The Finance Ministry of the U.A.E plans to introduce corporate taxes to be levied on business profits starting from the fiscal year 1st June 2023. The state’s decision to impose the corporate tax was based on its goal of accelerating its development and strategic objectives. Corporate tax will be a direct tax levied on the net income or profit of businesses incurred. It will be a federal tax applicable to all Emirates. The Ministry by publishing a consultation document had sought suggestions on the legislation to be incorporated governing corporate tax and it is now in the process of releasing draft legislation. This draft legislation will provide an overview by providing an insight as to when corporate taxes shall be effective in the U.A.E. along with the respective calculation, the basis of such calculation, tax groups, etc.
The entities that are taxable would include limited liability companies, public corporations, public-joint stock companies, and other legal entities. Furthermore, corporate taxes will be levied on foreign entities that own permanent establishments in the U.A.E. and earn an income here. In another instance if the entity is managed and controlled from U.A.E it will also be subjected to the tax, entities present in the free zone have an 0% corporate tax exemption but if the entity has a branch in the mainland then that branch has no exemption and must pay corporate tax for that branch and not the entire entity. The entities whose income would be exempted from corporate tax include dividends and capital gains from qualifying shareholding, government-run entities, charities with public benefit organizations, and federal/Emirate governments and departments.
A corporate tax of 9% will be levied if the annual taxable income of a business exceeds AED 375,000/- and 0% if it is below the prescribed amount. It is pertinent to note that different tax rates will be applicable for large multinational entities which aren’t specified as of now. Deductions will be made for interest and other financial costs however the deductibles will be capped at 30% before tax, interest, and depreciation to stop entities from using excessive debt financing to gain tax benefits.
Furthermore, groups of companies operating within the U.A.E under the below-given conditions may join together to form a tax group that would lead to relief in matters of tax i.e., a higher effective tax which would aid in situations where certain companies in the group are making a profit and others lose.
- the parent company must hold at least 95% of the share capital and voting rights of its subsidiaries.
- neither the parent company nor any of the subsidiaries can be an exempt person or a Free Zone Person that benefits from the 0% corporate tax rate, and all group members must use the same financial year.
- a subsidiary can also be part of the tax group if it is owned indirectly by the parent company and other subsidiaries own at least 95% of its shares, or if it is a UAE branch of the parent company or one of its subsidiaries.
For the formation of a tax group, a notice signed by the parent company and all subsidiaries will need to be submitted to the Federal Tax Authority. Additional subsidiaries can join an existing tax group by following the same process. Once a tax group is formed the parent company is responsible for the administration and payment of corporate tax on behalf of the tax group. The parent company also is responsible for calculating and determining the taxable income of the tax group. For groups of companies that do not meet the minimum 95% common ownership requirement or that do not want to form a tax group, the UAE corporate tax regime can allow a transfer of tax losses from one group company to another group company with profits, provided certain conditions are met.
The procedure for filing taxes, it is presumed that the tax will be filed electronically via an online portal similar to the VAT and ESR filings. There is no information provided regarding the supporting documents to be filed. Based on the practices in other jurisdictions, the following documents may be required:
- Financial statements.
- Taxable income calculation showing adjustments made to the accounting net profit.
- Tax depreciation schedules and worksheets.
- Transfer Pricing documentation.
- Details of related party transactions.
- Movement of provisions.
To ensure the smooth functioning and implementation of the corporate tax the finance ministry has given powers to the Federal Tax Authority (“FTA”) which will oversee the administrative aspect. Any business subject to corporate tax will need to register with the FTA and obtain a Tax Registration Number within a prescribed period. The FTA will also be able to automatically register a business for corporate tax purposes if the person does not voluntarily do so. Where a business ceases to be subject to the corporate tax due to cessation or liquidation of the business, it will need to apply to the FTA to be deregistered for corporate tax purposes within three months from the date of cessation. The FTA will only deregister a person where the FTA is satisfied that the person has filed corporate tax returns and settled all corporate tax liabilities and penalties due for all periods up to and including the date of cessation. Where a person does not apply for deregistration within the time limits or comply with the payment and filing obligations, the FTA may deregister the person based on available information.
The U.A.E’s corporate tax regime will be based on a self-assessment principle. This means that a business will be responsible for ensuring that the tax return and any supporting schedules submitted to the FTA are correct, complete, and comply with the U.A.E corporate tax law. To ensure the integrity of the corporate tax regime, the FTA may review a corporate tax return filed and may issue an assessment within the timeframe prescribed in the Tax Procedures Law. A taxpayer may challenge an amended assessment issued by the FTA via the processes and procedures outlined in the Tax Procedures Law.
In preparation for the implementation of corporate tax businesses should assess the potential impact of corporate tax on their operations and prepare for corporate tax compliance requirements in the U.A.E. They should assess whether the existing tax function, operating model and governance are sufficient to address the requirements of the corporate tax regime, identify potential exposures and opportunities to drive tax efficiencies from both a tax cost and administrative perspective prior to the corporate tax implementation, e.g., legal entity rationalization, international and domestic restructuring, and transfer pricing. Also, businesses should assess whether accounting policies and data management systems are appropriate to achieve a position of full compliance with both corporate tax and existing Value Added Tax reporting obligations.
Taxes are the main source of revenue for most countries. The introduction of a federal corporate tax allows U.A.E to generate additional revenue which helps aid development in the country, Moreover, the implementation of a federal corporate tax at 9% makes U.A. E’s corporate tax competition in the GCC region considering that four of the six nations already have an extensive corporate tax system Saudi Arabia levying 20% corporate tax, Qatar 10%, Kuwait 15%, and Oman 15%. The Ministry of Finance has not commented on anything new with regard to the Corporate Tax since the publishing of the consultation document and with the closing of the suggestions on May 19th, 2022 the industry waits patiently for the draft of the legislation.