The Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses (hereafter referred to as the "CT law") was published by the UAE on December 9, 2022. The MoF website has an unofficial translation available. On the MoF website, Frequently asked questions are also posted, which were very helpful clarifications of the law.
For financial years beginning on or after 1st June 2023, the CT law serves as the legal foundation for the adoption and operation of a Federal CT in the UAE. After being published in the official gazette, the CT law will take effect 15 days later.
Under the Consultation Document, which was published in April 2022, the CT law elaborates and clarifies several significant clauses.
It also leaves several questions unanswered that will need to be properly addressed in further Cabinet and Ministerial decisions as well as Tax Authority recommendations. The CT law is still a significant milestone for all firms in the UAE and needs to be properly considered.
This warning summarises some of our initial thoughts and important conclusions regarding the CT bill; a more thorough summary will be released soon.
The treatment of Free Zone Persons was one of the CT law's most highly debated topics. A key unanswered issue from the Consultation Document is whether a Qualifying Free Zone Person can have both Qualifying Income (taxed at a rate of 0%) and non-qualifying Taxable Income (taxed at 9%). On this, though, there are still some unanswered questions.
A Qualifying Free Zone Person must meet some requirements to qualify, including maintaining sufficient substance, abiding by transfer pricing rules, and not choosing to be subject to CT. Regardless of whether they are Qualifying Free Zone Persons or not, all Free Zone entities must register and submit a CT return.
Unanswered questions include whether the choice to be subject to normal CT in the UAE is irrevocable, the treatment of transactions between group entities situated in mainland UAE and Free Zone entities, and what qualifies as qualifying income (subject to Cabinet decision).
Who will be excluded from UAE CT is determined by the CT law, and this definition has been somewhat broadened from that in the Consultation Document to now include some non-extractive natural resource enterprises.
Furthermore, the CT law has added more definitions for government entities and government-controlled companies. In particular, the CT law has stated that unless undertaking any business or business activity under a License issued by a Licensing Authority, Government entities would be treated as exempt individuals. Government-controlled organizations would be regarded as exempt individuals unless they were engaging in prohibited activities.
The CT law has made it clear that for companies in the extractive industries if an entity is making money from both extractive and non-extractive ventures, the extractive income is to be taxed by the applicable Emirate Legislation and the other business income is to be taxed per the CT law.
The law of Connecticut reaffirmed that taxable income would be calculated based on the net profit (or loss) in financial statements prepared for financial reporting purposes in conformity with recognized accounting standards.
Regarding the tax adjustments that will be made to the reported accounting income, the provisions offer insight. These contain explanations of how to handle unrealized gains and losses as well as interest costs.
Tax grouping is a crucial method for taxpayers to share losses and lessen the administrative cost of paying taxes. Rules governing the use of tax losses in situations where a subsidiary joins a tax group and in situations where a tax group dissolves were made clearer.
Several articles in the UAE CT law deal with transfer pricing. The following is a summary of the main points covered by the CT law:
The arm's length concept must be adhered to
in transactions between connected parties and related parties.
TP techniques are introduced, substantially aligned with the OECD TP Guidelines.
The terms "Related Parties," "Control," and "Connected Persons" are all defined.
The idea of transfer price changes is presented, along with associated adjustments and relevant procedures.
Prepare TP paperwork by taxpayers (disclosure form, master file, local file). By distinct ministerial directives and tax authority guidelines, conditions and format must be presented.
Provisions for transition
Certain income (dividends, capital gains) are excluded from UAE CT under the participation exemption. In addition to the previously indicated requirements (5% ownership and a 9% tax rate for the investee company), a 12-month continuous holding term is now necessary. The CT law makes it clearer how the participation exemption may be used when the immediate participation does not comply with the exemption's requirements.
The CT law didn't offer any additional instructions regarding Pillar Two. According to the frequently asked questions, multinationals will be subject to CT under the standard UAE CT framework until the UAE adopts the Pillar Two regulations. On the implementation of the Pillar Two guidelines in the UAE, more information will be made available as soon as possible.
UAE publishes new corporation tax regulations.
Other points to consider :
Non-residents who have "nexus" (business interactions) with the State are taxable individuals.
The Cabinet will provide more information in this regard.
Exemption for foreign permanent establishments (PE)
Foreign PEs should be subject to foreign tax of at least 9% even though the decisions to exempt them from it no longer appear to be final.
group reorganizations and transfers
For tax-neutral intra-group transactions and corporate restructurings, additional requirements were introduced, and the claw-back period was set at two years.
Laws against abuse:
The CT law established general anti-abuse principles that apply to transactions that result in a tax advantage when there is no legitimate commercial justification for the tax advantage and the tax advantage was the primary goal of the transaction or one of the primary goals.
The CT legislation specifies the details that must be conspicuous in the tax return. In addition, the due dates for filing, paying taxes, and maintaining records.
Conclusion and further actions:
The rules outlined in the UAE CT law integrate ideas that are generally acknowledged best practices. But there are still definite issues that need to be resolved.
The transition to the new administration will have a significant impact on how business is conducted, so enterprises must make preparations now. Our team is already engaged in tax effect analyses, transfer pricing studies, and operational implementation planning for a range of UAE-based companies, including system and process improvements.
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