UAE Corporation Tax Consultation Document Published
In advance of the final publication of the corporation tax law in the UAE a consultation document has been issued. The document contains information on the proposed United Arab Emirates (UAE) Corporate Tax regime and is released for the purposes of obtaining input from interested parties. It does not reflect the final view of the UAE Government, and is not intended to comprehensively address all possible aspects of the proposed UAE Corporate Tax regime.
The public consultation document is released in advance of relevant legislation being finalised and promulgated, and is released on the basis that it is without prejudice to the final UAE Corporate Tax regime. As such, the consultation document should not be used or relied upon to make individual or business decisions as it does not represent the final legislation.
In this article we explore some of the key points raised to give readers an early indication of what to expect once the law is published.
On 31 January 2022, the Ministry of Finance announced that the United Arab Emirates (UAE) will introduce a federal Corporate Tax (CT) on business profits effective for financial years starting on or after 1 June 2023. Since the announcement, work has continued on the finalisation of the UAE CT regime to ensure that it incorporates best practices globally and minimises the compliance burden for businesses.
Free Zones
In line with the original intention and purpose of Free Zones, a Free Zone Person can benefit from a 0% CT rate on income earned from transactions with businesses located outside of the UAE, or from trading with businesses located in the same of any other Free Zone. The 0% CT rate may also apply to income from certain regulated financial services directed at foreign markets.
Where a Free Zone Person transacts with mainland UAE but does not have a mainland branch, the Free Zone Person can continue to benefit from the 0% CT rate if its income from mainland UAE is limited to ‘passive’ income. This would include interest and royalties, and dividends and capital gains from owning shares in mainland UAE companies
To prevent Free Zone businesses from gaining an unfair competitive advantage compared to businesses established in mainland UAE, any other mainland sourced income will disqualify a Free Zone Person from the 0% CT regime in respect of all their income.
Calculation of taxable income
To reduce complexity and compliance costs, the UAE CT regime proposes to use the accounting net profit (or loss) as stated in the financial statements of a business as the starting point for determining their taxable income.
Using accounting standards provides for a common definition of income, which reduces compliance costs and provides a base which follows international standards. Aligning the calculation of taxable income to accounting profits (where possible and appropriate) limits book-tax differences and prevents businesses from having to maintain two sets of records: one for financial reporting purposes and the other for CT purposes.
The financial statements should be prepared using accounting standards and principles that are acceptable in the UAE, and businesses will use their financial accounting period as their (annual) tax period. Where a business does not have a financial accounting period, their default tax period will be the Gregorian calendar year.
Although International Financial Reporting Standards are commonly used in the UAE, consideration is being given to allowing alternative financial reporting standards and mechanisms for determining taxable income to accommodate and reduce the compliance costs for certain taxpayers (e.g., startups and small businesses).
Non-deductible expenses
As discussed in section 3.8, related party payments made to a Free Zone Person that is taxed at 0% on receipt of the income will not be deductible for CT purposes. However, the related party will be allowed to claim a deduction if the payment is attributed to a mainland branch of the Free Zone Person.
Businesses will be allowed to deduct up to 50% of expenditure incurred to entertain customers, shareholders, suppliers and other business partners, to acknowledge that these types of expenses often also have non-business or personal element. 21
No deduction will be allowed for certain specific other expenses such as administrative penalties, recoverable VAT, and donations paid to an organisation that is not an approved charity or public benefit organisation.
Transfer pricing
This section sets out the proposed treatment under the UAE CT regime of transactions between related parties.
The UAE CT regime will have transfer pricing rules to ensure that the price of a transaction is not influenced by the relationship between the parties involved. In order to achieve this outcome, the UAE will apply the internationally recognised “arm’s length” principle to transactions and arrangements between related parties and with connected persons.
Transfer pricing
This section sets out the proposed treatment under the UAE CT regime of transactions between related parties.
The UAE CT regime will have transfer pricing rules to ensure that the price of a transaction is not influenced by the relationship between the parties involved. In order to achieve this outcome, the UAE will apply the internationally recognised “arm’s length” principle to transactions and arrangements between related parties and with connected persons.
Calculation of CT liability
This section sets out the proposed approach to calculating the CT payable by a business, and how such CT liability may be satisfied.
Applicable CT rates
CT will be charged on the annual taxable income of a business as follows: ● 0%, for taxable income not exceeding AED 375,000; and ● 9%, for taxable income exceeding AED 375,000; or
Withholding tax
Given the position of the UAE as a global financial centre and an international business hub, a 0% (zero percent) withholding tax will apply on domestic and cross-border payments made by UAE businesses.
The following income shall be subject to 0% withholding tax: ● UAE sourced income earned by a foreign company that is not attributable to a PE in the UAE of that foreign company; ● Mainland UAE sourced income earned by a Free Zone Person that benefits from the 0% CT regime, unless the income is attributable to a mainland branch of that Free Zone Person; and ● Dividends and other profit distributions made by a Free Zone Person that benefits from the 0% CT regime to a mainland UAE shareholder in the Free Zone Person. 28
Given the rate of withholding tax is proposed to be at 0%, UAE businesses will not be required to make any deductions from payments made, nor will there be an obligation to file withholding tax returns.
Filing, payment and refund
In order to keep the administrative burden on taxpayers to a minimum, a business will only need to prepare and file one tax return and other related supporting schedules with the FTA for each tax period. There will be no requirement for a business to file a provisional CT return and make advance payments of CT.
Each tax return and related supporting schedules will need to be submitted to the FTA within nine (9) months of the end of the relevant Tax Period. For additional documentary support that may need to be provided to the FTA, please refer to section 10.5.
Payments to settle a taxpayer’s CT liability for a Tax Period will need to be made within nine (9) months of the end of the relevant Tax Period. Where a taxpayer can demonstrate that a CT refund may be due, the taxpayer can apply to the FTA to request a refund.
Assessment
The UAE CT regime will be based on a self-assessment principle. This means that a business is responsible for ensuring that the tax return and any supporting schedules submitted to the FTA are correct, complete and comply with the UAE CT law.
To ensure the integrity of the CT regime, the FTA may review a CT return filed and may issue an assessment within the timeframe prescribed in the Tax Procedures Law.
A taxpayer may challenge an amended assessment issued by the FTA via the processes and procedures outlined in the Tax Procedures Law.
Documentation requirements
A business will be required to maintain financial and other records that explain the information contained within the CT return and other documents submitted to the FTA. Certain exempted persons will also be required to maintain records to allow the FTA to ascertain the person’s exempt status.
Whether the financial statements of a business are required to be audited by an accredited audit firm is and will continue to be determined by applicable company laws and regulations. However, the UAE CT regime will require a Free Zone Person to have audited financial statements if it wants to benefit from the 0% CT regime.
There is a lot to unpack from the selected points we have chosen to focus on and as mentioned this is not the final law. In advance of the UAE CT law being published businesses should start looking at their accounting systems, documentation storage and business structure.
Advice should be sought if the business process review is deemed too daunting at this stage.