Corporate Tax Services
INTRODUCTION TO THE UAE FEDERAL CORPORATE TAX LAW
The UAE Ministry of Finance (MoF) announced on 31 January 2022 that the federal Corporate Tax in Dubai will become applicable for fiscal years beginning on or after 1 June 2023. It is believed that the UAE Corporate tax will adhere to the best international taxation principles and will have minimal compliance ramifications for firms.
The United Arab Emirates’ decision to introduce the Corporate Tax is a response to the changing global tax landscape, particularly in relation to the Pillar One and Pillar Two reforms that the Organization for Economic Cooperation and Development (OECD) is attempting to implement as part of the Base Erosion and Profit Shifting Project (BEPS Project 2.0).
In designing and implementing the proposed UAE CT system, the Ministry of Finance has adhered to a set of internationally recognised standards to promote efficiency, justice, openness, and predictability.
The UAE government wants to accomplish the following through implementing CT:
- To reaffirm UAE’s commitment to fulfilling international standards for tax transparency and combating harmful tax practises. To accelerate UAE’s development and transformation in pursuit of its strategic objectives.
TAXABLE PERSONS UNDER THE CT REGIME
The UAE Corporate Tax applies to the following persons:
- Natural Persons: Natural people include those who obtain a commercial licence or permit to participate in business or commercial activity, unincorporated partnerships, and sole proprietorships or businesses.
- Legal Persons: Legal persons include UAE companies and other legal entities incorporated in the UAE, foreign legal entities that have a permanent establishment in the UAE or are effectively managed and controlled in the UAE, foreign legal entities that derive income from the UAE, limited liability companies, private shareholding companies, and public joint-stock companies limited liability. It will apply to all UAE firms and commercial operations, with the exception of natural resource exploitation, which will continue to be subject to corporate taxation at the Emirate level.
- Free zones: Free zone corporations will be subject to a 0% corporate tax rate on income derived from transactions with firms situated outside the UAE or with other free zone corporations. The on-continent branch of the free zone corporation will be subject to standard Dubai corporate tax rate. Any passive revenue earned by Freezone enterprises from the Mainland, such as royalties, dividends, etc., is exempt from taxation.
- Exempt Persons: Exempt persons include Federal and Emirate governments and other public institutions that conduct non-commercial activities, wholly Government-owned UAE entities that carry out a sovereign or mandated activity to the extent of the income generated from this activity only, entities engaged in the activity of extraction and exploitation of natural resources, charities and other public benefit organisations, retirement & social security pension funds, and investment funds that invest in sovereign or mandated activities.
Basis of Taxation
- Residents will be taxed on their worldwide income in the UAE.
- Non-residents will only be taxed on taxable income derived from their permanent establishment in the UAE and if the income is obtained in the UAE.
- To comply with tax laws and regulations, companies are required to file corporation tax return with the relevant tax authority.
Basis of calculating tax
- As a starting point for calculating a company’s taxable income, the UAE CT regime intends to use the accounting net profit (or loss) as shown in its financial statements.
- For businesses without a financial accounting period, the Gregorian calendar year will be the default tax period.
- The UAE capital gains tax will have particular standards for determining whether an unrealized gain or loss should be included in the calculation of taxable income.
- To ensure that only expenditures incurred for generating taxable income may be claimed as a deduction, the UAE taxable income regime would reject or limit the deductibility of certain specific expenses.
- Interest and all other forms of financing expenses will be capped at 30 percent of adjusted EBITDA.
- The maximum allowable deduction for entertainment expenses is fifty percent of the actual amount incurred.
- Penalties, recovered VAT, and unapproved charitable contributions will not be deductible.
Restriction on Deduction of Expense
- The firms will be able to credit losses from one period against the taxable income of subsequent periods, up to 75% of the taxable income in each of those future periods.
- Tax losses may be carried forward indefinitely if the same shareholder(s) hold at least 50 percent of the share capital from the beginning of the period in which a loss is incurred to the end of the period in which the loss is offset against taxable income, or if the new owners are conducting the same or a similar business.
- A group of UAE-resident firms may elect to form a tax group and be classified as a single taxable person if the parent company possesses at least 95% of the voting rights and share capital of its subsidiaries. To form a tax group, neither the parent firm nor any of its subsidiaries may be an exempt person or a free zone person who enjoys a 0% CT rate, and all group members must have the same fiscal year.
- The UAE CT framework will provide full consolidation for tax purposes for a group of wholly-owned firms, as well as the transfer of losses amongst group entities that are at least 75% commonly held.
- The objective of transfer pricing regulations is to ensure that transactions between connected parties are conducted at arm’s length (i.e., as if the transaction was carried out between independent parties).
- Payments or benefits to “Connected Persons” (which includes related parties) are only deductible if the taxpayer can show that the payment of benefits corresponds to the market value of the service given and is incurred completely and solely for the taxpayer’s business.
- Withholding tax is a tax collected by the payer at the source on behalf of the income receiver. In many tax systems, withholding taxes exist and are often applied on dividends, interest, royalties, and other comparable payments.
- There would be no withholding tax applied to domestic and international payments made by UAE enterprises.
- Within the stipulated time frame, a business subject to CT must register with the FTA and get a Tax Registration Number.
- The Tax return and the CT payment are due within nine (9) months of the conclusion of the applicable Tax Period.
Applicable Corporate Tax Rate in the UAE
- The UAE corporation tax will be imposed in the following manner on the annual taxable income of businesses:
- 0 percent, if the taxable income does not exceed AED 375,000, and 9 percent, if it does.
- Large multinational corporations that meet particular conditions regarding “Pillar Two” of the OECD Base Erosion and Profit Shifting project will be subject to a varied tax rate.
- The UAE’s corporate tax rate is one of the most competitive in the Middle East because it is lower than that of the majority of other nations in the region.
How can Merak Tax Consultant help you prepare for the CT regime?
Having a team of highly qualified Chartered Accountants and Tax specialists, we can efficiently provide tax assessment, consulting, and other tax-related services to assist businesses in preparing for the implementation of the CT system. To gain a comprehensive understanding of how we can assist your firm with the implementation of corporate tax company, please refer to the services listed below.
Corporate Tax Impact Assessment Study
- According to the company’s current operational structure, a preliminary assessment of the corporate tax ramifications will be conducted.
- This will be followed by a system impact analysis, which will include analysing the data that must be compiled for corporation tax regulations and determining if the same data is recorded by the current systems.
Corporate Tax Implementation Services
- As determined by the Impact Assessment Study, the organisational structure modifications necessary to restructure the company shall be implemented.
- Understanding the applicability of tax decisions and modifying policies or contracts as required shall be performed.
- A corporate tax governance framework will be established for the organisation to adhere to.
Corporate Tax Filing Services
- Providing all businesses with tax registration services.
- Assisting in the preparation and filing of corporate tax returns.
- Providing tax accounting services in order to streamline the accounts in accordance with CT laws.
Please contact us immediately if you are seeking Corporate Tax professionals in Dubai or the UAE who can explain how you should prepare your firm for the impending Federal Corporate Tax law.
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