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Public Consultation on UAE's Corporate Tax Regime

Updated: May 22, 2022

The UAE Ministry of Finance (MoF) recently published a public consultation document on the Corporate Income Tax (CIT) to outline policy background and key principles of the proposed corporate tax regime, and to obtain input from the business community and other interest parties.

The UAE Ministry of Finance recently published a public consultation paper on Corporate Income Tax to outline policy background and key principles of the proposed corporate tax regime, and to obtain input from the business community and other interest parties.

While the consultation document is not comprehensive and does not reflect the final view of the proposed tax regime, it is expected that it will not diverge much from the key principles and concepts announced.



Comments were open for submission online until 20 May 2022.


This article highlights key principles included in the consultation document and their potential practical impact.



Taxable Persons

Natural Person

Natural persons engaged in a business or commercial activity in the UAE will be subject to CIT. Examples are:

  • Freelancers

  • Sole establishments or proprietorships

  • Individual partners in an unincorporated partnership

An individual will be considered engaged in a business if they carry out an activity that requires obtaining a business license or equivalent permit from a relevant authority in the UAE.


Exclusion:

Corporate Income Tax will, however, not be applicable to income of natural persons (individuals), employment and other personal income earned by UAE nationals and expats such as:

  • Dividends

  • Rental receipts

  • Other investment income.

  • UAE real estate and other investments that are held through a private or family trust on behalf of beneficiaries that are natural persons.

Legal Person

In general, CIT will be applicable to legal persons (entities that have separate legal personality such as LLCs.), which include:

  • UAE companies and other legal persons incorporated in the UAE mainland and free zones.

  • Foreign legal entities that have a permanent establishment (see paragraph [4.8]) in the UAE or that earn UAE sourced income

  • Foreign legal entities that are effectively managed and controlled in the UAE

  • Foreign legal entities earning UAE sourced income.

As a basic rule, it can be stated that any legal entity holding a license or permit issued by any licensing body including economic departments and free zones for carrying out business activity within the UAE will be subject to CIT.

Fiscally Transparent and flow-through principle

Limited and general partnerships and other unincorporated joint ventures and associations of persons will be treated as ‘transparent’ for UAE CIT purposes. This means that they will not be taxpayers in their own right, but their income will instead ‘flow through’ and be taxed in the hands of the partners or members only.


Free Zones

Whilst Free zone companies and branches will be within the scope of the UAE Corporate Tax and subject to tax return filing requirements, the proposed tax regime will honors existing tax incentives offered to Free Zone companies, provided that they:

  1. Maintain adequate substance (premises & resources) and

  2. Comply with all regulatory requirements.

  3. Prepare and maintain audited financial statements

Types of incomes earned by a Free Zone company that benefit a 0% CIT

Compliant free zone companies can benefit a 0% CIT on income earned from business within the same or other free zones or from outside the UAE. as well as passive income from mainland companies such as interest, dividends, or royalties.


Free zone companies will, however, be subject to the normal CIT rate of 9% on income generated by branches of free zone companies established in the UAE mainland.


Any other mainland sourced income will disqualify a Free Zone company from the 0% CIT regime in respect of all their income.


It is worth mentioning that free zone companies may elect to be subject to the normal CIT rate at any time. Once such an election has been made, it cannot be reversed.


Taxable income calculation


The starting point to determine the taxable income is the accounting net profit as stated in the company's financial statements prepared as per the international accounting standards. Then, several adjustment and deductions need to be carried out to reach the taxable income.


Unrealized gains

While unrealized gains or losses from capital items is excluded, gains from revenue items such as inventory will be taxable.


Exempt income

The UAE CIT regime will exempt certain forms of income from taxation

  • Income earned by UAE companies from investments in other companies, and from operations conducted outside the UAE through foreign subsidiaries or foreign branches

  • All domestic dividends earned from UAE companies, including dividends paid by a Free Zone Person that benefits from the 0% CIT regime.

  • Dividends paid by foreign companies, and capital gains from the sale of shares in both UAE and foreign companies, provided certain conditions are met.

  • Foreign branch profits by either claiming a foreign tax credit for taxes paid in the foreign branch country, or elect to claim an exemption for their foreign branch profits.


Deductible expenses

Expenses incurred for the purpose of generating taxable income are deductible, for example, salaries, rent, licensing fees, irrecoverable VAT, and bad debts. However, the UAE Corporate Tax regime will disallow or restrict the deduction of certain expenses such as:

  • Related party payments to free zone companies (unless payment for mainland branch)

  • 50% of entertainment expense to customers, shareholders, suppliers and other business partners.

  • Administrative penalties, recoverable VAT, donations to unapproved charities or public benefit organizations

Losses relief

UAE businesses will be able to offset a loss incurred in one period against the taxable income of future periods, up to a maximum of 75% of the taxable income in each of those future periods.


Group entities can transfer losses from one group company to another profitable group company (that at least 75% commonly owned), provided certain conditions are met. transfer of losses from free zone company that benefit from the 0% corporate tax is not allowed.


The total tax loss offset will not be allowed to exceed 75% of the taxable income of the company receiving the transferred losses in the relevant period.


Tax groups

A UAE resident group of companies can elect to form a tax group and be treated as a single taxable person if the parent company holds at least 95% of the share capital and voting rights of its subsidiaries.

To form a tax group, neither the parent company nor any of the subsidiaries can be an exempt person or a Free Zone company that benefits from the 0% Corporate Tax rate, and all group members must use the same financial year.

Transfer pricing

The UAE CIT regime will have transfer pricing rules to ensure that the price of a transaction is not influenced by the relationship between the parties involved. The tax regime will apply the internationally recognized “arm’s length” principle to transactions and arrangements between related parties.

Conditions of a transaction between related parties should be the same as the conditions for a comparable transaction between unrelated parties.

Compliance with transfer pricing will also require relevant companies to disclose information regarding transactions with related parties and to maintain a master and local file where the arm’s length value of their related party transactions exceeds a