Overview of Corporate Tax Reforms in the UAE: Implementation, Rates, and Compliance

 

1. Timeline of Tax Reforms in the UAE

The tax regime in the United Arab Emirates (UAE) has undergone several changes in recent years. Here is a timeline of key events:

1. 2018: Introduction of VAT (Value Added Tax)

In 2018, the UAE implemented a Value Added Tax (VAT) system. VAT is a consumption tax applied to the sale of goods and services.

2. 2019: Introduction of Economic Substance Regulations

The UAE also introduced Economic Substance Regulations in 2019. These regulations require certain companies to demonstrate substantial economic activity within the UAE to prevent tax avoidance and meet international standards.

3. 31st Jan, 2022: Announcement of Corporate Tax (CT)

On January 31, 2022, the UAE government announced the implementation of Corporate Tax (CT). Corporate tax is a direct tax imposed on the income or profits of corporations.

4. 28th Apr, 2022: MOF launched Public consultation for CT

On April 28, 2022, the UAE Ministry of Finance (MOF) launched a public consultation process to gather feedback and input from various stakeholders regarding the implementation of Corporate Tax.

5. 9th Dec, 2022: CT Law issued

On December 9, 2022, the Corporate Tax Law was officially issued. This law contains detailed provisions and regulations regarding the implementation of corporate taxation in the UAE.

6. 1st Jun, 2023: Applicability of Corporate Tax

Starting from June 1, 2023, the Corporate Tax will become applicable in the UAE. Companies operating in the UAE will be required to comply with the provisions of the Corporate Tax Law and fulfill their tax obligations.

2. Need To Introduce Corporate Tax in UAE

The UAE aims to establish itself as a global business hub by prioritizing tax transparency and preventing harmful tax practices. It is committed to meeting international standards and implementing Pillar 2 of the BEPS project by the OECD. These efforts enhance the UAE's reputation, promote fairness, and contribute to global tax compliance, reinforcing its position as a leading destination for businesses and investment.

3. Corporate Tax Rates

For individuals and juridical persons in the UAE, the applicable tax rates are as follows:

Taxable Income:

Up to AED 375,000----------------0% tax rate

More than AED 375,000----------9% tax rate

Qualifying Free Zone Persons enjoy the following tax rates:

Taxable Income:

Qualifying Income*------------------------------------0% tax rate

Taxable income that is not Qualifying Income:---9% tax rate

*Qualifying Income refers to income derived from a Qualifying Activity within a Designated Zone, as determined by the UAE tax authorities.

4. Effective Date

The effective dates for the implementation of the Corporate Tax Law in the UAE are as follows:

Serial Number	Financial Year	Corporate Tax Effective for the first time for the year starting
1	January - December	1 January 2024
2	April - March	1 April 2024
3	July - June	1 July 2023

These dates indicate when the Corporate Tax Law will apply to businesses for their respective financial years. For example, for businesses with a financial year from January to December, the Corporate Tax Law will be effective from 1 January 2024. Similarly, for businesses with financial years starting in April - March or July - June, the law will be effective from 1 April 2024 and 1 July 2023, respectively.

5. Taxable Persons and Basis of Taxation

5.1 Taxable Persons

Residents

- Legal persons incorporated or established in the UAE, including Free Zones

- Natural persons who conduct a business or business activity in the UAE

- Foreign entities effectively managed and controlled in the UAE

Non-Residents

- Having a Permanent Establishment (PE) in the UAE

- Earning State sourced income

- Having a nexus in the UAE

5.2 Basis of Taxation

5.2.1 UAE Residents

- Taxable on their worldwide income

- Natural persons' scope limited to income earned from their business or business activity

5.2.2 Non-Residents

Taxable on:

- Income attributable to their presence in the UAE

- State-sourced income not attributable to a PE

- Income attributable to the nexus of the Non-resident

5.3 Taxation for Individuals in UAE

- Individuals conducting a business or business activity in the UAE

- Salary, interest, etc., earned in personal capacity are not taxable

- Categories of business or business activity to be specified in a Cabinet decision

- Wide definition of business as any activity conducted regularly, on an ongoing and independent basis by any person

- Income derived from the UAE or from outside the UAE related to the business or business activity conducted in the UAE

5.4  Taxation – Others

5.4.1 Unincorporated Partnership

- Treated as fiscally transparent

- Partners considered as conducting business

- Partnership can elect to be considered as a Taxable Person

5.4.2 Family Foundations

Can apply to be treated as Unincorporated Partnership upon meeting certain conditions

6. PE Concept

Fixed Place

- Branch, office, factory, building site, construction project where activities are carried on for over 6 months etc.

- Exclude: Preparatory or Auxiliary activities

Dependent Agent

- Person having and habitually exercising authority for concluding or negotiating contracts

- Any other form of nexus in UAE as may be specified

6.1 UAE Sourced Income

- Income derived from UAE resident person

- Income derived from a Non-resident person where it is attributable to a PE

- Income accrued or derived from activities performed, assets located, capital invested, rights used, or services performed or benefitted from in the UAE

6.2 Exemption List

- UAE Federal/Emirate Government Entity and their departments, agencies, authorities, or other public institutions

- Government-owned UAE company listed in a Cabinet Decision

- Businesses engaged in the extraction of UAE natural resources and related non-extractive activities

- Public Benefit Entities listed in a Cabinet Decision

- Investment Funds meeting prescribed conditions

- Public or private pension or social security funds meeting certain conditions

- UAE juridical persons wholly-owned and controlled by exempted entities after meeting certain conditions

7. Applicability to Free Zone Companies

- Corporate Tax applicable to companies and branches registered in a Free Zone ("Free zone persons").

- "Qualifying Free Zone Persons" subject to UAE Corporate Tax:

0% on Qualifying Income (to be specified in the Cabinet decision)

9% on Taxable Income not meeting the Qualifying Income definition.

- "Qualifying Free Zone Persons" must meet conditions related to substance, deriving qualifying income, not electing to be subject to Corporate Tax, and compliance with transfer pricing provisions and documentation.

All Free Zone entities required to register and file Corporate Tax.

8. Tax Compliance – Procedure

The tax compliance procedures in the UAE involve several steps. Here is a summary of the process:

1. Registration: Companies must obtain a Tax Registration Number (TRN) from the Federal Tax Authority (FTA) within the prescribed time frame.
2. Return: Companies are required to file a tax return. There is a single filing requirement, and the return must be filed within 9 months of the relevant tax period.
3. Payment of tax: Tax liabilities must be settled before filing the tax return.
4. Assessment: The tax assessment process follows the guidelines and decisions outlined in the Tax Procedures Law and related implementation decisions. Fines and penalties may be imposed based on these regulations.
5. Record keeping: Taxable persons, including exempt entities, are obligated to maintain all records and documents for a period of 7 years.

Adhering to these tax compliance procedures ensures that companies fulfill their obligations and meet the regulatory requirements set forth by the UAE tax authorities.

9. Other Aspects

In addition to the previously mentioned aspects, there are further considerations related to tax compliance in the UAE:

Record keeping: All taxable persons, including exempt entities, are required to maintain records and documents for a period of 7 years. These records should support the preparation and filing of tax returns.

Financial Statements: The requirement to maintain audited or certified financial statements will be specified in a separate decision. The details regarding this requirement will be provided separately.

Clarification and Advance Pricing Agreements (APAs): Taxable persons have the option to seek clarification from the Federal Tax Authority (FTA) by filing an application. This can pertain to the application of the Corporate Tax Law (CT Law) or the conclusion of Advance Pricing Agreements (APAs) to determine transfer pricing arrangements. The form and manner of filing these applications will be communicated by the FTA at a later stage.

Small Business Relief: There will be simplified compliance obligations available for businesses based on revenue under the Small Business Relief scheme. The specific threshold for qualifying under this scheme is yet to be specified.

10. Observations:

- Implementation of provisions like domestic transfer pricing and permanent establishment determination could increase complexity and litigation risks.

- Lack of consistency in accounting policies may pose challenges for businesses.

- Introduction of the General Anti-Avoidance Rule (GAAR) aims to prevent tax avoidance during the transition period.

- Further details and clarifications are awaited in the Implementing Regulations.

11.  Action Points for Compliance with Corporate Tax:

- Assess how the draft law may impact your business.

- Review and consider restructuring options to optimize tax and compliance costs.

- Ensure consistency in compensation mechanisms for shareholders, directors, and foreign affiliates from a tax perspective.

- Prepare for mandatory transfer pricing documentation and compliance requirements.

- Train in-house teams on the new developments and potential IT system changes for information management.

- Please note that these observations and action points are based on the provided information. It's advisable to seek guidance from tax professionals or legal advisors for customized advice pertaining to your specific circumstances.

12. CORPORATE TAX – Comparison between India and UAE

Aspect	India	UAE
Tax Year	1st April to 31st March	Any financial year followed for financial statements can be adopted as tax year
Tax Rate	Varies for different entities	9% for Corporates and Individuals if taxable income exceeds threshold in UAE
Free Zones	Deduction based on export turnover	0% on Qualifying Income, 9% on non-Qualifying Income for Free Zone companies
Advance Tax and Withholding Tax	Applicable	Applicable for both residents and non-residents in India
Interest Expenses Deduction	Capped at 30% of EBITDA	Capped at 30% of EBITDA (threshold to be specified)
Transfer Pricing Regulations	Applicable to cross-border and specified domestic transactions	Applicable to cross-border and domestic transactions in the UAE
General Anti-Avoidance Rule (GAAR)	Threshold of INR 3 Crores specified	No threshold limit prescribed for the applicability of GAAR

Note: This simplified table provides a high-level overview, and there may be additional details and nuances to consider. Consultation with tax professionals or legal advisors is recommended for a comprehensive understanding of the tax regulations in India and the UAE.

Conclusion:

The introduction of Corporate Tax in the UAE signifies the country's commitment to tax transparency, international standards, and fair taxation. The implementation, rates, and compliance procedures discussed in this article provide businesses with valuable insights into the UAE's tax regime. However, seeking guidance from tax professionals or legal advisors is recommended for specific advice tailored to individual circumstances.

 

Article Compiled by:-

Mayank Garg

(LegalMantra.net Team)

+91 9582627751

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including newspapers, Journals, Bare Acts, Case Material. Charted Secretary, Taxmaan etc.

 

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