The UAE has issued its long anticipated Corporate Tax Law (CT Law). The CT Law comes into effect 15 days from its publication in the official Gazette and applies to Tax Periods commencing on or after 1 June 2023 (Article 69).
This article summarises, at a high level, some of the key provisions of the CT Law. Unless otherwise specified, all Article references and defined terms are those set out or defined in the CT Law.
This article does not purport to be an exhaustive summary of the CT Law provisions, and we encourage you to get in touch with our Tax Team and Regulatory Team for any further information. You can download an English version of the CT Law by clicking this link and an Arabic version by clicking this link.
A. SCOPE
Corporate Tax applies to all Taxable Persons, including Resident and Non-Resident Persons.
A Resident Person includes legal or natural persons and Free Zone Persons that are either:
- incorporated, established or recognised in the UAE;
- effectively managed and controlled in the UAE; or
- conducting a Business or Business Activity in the UAE.
A Non-Resident Person is a person that either:
- has a Permanent Establishment in the UAE;
- derives State Sourced Income; or
- otherwise has a nexus in the UAE as specified in a Cabinet decision.
Free Zone Persons
Qualifying Free Zone Persons that:
- maintain adequate substance in the UAE;
- derive Qualifying Income as specified by the Cabinet;
- have not elected to be subject to Corporate Tax; and
- comply with Arm’s Length Principle (Article 34) and Transfer Pricing (Article 55),
will be subject to the Corporate Tax Rate set out below for the remainder of the tax incentive period stipulated in the applicable legislation of the Free Zone in which the Qualifying Free Zone Person is registered (Article 18(4)).
Unincorporated partnerships
Unless an application is made under Article 16(8) for the Unincorporated Partnership to be treated as a Taxable Person, and subject to any conditions the Minister may prescribe, an Unincorporated Partnership is not considered a Taxable Person in its own right, and Persons conducting a Business as an Unincorporated Partnership are treated as individual Taxable Persons for the purposes of CT Law.
B. EXEMPT PERSONS
The following Persons are exempt from Corporate Tax:
- a Government Entity;
- a Government Controlled Entity;
- a Person engaged in an Extractive Business, that meets the conditions of Article 7 of the CT Law. This relates to Persons engaging in extracting Natural Resources who may be already subject to local Emirate taxation or royalties;
- a Person engaged in a Non-Extractive Natural Resource Business, that meets the conditions of Article 8 of the CT Law. This relates to Persons engaging in extracting Natural Resources who may be already subject to local Emirate taxation or royalties;
- a Qualifying Public Benefit Entity under Article 9 of the CT Law;
- a Qualifying Investment Fund under Article 10 of the CT Law;
- a public pension or social security fund, or a private pension or social security fund that is subject to regulatory oversight of the competent authority in the UAE and that meets any other conditions that may be prescribed by the Minister;
- a juridical person incorporated in the UAE which is wholly owned and controlled by an Exempt Person, subject to meeting certain conditions; and
- Any other Person as may be determined by the Cabinet.
C. TAX RATE, PERIOD, AND TAX RETURN
Tax Rate
Corporate Tax on Taxable Income:
- 0% on the income threshold (to be set by the Cabinet); and
- 9% on the income that exceeds that threshold to be set by the Cabinet.
Corporate Tax on Qualifying Free Zone Person:
- 0% on Qualifying Income; and
- 9% on Taxable Income that is not Qualifying Income (under Article 18 and any decision of the Cabinet).
Tax Period
The Financial Year of a Taxable Person is the Gregorian calendar year, or the 12-month period for which the Taxable Person prepares financial statements, although the Taxable Person may apply to use a different Tax Period, subject to conditions to be set by the FTA.
Tax Return
A Taxable Person must file a Tax Return with the FTA no later than (9) nine months from the end of the relevant Tax Period, or by such other date as directed by the FTA.
D. CALCULATING TAXABLE INCOME
The Taxable Income for each Tax Period is determined on the basis of adequate, standalone financial statements prepared for financial reporting purposes in accordance with accounting standards accepted in the UAE.
The Taxable Income for a Tax Period is the Accounting Income for that period, adjusted (to the extent applicable) for the following:
- any unrealised gain or loss;
- Exempt Income;
- Relief (if any);
- Deductions (if any);
- transactions with Related Parties and Connected Persons;
- Tax Loss relief;
- any incentives or relief for a Qualifying Business Activity as specified by the Cabinet; and
- any other adjustments.
Corporate Tax Base
Resident Person
Legal Person – Corporate Tax will be imposed on Taxable Income derived from the UAE or outside the UAE.
Natural Person – the Cabinet will define what Business and Business Activities conducted by a natural person will be subject to Corporate Tax.
Non-Resident Person
A Non-Resident Person will be subject to Corporate Tax on the following:
- Taxable Income from a Permanent Establishment in the UAE;
- State Sourced Income not attributable to a Permanent Establishment in the UAE; and
- Taxable Income attributable to the nexus of the Person in the UAE, to be determined by the Cabinet.
Relief and Exemptions
Exemptions:
The following income is not taken into account in determining Taxable Income:
- Dividends and profit distributions from a juridical person that is a Resident Person;
- Income from a Participating Interest (as specified in Article 23);
- Income of a Foreign Permanent Establishment that meets the conditions of Article 24, that a Resident Person elected to not take into account; and
- Income derived by a Non-Resident Person from operating aircraft or ships in international transportation that meets the conditions of Article 25.
Relief
When calculating Taxable Income for the purposes of CT Law:
- the following gains and losses need not be taken into account:
- Transfers within a Qualifying Group – gains and losses in relation to transfers of assets or liabilities between two Taxable Persons that are members of the same Qualifying Group need not be taken into account when calculating Taxable Income;
- Business Restructuring Relief: transfer to a Taxable Person or someone who becomes taxable as a result of the transfer;
- a Resident Person may be eligible for Small Business Relief and elect to be treated as not having derived any Taxable Income when the Revenue of that Taxable Person does not exceed the threshold to be determined by the Minister; and
- a Tax Loss can be offset against the Taxable Income of subsequent Tax Periods to arrive at the Taxable Income for those subsequent Tax Periods in accordance with Chapter 11.
Deductions
When calculating Taxable Income for the purposes of CT Law, the following deductions are permitted:
- Deductible Expenditure – Expenditure incurred wholly and exclusively for the purposes of the Taxable Person’s Business that is not capital in nature.
- Interest Expenditure, subject to Article 28, General Interest Deduction Limitation Rule in Article 30 and Specific Interest Deduction Limitation Rule in Article 31.
- Entertainment Expenditure – subject to Article 28, a Taxable Person may deduct 50% of any entertainment, amusement, or recreation expenditure incurred during a Tax Period.
- The following are Non-deductible expenditure as detailed in Article 33, including:
- donations, grants, or gifts made to an entity that is not a Qualifying Public Benefit Entity;
- fines and penalties, other than amounts awarded as compensation for damages or breach of contract;
- bribes or other illicit payments; and
- dividends or profit distributions paid to an owner of the Taxable Person.
Transactions with Related Parties and Connected Persons
In determining Taxable Income, CT Law adopts Arm’s Length Principles similar to international standards relating to transactions between related and connected parties.
A transaction or arrangement between Related Parties meets the arm’s length standard if the results are consistent with the results that would have been realised if unrelated Persons had engaged in a similar transaction or arrangement under similar circumstances.
Where the result of the transaction or arrangement between Related Parties does not fall within the arm’s length range, the FTA can adjust the Taxable Income to achieve the arm’s length result.
E. TAX GROUP PROVISIONS
Tax Group
A Resident Parent Company which owns at least 95% of the share capital of a Subsidiary can make an application to form a Tax Group, provided the conditions in Article 40(1) are met. A Tax Group formed under Article 40(1) is treated as a single Taxable Person for the purposes of the CT Law, represented by the Parent Company.
The Parent Company and each Subsidiary shall be jointly and severally liable for Corporate Tax Payable by the Tax Group for those Tax Periods when they are members of the Tax Group.
Taxable Income of a Tax Group
For the purposes of determining the Taxable Income of a Tax Group, the Parent Company shall consolidate the financial results, assets and liabilities of each Subsidiary for the relevant Tax Period, eliminating transactions between the Parent Company and each Subsidiary that is a member of the Tax Group.
F. PAYMENT AND REFUND OF TAX
Payment of Tax
A Taxable Person must settle the Corporate Tax Payable within (9) nine months from the end of the relevant Tax Period.
Refund of Tax
Where:
- the Withholding Tax Credit available to a Taxable Person exceeds that Taxable Person’s Corporate Tax Payable; or
- the FTA is otherwise satisfied that the Taxable Person has paid Corporate Tax in excess of that Taxable Person’s Corporate Tax Payable,
the Taxable Person may make an application to the FTA for a Corporate Tax refund in accordance with the provisions of the Federal Decree-Law No. (28) of 2022 repealing and replacing Federal Law No. (7) of 2017 (Tax Procedures Law). Please keep an eye on our upcoming publication on the UAE Tax Legislative Instruments.
G. ANTI-AVOIDANCE RULES
General Anti-Abuse Rule applies to a transaction or arrangement if it can reasonably be concluded that:
- the entering into or carrying out of the transaction or arrangement, or any part of it, is not for a valid commercial or other non-fiscal reason which reflects economic reality; and
- the main purpose, or one of the main purposes, of the transaction or arrangement is to obtain a Corporate Tax advantage that is not consistent with the intention or purpose of the CT Law.
The FTA is empowered to make a determination that the Corporate Tax advantages obtained as a result of such transaction or arrangement are to be counteracted or adjusted, in accordance with the requirements set out in Article 50.
H. OTHER INSTRUMENTS
International Agreements
If the terms of any international agreement in force in the UAE are inconsistent with the provisions of the CT Law, the terms of the international agreement will prevail.
Implementing decisions
The CT Law contemplates the issuance of multiple implementing decisions to be issued by the Minister, the Cabinet and the FTA to implement the provisions of the CT Law.
I. TRANSITIONAL RULES
A Taxable Person’s Opening Balance Sheet for Corporate Tax purposes will be set as the closing balance for the Financial Year ending immediately before the first Tax Period commences. In this respect, the General Anti Abuse Rules operate from the time of publication of the Decree Law in the Official Gazette.