The UAE was a tax-free country until May 31, 2023. On June 1, 2023, the UAE implemented a new corporate tax law with a headline rate of 9%. The new law applies to all businesses that are resident in the UAE, regardless of whether they are in a free zone or not.
The
Ministry of Finance (MoF) has issued a few decisions to implement the new tax
law. Some of the most important decisions include:
- Decision No. 1 of 2023 defines
the terms used in the new tax law.
- Decision No. 2 of 2023 sets
out the procedures for calculating and paying corporate tax.
- Decision No. 3 of 2023 provides
exemptions from corporate tax for certain types of businesses.
The
MoF has also published a few FAQs to help businesses understand the new tax
law.
The
new corporate tax law is a significant change for the UAE. However, the MoF has
taken steps to ensure that the transition is smooth for businesses. Businesses
should carefully review the new tax law and the MoF's decisions to ensure that
they are compliant.
Here
are some of the key points to remember about the new corporate tax law:
·
UAE announced the small
business relief for businesses earning revenue less than AED 3 million. A
reduced corporate tax rate will be applicable to such businesses. The Small Business Relief will not be
available to Qualifying Free Zone Persons or members of Multinational
Enterprises Groups (MNE Groups) as defined in Cabinet Decision No. 44 of
2020.
·
Further, UAE ministry of Finance provides for exceptions
from registration requirements
for government entities, government-controlled entities, as well as extractive
businesses and non-extractive natural resource businesses that meet the
necessary conditions under the Corporate Tax Law. The important exemption is
for Non-Resident earning UAE sourced income and not having a PE in UAE. This
would mean that Non-Residents would be paying tax in UAE only if they have a PE
in UAE. It would also mean that in future once the withholding tax rates move
up from 0%, that may become the final liability for the Non-Residents.
·
The UAE Government has notified threshold limit/ conditions
for mandatory preparing and maintaining Audited Financial Statements for UAE
Corporate Tax purposes:
a)
Taxpayers deriving Revenue exceeding AED 50,000,000 (AED Fifty Million only)
during the relevant Tax Period; or
b) A Qualifying
Free Zone Person (claiming benefit of 0% Corporate Tax rate).
·
The Ministry of Finance has issued a long-awaited update
regarding the threshold required for maintaining transfer pricing
documentation. The newly released
Ministerial Decision No (97) of 2023 highlights situations where taxpayers are
obligated to keep transfer pricing documentation, which includes a master file
and a local file. These requirements apply to taxpayers who have generated
revenues of at least Dh200 million in a relevant tax period or are part of a
multinational group with a total consolidated group revenue of at least Dh3.15
billion in the relevant tax period. Moreover, the decision provides an overview
of the transactions or arrangements that should be included in the local
file.
·
The Federal Tax Authority (FTA) has issued Press Release dated
14th May 2023 and launched the UAE Corporate Tax Registration through the
EmaraTax digital tax services platform. Vide this Press Release, the UAE
Corporate Tax Registration has been opened only for Public Joint Stock
Companies and Private Companies in the UAE starting from 15th May 2023, in line
with Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and
Businesses, which stipulates that Taxable Persons will become subject to
Corporate Tax from the beginning of their first financial year that starts on
or after 1st June 2023. Therefore, Taxable Persons must register and obtain a
Tax Registration Number for Corporate Tax purposes. Corporate Tax Registration
for Free Zone Persons and Natural Persons conducting Business or Business
Activity will be opened later. Further, Corporate Tax Registration will be
available to individual Legal Entities only. Entities which wish to form a Tax
Group must register individually first and then make an application to form a
Tax Group.
·
Interest deduction limits notified in the UAE corporate tax
law. It's 12 million dirhams. This will help a lot of startups in the UAE which
are into losses. So, ministerial decision no. 126 also clarifies what is
included in the interest and that EBITDA cannot be a negative figure. It can be
zero in case of negative EBITDA. The interest includes but is not limited to
guarantee fees, commitment charges, capitalisation of interest, etc.
·
MoF issued Ministerial Decision No. 49 of 2023 on specifying
the categories of Business or Business activities conducted by a Resident or
Non-Resident Natural Persons that are subject to Corporate Tax for the purposes
of the Federal Decree Law No. 47 of 2022 on Taxation of Corporations and
Businesses (“CT law”). The MoF chose to issue a negative list which are
not taxed and hence not actually specified which business will be
taxed. Thus granting exemption and those which are not falling within exemption
will be taxed.
Key
Highlights of the decision:
(1)
Resident or Non-Resident Individuals conducting business or business activities
shall be subject to CT if the consolidated turnover exceeds AED 1 million in a
calendar year.
However,
the income earned by Resident or Non-Resident Individuals from following
activities (regardless of the turnover) shall not be subject to CT-
(a)
Wage- Salary and other benefits under employment contract.
(b)
Personal investment income- Investment Income earned in personal
capacity, that is not conducted or does not require to be conducted through
license from licensing authority.
(c) Real
estate Investment income- Income from real estate activity such as
sale, leasing, sub-leasing and rental of land or real estate property that is
not conducted or does not require to be conducted through license from
licensing authority.
Individuals
who are not subject to CT will not be required to register for CT and
accordingly may not be required file tax returns.
Key
Takeaways:
(1) The
threshold turnover of AED 1 million will provide relief to small business
carried by individuals from tax burden and compliance obligations.
(2) The
taxability of business and business activity (other than the exclusions above)
is not linked to license requirement. This means that once the turnover of the
business activity exceeds the threshold of AED 1 million, the individual shall
be subject to CT, irrespective of whether there is a license or not
(3) The
specific exclusion of investment income and real estate investment income
earned in personal capacity of individual is a significant clarification and
was much awaited.
Businesses
should start preparing for the new corporate tax law now. This includes
reviewing their financial records, updating their accounting systems, and
training their staff on the new tax rules.
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