The UAE has introduced a new federal corporate tax (CT) regime with the enactment of the Federal Decree-Law no. 47 of 2022 on the Taxation of Corporations and Businesses. This law aims to create a transparent and easily understandable tax framework with statutory tax rates ranging from 0% to 9%. The UAE’s corporate tax regime aligns with the global minimum tax initiative proposed by the Organization for Economic Co-operation and Development (OECD) under the Base Erosion and Profit Shifting (BEPS) project.
In this interview with Economy Middle East, Maroun Abou Harb, Associate, BSA, answered important questions that few people know about the corporate tax regime,
Are free zone entities exempted from corporate tax? what is the de minimis requirement? Can a free zone transact with another free zone entity located in a different free zone and still be exempted from tax?
In order for a free zone entity to be exempt from corporate tax, it should at all time meet the following conditions (i) Maintains adequate substance in a free zone, (ii) has not elected to be subject to Corporate Tax, (iii) complies with Arm’s Length Principle and Transfer Pricing Documentation, (iv) derives Qualifying Income as specified in Cabinet Decision no. 55 of 2023, (v) its non-qualifying revenue does exceed the De Minimis requirements, and (vi) maintains audited financial statements.
The De Minimis Requirement is when the non-qualifying revenue in a certain tax period is less than 5% of the total revenue or AED 5,000,000, whichever is lower.
A freezone will be exempted from Corporate Tax when it transacts with another freezone entity located in a different freezone as long as said freezone is providing any of the qualifying activities.
Read: UAE corporate tax now in full effect with real estate update
Will free zone entities be subject to the global maximum tax (OECD, BEPS Pillar 2) rules?
Qualifying freezone entities, which form part of a prominent multinational group, will be subject to a distinct corporate tax rate after the integration of the pillar two regulations within the UAE Corporate Tax framework.
Will there be any relief available for transfers between group companies?
The companies that form a qualifying group can transfer assets and liabilities among themselves at their net book value. This ensures that such transfers can be executed in a manner that is tax neutral, meaning they do not result in any taxable gain or loss for the purposes of corporate tax.
Will there be any relief to facilitate mergers, spin-offs and other restructuring transactions?
The Corporate Tax provision facilitates the execution of legally compliant mergers, business mergers, spin-offs, and other transfer and restructuring transactions, as outlined in the Corporate Tax Law. These transactions can be conducted without incurring any gains or losses for Corporate Tax purposes.
What is the UAE CT treatment for any unrealized gains and losses arising from accounting fair value or impairment adjustments?
When preparing financial statements on an accrual basis, businesses in the UAE have two options for the treatment of unrealized accounting gains and losses for Corporate Tax purposes.
Option 1 allows the taxpayer to recognize gains and losses on a “realization basis” for all assets and liabilities, meaning unrealized gains are not taxable until realized, and unrealized losses are not deductible until realized.
Option 2 permits the taxpayer to apply the “realization basis” only to assets and liabilities held on capital account, excluding unrealized gains and losses from taxation or deduction until realized. Unrealized gains and losses associated with assets and liabilities held in the revenue account, however, remain included in taxable income.
How are capital gains taxed?
There is no distinction between gains arising from the sale of capital assets and those resulting from the sale of non-capital (revenue) assets. Capital gains derived from the disposal of assets are included in annual taxable income in the same manner as other income from the business.
Will a UAE-based investment fund manager be subject to corporate tax?
In the event such fund manager is a resident of the UAE, or if he/she operates in the UAE through a permanent establishment, the investment fund manager will be subject to Corporate Tax.
Will dividends paid by UAE companies be deductible for corporate tax purposes?
The dividends paid by UAE companies is not considered as deductible expenses for Corporate Tax calculations.
Will service fees paid to local and Federal Governments be deductible for corporate tax?
Business setup expenses, license renewal fees, and other government charges incurred solely for the purpose of conducting ordinary business activities are eligible for deduction for Corporate Tax purposes.
Will Value Added Tax paid be deductible for corporate tax?
In accordance with the tax regulations in force, only irrecoverable input value-added tax can be considered eligible for deduction when calculating taxable income. However, it is important to recognize that any VAT charged or incurred would not exert any influence on the determination of taxable income.
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