LPA Middle East | Smart Alert – UAE release the tax corporate law
19 January 2023
LPA Middle East | Smart Alert – UAE release the corporate tax law
On December 9, 2022, the UAE Ministry of Finances finally released the Federal Decree Law N. 47 of 2022 about Taxation of Corporation and Business (the “CT Law”), which will be effective for the financial years starting or on after the 1st of June of 2023. Businesses with a financial year starting on the 1st of January will be subjected to the CT Law starting from the 1st of January 2024.
The CT Law introduces a Federal Corporate Tax on business profits (the “Corporate Tax”) with a standard rate of 9% on taxable income exceeding AED 375,000 (this amount still needs to be confirmed by a Cabinet Decision).
Any business falling into the scope of the CT Law (including Free Zone Persons) must register for Corporate Tax and obtain a Corporate Tax Registration Number (different from the one issued for the VAT) through the Federal Tax Authority.
It is important to note that whilst the CT Law clarifies many points with regards to the introduction of the Corporate Tax in the UAE, many details require additional clarification that will be made through the Implementing Regulations to the CT Law that have not yet been issued.
Scope of the CT Law
The Corporate Tax applies to:
- UAE companies and other juridical person that are incorporated or effectively managed and controlled in the UAE;
- Non-resident juridical persons (foreign legal entities) having a Permanent Establishment on the UAE; and
- Natural persons (individuals) who conduct a Business or Business Activity in the UAE as specified in a Cabinet Decision to be issued in due course.
The CT Law taxes income on both a residence and source basis. The applicable basis of taxation depends on the classification of the Taxable Person.
- A “Resident Person” is taxed on income derived from both domestic and foreign sources;
- A “Non-Resident Person” will be taxed only on income derived from sources within the UAE;
- Natural persons will be subject to Corporate Tax as a “Resident Person” on income from both domestic and foreign sources, but only insofar as such income is derived from a Business or Business Activity conducted by the natural person in the UAE. Any other income earned by a natural person would not be within the scope of Corporate Tax.
Free Zones
Juridical persons established in a UAE Freezone are also included within the scope of Corporate Tax as “Taxable Persons” and will need to abide by the requirements of the CT Law. It means that the tax holiday that Free Zone Persons were enjoying so far will cease to the extent that such Free Zone Persons do business with (and therefore derive revenue from) entities established in Mainland UAE.
However, a Free Zone Person can benefit from a 0% rate on their Qualifying Income, if they are considered a Qualifying Free Zone Person, by meeting the following requirements to be :
- maintain adequate substance in the UAE;
- derive ‘Qualifying Income’;
- not have elected to be subject to Corporate Tax at the standard rates; and
- comply with the transfer pricing requirements under the CT Law.
Please note that the notion of “Qualifying Income” is to be further clarified by the Cabinet of Ministers.
Exceptions
Dividends and capital gains earned from domestic and foreign shareholdings will generally be exempted from Corporate Tax.
Furthermore, note that non-resident persons that do not have a Permanent Establishment in the UAE, or that earn UAE sourced income that is not related to their Permanent Establishment, may be subject to a Withholding Tax (currently at the rate of 0% but possibly at a rate above zero in the future) on their UAE sourced income.
Consequence for French groups
Implementation of the CT Law in the UAE may directly impact any local entity held by French companies which should pay particular attention to intra-group exposure. As a consequence local transactions of the UAE subsidiaries with the parent company as well as intra-group transactions shall have to be reviewed carefully on a case by case basis.
How can we help?
LPA Middle East can advise businesses on the impact of the CT Law and identify options to comply with the law in an efficient manner.
For more information on how this might affect your business, please do not hesitate to contact us.