After the announcement of the introduction of a federal corporate income tax in the UAE (“ICT”) on January 31, 2022, the United Arab Emirates Ministry of Finance (“Ministry of Finance”) recently published a public consultation document on the CIT on its website with the possibility of submit comments until May 19, 2022. This legal briefing examines the most important points included in the consultation document and their potential practical impact.
From June 1, 2023, taxable persons will be subject to a corporation tax of 9% on their taxable income. Although the Ministry of Finance has already compiled important information on the applicability of the CIT on its website, some topics have remained open or unclear.
The Department of Finance’s consultation document now addresses important points in more detail. However, due to the nature of the document, this information (as described herein) may be subject to further change.
IS at the rate of 9% will be applicable to resident taxable persons on their taxable income.
1. Taxable persons
a. General rule
In general, the CIT will be applicable to companies and other legal persons incorporated in the UAE as well as foreign companies with a permanent establishment (“PE”) in the UAE or income from the UAE. This means that the following companies will be subject to IS:
- limited liability companies
- stock companies
- free zone companies
- branches of foreign companies
- civil partnerships
- only establishments
- limited liability companies
- partnerships limited by shares.
It should be noted that individual establishments and civil partnerships will not be taxed at the level of the company but rather at the level of the associates / associates.
As a general rule, it can be said that any legal person – regardless of its legal form – holding a license or permit issued by a Ministry of Economic Development or a Free Zone Authority to conduct business in the UAE or in a free zone, will be subject to corporation tax.
The following legal entities will be exempt from corporate tax:
- governments and their departments and institutions at federal and emirate level
- wholly government-owned companies (to be listed in a respective cabinet decision)
- charities and public benefit organizations (to be listed in a respective cabinet decision)
- companies engaged in the extraction and exploitation of the UAE’s natural resources
- social security funds and regulated public and private pension funds
- Investment Funds.
vs. Free zone companies
In general, free zone companies (including branches of foreign companies incorporated in a free zone) are subject to corporation tax. However, the Ministry of Finance has decided to honor the existing tax incentives offered to companies in the free zone.
This means that under certain conditions, companies in the free zone will benefit from a 0% corporate tax rate on the following transactions:
- transactions with companies located outside the UAE
- transactions with companies located in the same or another free zone
- passive income from activities in the UAE mainland (e.g. interest, royalties, dividends, capital gains)
- transactions with group companies on the mainland of the United Arab Emirates.
Companies in the free zone will, however, be subject to the standard corporate tax rate of 9% on all transactions with companies in the mainland of the United Arab Emirates. The same applies to income generated by branches of free zone companies established on the mainland of the United Arab Emirates.
Notwithstanding the foregoing, companies in the free zone can choose to be subject to the normal rate of corporate tax at any time. Once such a choice has been made, it cannot be reversed.
In addition, it should be noted that companies in the free zone wishing to benefit from the 0% rate of corporate tax must prepare audited financial statements.
D. Residence and permanent establishment (EP)
In principle, only taxable persons residing in the UAE are subject to the UAE CIT. This means that any legal person incorporated in the UAE (and actually holding a license issued in the UAE) is considered a resident of the UAE.
However, there are two main exceptions to this principle:
- foreign companies effectively managed and controlled in the UAE (i.e. major management and business decisions are made in the UAE);
- Permanent establishments.
The Ministry of Finance will follow internationally accepted principles for determining a PE, as set out in Art. 5 of the OECD Model Tax Convention.
A PE can be established either through a fixed place of business (e.g. a branch, office, factory, workshop or property from which business activities are carried on for more than 6 months ) or a dependent agent who enters into contracts on behalf of the foreign enterprise PE.
2. Taxable income
Taxable income will be determined on the basis of the accounting net profit as shown in the financial statements and calculated in accordance with internationally accepted accounting standards.
Passive income such as dividends received from subsidiaries and capital gains from the sale of shares of subsidiaries (subject to certain conditions) will be exempt from corporation tax and will not be taken into account in the calculation taxable income.
Profits of foreign branches (of companies based in the UAE) can be accounted for in two forms:
- claim a tax credit if taxes have been paid in the host country; or
- claim a tax exemption for the profits of a foreign branch.
A foreign branch profits tax exemption can only be claimed for all branches of a UAE company (not just certain branches) and cannot be reversed.
The UAE Federal Revenue Authority will be responsible for the administration, collection and enforcement of the CIT. According to the consultation document, a new registration for CIT will be required. This means that companies will also receive another tax registration number for the CIT. It is not known whether the existing VAT portal will be extended or not.
Each business only needs to prepare one tax return. Submission and payment of the CIT must be made within 9 months of the end of the respective tax period (i.e., for companies with a financial year ending on December 31, the deadline for submission and payment would be September 30).
III. Summary and Recommendations
The consultation document published by the MoF provides more detailed information on some topics that have been mentioned on the MoF website in the form of FAQs.
Due to the nature of the consultation document, it remains to be seen whether the final corporate tax law will adopt the principles set out in the consultation document without further modification or whether certain provisions will be completely modified.
In any case, as more light has been shed on free zone companies and the applicability of corporation tax to them, companies are advised to reassess their business models and facilities in the UAE and whether they remain profitable under the new corporate tax regime. In addition, companies in the free zone may need to implement additional accounting procedures and principles in order to benefit from the corporate tax exemption.