligible foreign PEs. Expenses incurred to generate exempt income are non-deductible.
Participation Exemption
Article 23 provides rules for the participation exemption, relevant for UAE-based parent and holding companies, exempting dividends, profit distributions, capital gains/losses, and impairment gains/losses from participating interests. Key requirements include:
- The parent company holds at least 5% or greater ownership interest in the subsidiary.
- The ownership interest is held or intended to be held for an uninterrupted period of 12 months.
- The subsidiary is subject to a minimum level of taxation of 9% in its jurisdiction. Certain exceptions apply, such as for qualifying free zone persons and pure equity holding companies in specific situations. The effective tax rate of the foreign subsidiary can be considered.
- The ownership rights entitle the holder to at least 5% of the profits and liquidation proceeds of the subsidiary.
- An asset test applies to the subsidiary’s assets, with at least 50% (by value) needing to meet participation exemption requirements.
- Alternatively, the participation exemption can be claimed if the historical cost of acquisition of the shares or capital is at least AED 4 million.
- Ministerial Decision No. 116 provides flexibility in aggregating ownership interests within a qualifying group and for the minimum acquisition cost.
Free Zones
Special rules apply to companies operating in UAE Free Zones. A Free Zone Person is a juridical person incorporated, established, or registered in a free zone, including a branch of a non-resident person. Natural persons, sole establishments, and unincorporated partnerships are not Free Zone Persons.
A Qualifying Free Zone Person must meet several conditions:
- Maintain adequate substance in the free zone, with core income-generating activities performed there, sufficient assets, and adequate staff and operating expenses incurred in the free zone.
- Derive qualifying income, which includes income from transactions with other free zone persons (excluding excluded activities), income from qualifying activities with any other person (Mainland, foreign), and other incidental non-qualifying income that meets a de minimis test.
- Comply with transfer pricing rules and documentation requirements.
- Not elect to be subject to corporate tax at the standard 9% rate.
- Prepare audited financial statements.
- Meet the de minimis requirements for non-qualifying income (less than 5% of total revenue or less than AED 5 million). If the de minimis test is not met, all income is treated as non-qualifying.
Qualifying activities include manufacturing, holding of shares, ship operation, reinsurance, fund management, wealth management, headquarters activities, financing and leasing of aircraft, distribution of goods from designated zones for resale, logistics services, and ancillary activities. Excluded activities generally include transactions with natural persons (with some exceptions), banking, insurance, finance and leasing subject to regulatory oversight, ownership/exploitation of immovable property (excluding commercial property with other free zone persons), and intellectual property assets.
Benefits of being a Qualifying Free Zone Person include paying 0% corporate tax on qualifying income and 9% on non-qualifying income. However, they are not eligible for certain reliefs such as small business relief, transfers within a qualifying group, business restructuring relief, transfer of tax losses, and being part of a Tax Group, unless they elect to be taxed at the standard rate. Electing to be subject to the standard rate is irrevocable for the current and four subsequent tax periods.
Tax Reliefs
- Tax Loss Relief: Tax losses incurred in previous tax periods can be carried forward indefinitely to offset future taxable income, subject to a maximum offset of 75% of the taxable income in a given year. A condition for carry forward is maintaining at least 50% ownership in the business, with exceptions for listed entities and if the same or similar business activity continues after a change in ownership. Losses incurred before the effective date of the corporate tax law, before becoming a taxable person, or from exempt activities cannot be carried forward. Tax losses cannot be partially utilized below the AED 375,000 threshold.
- Business Restructuring Relief: Article 27 allows for the transfer of an independent business unit or a whole business in exchange for shares or other ownership interests on a tax-neutral basis, provided certain conditions are met, including valid commercial reasons and the transfer being in line with applicable UAE legislation. Both transferor and transferee must be resident or non-resident with a UAE PE, not be exempt or qualifying free zone persons, have the same financial year and accounting standards, and the relief is subject to election. Assets and shares must generally remain within the same group for at least two years. Monetary consideration should not exceed 10% of the nominal value of transferred shares or assets.
- Tax Group Provisions: Article 40 allows related entities to form a single taxable person (Tax Group) if they meet specific conditions, including a 95% or higher direct or indirect ownership of share capital and voting rights, and entitlement to profits and assets by the parent company in the subsidiaries. All members must be resident juridical persons (also tax resident under relevant double taxation agreements), have the same financial year and accounting standards, and none can be exempt or qualifying free zone persons. The parent company represents the Tax Group for filing and administration, but subsidiaries remain jointly and severally liable. Formation requires application to the FTA before the end of a specific tax period. A Tax Group can change its composition with effect from the beginning of a tax period. A subsidiary can apply to join a Tax Group, effective from the beginning of the tax period of application.
- Qualifying Group: A qualifying group requires a lower ownership threshold of 75% and can include non-resident persons with a UAE PE. It allows for the tax-neutral transfer of assets and liabilities between members, with the election made upon filing the tax return. Assets need to be maintained within the group for at least two years.
- Transfer of Tax Losses: Tax losses can be transferred between resident juridical persons with a direct or indirect ownership interest of at least 75% in each other, or where a single person owns at least 75% in both, subject to the exclusion of exempt and qualifying free zone persons, the same financial year and accounting standards, and the 75% utilization cap.
Transfer Pricing
Taxable income should be determined based on the arm’s length principle. Transactions between related parties should be consistent with those between independent parties. The FTA has the right to adjust prices of non-arm’s length transactions. Corresponding adjustments may be granted to avoid economic double taxation. Domestic corresponding adjustments are systematic, while cross-border adjustments require FTA approval. Articles 35 and 36 define related parties (e.g., entities with >50% common ownership, a person and their PE) and connected persons (e.g., directors, owners). Transfer pricing rules apply to remuneration paid to owners who are also directors or key personnel.
Compliance Requirements
- Registration: Registration is mandatory for all juridical persons incorporated in the UAE and natural persons with turnover exceeding AED 1 million. Application is via the Emirates Tax portal. Different registration timelines apply to various entity types. Deregistration requires application within three months of business cessation, effective after all returns are filed and taxes paid.
- Tax Return Filing: Tax returns are due nine months from the end of the tax period and must be submitted electronically via Emirates Tax. Minimum information requirements include business name, TRN, accounting basis, financial statements, taxable income, tax loss relief/transfer claimed, foreign tax/withholding credit claimed, and payable corporate tax. Tax Groups file a consolidated return through the parent company.
- Record Keeping: Businesses must maintain financial statements and other relevant documentation for seven years. Taxable persons with annual revenue exceeding AED 50 million and all qualifying free zone persons must maintain audited financial statements.
- Transfer Pricing Documentation: General documentation on related party and connected person transactions may be requested. Master and local files are required for taxable persons with revenue of AED 200 million or members of a group with consolidated revenue of AED 3.1 billion, to be provided within 30 days of FTA request.
- Payment: Corporate tax payable is due nine months after the end of the tax period, coinciding with the tax return filing deadline.
- Refunds: Refunds may be granted when withholding tax credits exceed the payable tax or if the FTA is satisfied that an overpayment has occurred.
- Penalties: Administrative penalties may be imposed for non-compliance with registration, filing, payment, and other requirements, with a maximum penalty cap of 200%.
Transitional Rules
The closing balance sheet for the financial year ending before the first tax period will be the opening balance for corporate tax purposes. Adjustments may be needed for gains on immovable property, intangible assets, and financial assets/liabilities held before being subject to tax.
UAE Corporate Tax: Taxable Person Definition
Based on the sources, the definition of a taxable person under the UAE Corporate Tax Law is divided into two main categories: resident person and non-resident person.
Resident Person:
- Natural Person: A natural person is considered a tax resident in the UAE if they conduct taxable business or business activities in the UAE.
- Juridical Person: A juridical person is considered a tax resident in the UAE based on two tests:
- Being incorporated, established, organized, or recognized under the law of the UAE, including free zone persons.
- Being incorporated in a foreign country but effectively managed and controlled in the United Arab Emirates. Key elements for this test include whether key management and commercial decisions necessary for the business are mainly prepared and made in the UAE, and where board meetings are held and board members reside. Such entities are considered tax residents because, from an economic standpoint, they are closer to the UAE. Double taxation agreements between the UAE and the foreign jurisdiction play a role in resolving dual residency situations, often relying on the place of effective management or mutual agreement procedures.
Non-Resident Person:
A non-resident person is an entity that does not satisfy the residency tests but falls into one of the following categories:
- Non-resident entities with a permanent establishment (PE) in the United Arab Emirates. A PE is defined based on two key components:
- Fixed place of business: A non-resident company has a PE if it has a fixed place through which its activity is wholly or partly conducted, including a place of management, a branch, an office, a factory, or a building site lasting more than six months. Certain activities are considered preparatory or auxiliary and are excluded from creating a PE (negative list), such as mere delivery. However, operating a warehouse as a business activity is not excluded. Specific conditions, outlined in ministerial decision 83 of 2023, may prevent a natural person present in the UAE due to exceptional circumstances (e.g., COVID-19) from creating a PE for their foreign employer.
- Agency PE (Dependent Agent): This is triggered when a person habitually concludes contracts on behalf of the non-resident person in the UAE or negotiates all elements of contracts that are concluded by the non-resident without substantial modification. The agent must be a dependent agent, meaning they do not act exclusively for the non-resident and are legally and economically connected to them. Independent agents do not trigger an agency PE.
- Non-resident juridical persons with a Nexus in the UAE. According to the relevant cabinet decision, a Nexus is created by immovable property in the UAE from which the non-resident juridical person derives income.
- Non-resident persons without a permanent establishment and without a Nexus in the UAE but who derive State Source income from the UAE.
Natural Persons and Business Activities:
A natural person is subject to corporate tax in the UAE when they conduct business or business activity in the UAE and their total turnover derived from such activities exceeds one million Dirham within a calendar year (January to December). For assessing this monetary threshold, the following are not taken into consideration:
- Wages and salaries (income from employment activities).
- Personal investment income (investment income derived in a private capacity without requiring a license and not considered a business under commercial transaction rules).
- Real estate investment income (income from the exploitation of immovable property where the income does not require a license).
Natural persons whose turnover from business or business activities does not exceed one million Dirham are not required to register for corporate tax purposes. However, juridical persons must register regardless of their taxable income.
UAE Free Zone Qualifying Person Tax Regime
Based on the sources, the concept of a Qualifying Free Zone Person is central to the special corporate tax regime for free zones in the UAE. Here’s a breakdown of what it entails:
1. Free Zone and Free Zone Person:
- A free zone is a designated and defined geographic area within the UAE. It’s important to note that the definition of a free zone for corporate tax purposes might have some overlap but is not entirely the same as a designated zone for VAT.
- A free zone person is a juridical person (a legal entity) that is incorporated, established, or otherwise registered in a free zone. This includes a branch of a non-resident person in a free zone. Importantly, this definition excludes natural persons, sole establishments, and unincorporated partnerships.
2. Qualifying Free Zone Person:
To be considered a qualifying free zone person, a free zone person must meet several key criteria and conditions:
- Maintain Adequate Substance in the Free Zone: This means demonstrating that the core income-generating activities are performed within the free zone, with sufficient assets and an adequate number of staff, and that sufficient operating expenses are incurred in the free zone. This aims to ensure the free zone regime applies to income genuinely derived from activities within the zone.
- Derive Qualifying Income: The person must primarily earn qualifying income, which is categorized based on the nature of the activities and the recipient of the services or goods.
- Comply with Transfer Pricing Rules and Maintain Documentation: Qualifying free zone persons must adhere to transfer pricing rules for all transactions with related parties and maintain the necessary documentation.
- Not Elect to be Subject to the Standard Corporate Tax Rate: A qualifying free zone person should not have made an election to be taxed at the standard rate of 9%. However, they can elect to be taxed at the standard rate if they wish to access certain reliefs.
- Prepare and Maintain Audited Financial Statements: Qualifying free zone persons are required to prepare and maintain audited financial statements.
- Meet the De Minimis Requirements (if applicable): If a qualifying free zone person has some non-qualifying income, they might still be considered as having only qualifying income if the non-qualifying income falls below a certain de minimis threshold.
3. Qualifying Income:
Qualifying income generally includes:
- Income derived from transactions with other free zone persons, as long as it’s not from an excluded activity.
- Income derived from transactions with any other person (including mainland entities, foreign entities, and natural persons), but only if it is in respect of a qualifying activity and not an excluded activity.
- Certain non-qualifying income that is incidental to qualifying income, provided it meets the de minimis test.
- Income from transactions with natural persons is generally considered non-qualifying, with exceptions for specific qualifying activities like shipping, fund management, investment/wealth management, and aviation financing/leasing.
4. Qualifying Activities:
Ministerial decisions provide a list of activities that are generally considered qualifying when performed in the free zone:
- Manufacturing and processing of goods and materials.
- Holding of shares and other securities.
- Ownership, management, and operation of ships.
- Reinsurance business.
- Fund management services (subject to regulatory oversight).
- Wealth and investment management services (subject to regulatory oversight).
- Headquarter services provided to related parties.
- Treasury and financing activities provided to related parties.
- Financing and leasing of aircraft (including engines and related equipment).
- Distribution of goods or materials from a designated zone to another person who will resell or use them for resale (Trading Income). Notably, designated zones here refer to those also considered as such for VAT purposes.
- Logistics services (which differ from distribution as the provider doesn’t own the goods).
- Any activities that are ancillary to the qualifying activities.
5. Excluded Activities:
Certain activities are specifically excluded from being considered qualifying activities:
- Transactions with natural persons, except for specific qualifying activities mentioned above.
- Banking activities.
- Insurance, finance, and leasing activities subject to regulatory oversight (aligning treatment with mainland).
- Ownership or exploitation of immovable property (other than commercial property located in a free zone and transacted with other free zone persons).
- Ownership or exploitation of intellectual property assets.
- Ancillary activities related to the excluded activities.
6. De Minimis Test:
If a qualifying free zone person earns income from non-qualifying activities, this income will still be treated as qualifying income if it meets the de minimis test. This test is met if the revenue from non-qualifying activities is either:
- Less than 5% of the total revenue, or
- Less than AED 5,000,000
If the de minimis threshold is not met, then all the income of the free zone person will be treated as non-qualifying income and subject to the standard 9% corporate tax rate.
7. Tax Implications for Qualifying Free Zone Persons:
The primary benefit of being a qualifying free zone person is the application of a 0% corporate tax rate on all qualifying income. However, non-qualifying income will be subject to the standard corporate tax rate of 9%. This also includes income attributable to a domestic or foreign permanent establishment and income from certain transactions related to immovable property within the free zone.
If a qualifying free zone person fails to meet any of the conditions for being qualified, they will be subject to the standard 9% corporate tax rate on their income for that tax period as well as the subsequent four tax periods.
8. Election to be Subject to Standard Corporate Tax Rate:
Despite the benefits of the 0% rate, a qualifying free zone person might choose to elect to be subject to the standard 9% corporate tax rate. The main reasons for this include gaining access to certain reliefs and provisions under the Corporate Tax Law that are not available to qualifying free zone persons, such as:
- Small business relief.
- Transfers within a qualifying group.
- Business restructuring relief.
- Transfer of tax losses.
- Being a member of a Tax Group.
- Benefiting from the tax-free threshold of the first AED 375,000 of taxable income.
If this election is made, it is irrevocable and will apply for the current tax period and the subsequent four tax periods.
9. Administrative Requirements:
Qualifying free zone persons are still subject to certain administrative requirements:
- Registration for corporate tax.
- Filing tax returns.
- Complying with transfer pricing rules and documentation requirements.
- Maintaining audited financial statements.
In summary, the qualifying free zone regime aims to maintain the UAE’s competitiveness by offering a 0% tax rate on income genuinely derived from qualifying activities within free zones, provided stringent conditions related to substance and the nature of income are met. Entities operating in free zones must carefully assess their activities and income streams to determine if they qualify and understand the implications of this special regime.
UAE Corporate Tax: Loss Relief Provisions
Based on the source, the discussion of tax loss relief is found on page 25. Here’s a breakdown of the key points regarding tax loss relief under the UAE Corporate Tax Law:
- Carry Forward: Previous tax losses incurred in previous tax periods are allowed to be carried forward indefinitely. This is presented as a significant advantage for taxable persons.
- Ownership Requirement: To carry forward and offset these losses, a condition is that you must maintain at least 50% or higher of the ownership in the business. If more than 50% of the ownership changes, you generally cannot carry forward previous tax losses.
- Exception for Listed Entities: This ownership requirement does not apply to listed entities due to frequent changes in ownership.
- Flexibility for Ownership Change: Even if more than 50% of the ownership changes, the taxable person may still be allowed to carry forward previous tax losses if they continue to have the same or similar business or business activity. Examples of maintaining the same or similar business activity include continuing to use some or all of the assets before the change of ownership and the change of ownership not triggering changes to the core business or business model.
- Offsetting Limit: There’s a limit on how much of the carried-forward tax losses can be used in a subsequent tax year. The amount you can offset is capped at 75% of the taxable income of each subsequent tax year. If some losses remain after this offset, they can be carried forward to future tax periods, subject to the same conditions. Tax losses must be fully utilized and cannot be used only partially, for example, up to the AED 375,000 threshold.
- Ineligible Losses: Certain losses are not eligible for relief:
- Losses incurred before the effective date of the corporate tax law.
- Tax losses incurred before a person becomes a taxable person (e.g., losses incurred while an entity was exempt).
- Losses incurred from assets or activities generating exempt income.
- Example: The source provides an example where a subsidiary has a loss in year one and taxable income in year two, with a partial change in ownership in year two. The example illustrates how the 75% offset limit applies and how remaining losses can be carried forward, provided the ownership requirement is met.
In summary, the UAE Corporate Tax Law allows for the indefinite carry forward of tax losses, subject to maintaining a certain level of ownership in the business and a cap on the amount that can be offset against taxable income in any given year. Certain types of losses are specifically excluded from this relief.
UAE Corporate Tax: Transfer Pricing Rules
Based on the information provided in the source, here’s a discussion of transfer pricing rules under the UAE Corporate Tax Law:
The UAE Corporate Tax Law stipulates that when determining taxable income, it should be based on the arm’s length principle. Article 20 of the law sets the rules for making adjustments to taxable income to meet this principle. The terms of transactions between related parties should be consistent with the terms of transactions conducted between independent (non-related) parties.
The Federal Tax Authority (FTA) has the right to adjust the price of transactions that are not conducted at arm’s length. The primary purpose of the transfer pricing rules is to ensure that the price of a transaction is not affected by the relationship between the related parties.
The law defines related parties as situations where:
- Two or more juridical persons own more than 50% in each other.
- One juridical person owns more than 50% in two or more other companies (in which case all three entities are considered related parties).
- A person and their permanent establishment (PE), whether the PE is in the UAE or abroad (intra-company transactions).
- Partners in an unincorporated partnership.
The law also refers to connected persons, which include a director of a business and the owner of a business. Notably, if the owner of a business works for that business and receives a substantial salary, transfer pricing rules will apply to ensure the remuneration corresponds to the service provided, is necessary for the business, and meets the arm’s length requirement. This prevents the erosion of the taxable base by paying excessively high salaries to owners.
Regarding documentation, there are general documentation requirements and specific transfer pricing documentation requirements:
- General Documentation: Taxable persons may be asked by the FTA to provide a disclosure of transactions with related parties and connected persons. This is applicable to qualifying free zone persons with both qualifying and non-qualifying income, as well as government entities with licensed business activities or government-controlled entities with non-mandated activities.
- Master and Local File: The FTA can request a master file and a local file from taxable persons whose own revenue exceeds AED 200 million, or who are part of a group with a consolidated revenue of AED 3.1 billion. This documentation must be provided within 30 days of the FTA’s request.
The Corporate Tax Law also includes a provision for corresponding adjustments:
- In a purely domestic situation, if the FTA adjusts the taxable base of one taxable person due to a transfer pricing issue, the FTA will systematically grant a corresponding adjustment to the other related taxable person involved in the transaction. This is to avoid economic double taxation.
- If a taxable person experiences a transfer pricing adjustment in a foreign jurisdiction, they can claim a corresponding adjustment in the UAE. However, this is subject to an application and approval by the FTA.
It’s important to note that qualifying free zone persons must comply with transfer pricing rules and maintain transfer pricing documentation as an essential condition of being a qualifying free zone person.
The record-keeping period for corporate tax purposes is seven years. Taxable persons are required to maintain all relevant information for this duration.
By Amjad Izhar
Contact: amjad.izhar@gmail.com
https://amjadizhar.blog
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