Highlights from the UAE Federal Corporate Tax Legislation

On 09 December 2022, the UAE Ministry of Finance (“MoF”) issued the much-anticipated Federal Decree-Law No.(47) of 2022 on the Taxation of Corporations and Businesses (“CT Law”). The UAE CT Law will be further supplemented by the implementing regulations to be issued by the Cabinet.

The CT Law will be effective 15 days from the date of publication in the Official Gazette.

Below are the key highlights from the UAE CT law:

A. Imposition of Corporate Tax and Applicable Rates:

*Subject to confirmation in Cabinet Decision

B. Qualifying Free Zone Person:

Free Zone Persons eligible for 0% Corporate Tax are known as Qualifying Free Zone Person. The following conditions must be met to be a Qualifying Free Zone Person:

• Maintenance of adequate substance.

• Mandatory compliance with Transfer Pricing (“TP”).

• Earn “Qualifying Income”.

• Tax holiday for the remaining tax incentive period of the applicable legislation.

C. Small business relief:

• Provision of small business relief is available for resident persons only.  

• Revenue for the relevant tax period and the previous tax period is below the specified threshold.

• No TP compliance.

• Treated to have no taxable income.

D. General Anti-abuse Rule (“GAAR”):

General Anti-Abuse Rule or "GAAR“ counteracts abuse of transactions made to achieve unfair advantage. The rule covers the following transactions:

• Entered from the date of publication of the CT Law.

• Lacking commercial substance and main purpose is to obtain an advantage from the CT perspective.

E. Tax on foreign persons:

Corporate Tax shall be imposed on non-resident persons in the following cases:

• Permanent Establishment in the UAE.

• Derive UAE sourced income.

• Effective control and management in the UAE.

• Business nexus in the UAE.

F. Transitional Provisions:

• Opening balance sheet will be the prior period closing accounting balance sheet.

• Opening balance sheet should be prepared considering the arm’s length principle.

• GAAR applicable after the date of publishing CT Law in the official Gazette.

G. Participation Exemption conditions

The following are the conditions in order for income from participating interest to be exempt:

• 5% or more ownership interest.
  • Minimum holding period of 12 months.
  • Investee entity subject to minimum tax of 9%.
  • Not more than 50% of the assets of the investee consists of ownership interest that would not qualify for exemption under CT held directly by the investor.

   

  H. Transfer Pricing

• All transactions with related parties and connected persons must be at arm’s length.

• TP regime broadly in line with the internationally accepted OECD Guidelines.

• Applies to all domestic and international transactions.

• Applies to transactions between exempt business activities and other business activities.

• Authority can make TP adjustments including corresponding adjustments.

I. Others

• A taxpayer is required to maintain all records and relevant documents for a period of 7 years.

• Private clarification can be taken from Tax Authority by submitting clarification application in respect of CT Law.

• With respect to the transactions between foreign related parties an Advance Pricing Agreements (“APA”) application can be initiated for TP transactions.