Introduction to tax at UAE

 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.