Unpacking the UAE's Corporate Tax Laws
By Ashish Mehta
Ashish Mehta dissects the nuances of the UAE's recently implemented Corporate Tax Law.
The United Arab Emirates (UAE) has strategically and gradually rolled out a new official 'corporate tax regime.' It began with the introduction and implementation of a 5 percent VAT on all goods and services in the UAE. The groundwork was further cemented by the introduction of regulations mandating declarations on 'ultimate beneficial ownership' and 'economic substance.'
Subsequently, in January 2022, announcements regarding the introduction of corporate taxes were made. That announcement was followed by regular primers from the competent authorities in the UAE on what to expect from the new tax regime. Eventually, on October 10, 2022, Federal Decree-Law No. 47 on the Taxation of Corporations and Businesses (the "CTL") was published in Issue No. 737 of the Official Gazette of the United Arab Emirates, thereby giving the legal mandate for corporate taxation in the UAE.
In the UAE In the parlance of tax laws, corporate income tax is a type of direct tax levied on a corporate entity's net income. It is also called "Business Profits Tax" in certain jurisdictions. However, in the UAE, the term 'corporate tax' is used.
The UAE aims to introduce and implement a very competitive corporate taxation jurisdiction in order to "cement the UAE's position as a leading global hub for business and investment, accelerate the UAE's development and transformation to achieve its strategic objectives, and reaffirm its commitment to meeting international standards for tax transparency and preventing harmful tax practices."
The UAE's Ministry of Finance (MoF) is the authority for the administration, collection, and enforcement of corporate taxes. The MoF is also the 'competent authority' in the UAE for bilateral/multilateral agreements and the international exchange of information for taxes. By mid-May 2023, the FTA had opened the EmaraTax digital tax services platform for businesses and asked entities to register themselves on such a platform and obtain a tax registration number for corporate tax purposes.
Effective Date By Article 69 of the CTL, the initial application of CTL began on 1 June 2023. An entity subject to CTL may file tax returns depending on the applicable tax period, which could be either the entity's financial year or even a part thereof. As such, tax returns may be filed within 9 months of the end of a tax period, and likewise, corporate taxes may also be paid within 9 months from the end of a tax period. In July 2023, two more Cabinet Decisions were issued. The first of these was related to tax procedures, and the other one was related to administrative penalties for corporate tax violations.
Corporate tax under the CTL is a federal tax and shall apply uniformly across all Emirates of the UAE.
The general idea about the application of corporate taxes under the CTL is that businesses operating with a license from the UAE, or persons conducting a business in the UAE, or persons (including foreign legal entities) with a permanent establishment in the UAE are subject to the provisions of the CTL. Therefore, they would be required to file tax returns, pay corporate taxes, and otherwise generally comply with all requirements of the CTL. So, any business making an income from the UAE shall come within the ambit of the CTL, subject, of course, to other applicable provisions of the CTL.
To answer the question as to which businesses are covered by the CTL, it may be noted that the following kinds of entities shall be subject to the CTL and therefore shall be liable to pay corporate taxes and also comply with the applicable requirements:
- all businesses and individuals conducting business activities under a commercial license in the UAE.
- free zone businesses, i.e., businesses operating with a license from one of the many free zones/free trade zones in the UAE. However, it may be noted that a Free Zone business that meets the conditions to be considered a 'Qualifying Free Zone Person' may be exempted from the CTL, and a Corporate Tax rate of 0 per cent would apply on their qualifying income, as corporate tax exemptions provided in certain qualifying free zones shall continue to apply.
- foreign entities and individuals, but only if they conduct a trade or business in the UAE in an ongoing or regular manner, i.e., through a permanent establishment.
- businesses engaged in banking operations, real estate management, construction, development, agency, and brokerage activities.
The provisions of 'Article 4 - Exempt Person' of the CTL describe the specific kinds of 'persons' who are exempt from the application of the CTL. As such, the term 'person' is meant to include both natural and juridical persons, as defined in Article 1 of the CTL. Following is a full list of the exempted persons under the CTL:
- Government entity: this includes the federal government, local governments in the UAE, and their ministries, along with government departments, government agencies, authorities, and public institutions of the federal or local governments, excluding businesses conducted by a government entity under a license from a licensing authority.
- Government-controlled entity: this includes any juridical person directly or indirectly wholly owned and controlled by a Government Entity. The MoF has the authority to further expand upon such meaning.
- Extractive business: this includes businesses or business activities engaged in exploring, extracting, removing, or otherwise producing and exploiting the natural resources of the UAE or any interest therein, as may be determined by the MoF, with a right, concession, or license issued by 'Local Government' (government of an Emirate) to undertake its extractive business, and that person must be subject to Emirate-level taxation.
- Non-Extractive Natural Resource Business: this includes persons involved in activities pertaining to separating, treating, refining, processing, storing, transporting, marketing, or distributing natural resources of the UAE with a valid license. Other conditions that apply to persons conducting extractive businesses also apply to this category.
- Qualifying Public Benefit Entity: This category includes entities formed solely for religious, charitable, scientific, artistic, cultural, athletic, educational, healthcare, environmental, humanitarian, animal protection, or other similar purposes, i.e., chambers of commerce.
- Qualifying Investment Fund: This includes entities issuing investment interests to raise funds or pool investor funds or forming joint investment funds with the aim of enabling the holder of such an investment interest to benefit from the profits or gains from the entity's acquisition, holding, management, or disposal of investments, in accordance with applicable legislation
Other kinds of exempted persons include public pension/social security funds, or a private pension or social security fund, subject to regulatory oversight by a competent authority in the UAE, and which meet the applicable conditions that may be prescribed by the MoF.
Furthermore, any juridical/legal person incorporated in the UAE, which is wholly owned and controlled by an exempted person (i.e., specifically a government entity, government-controlled entity, a qualifying investment fund, or a public pension or social security fund), and which undertakes activities of the aforementioned exempted persons, or holds such exempted persons' assets, or carries out only activities that are ancillary to those carried out by the exempted person, is also exempt.
The CTL also identifies income that is exempted from the applicability of the CTL. This includes:
- Dividends and other profit distributions received from a taxable juridical person or even a foreign juridical person.
- Income from a participating interest, subject to other CTL provisions.
- Income of an establishment permanently established outside the UAE.
- Income derived by a non-UAE resident person from operating aircraft or ships in international transportation.
Per the CTL provisions, all qualifying entities are supposed to pay corporate tax at the rate of 9 per cent on taxable income beyond the threshold (determined by the MoF). The current minimum income threshold is AED 375,000. Thus, corporate taxation will apply to the income of the business/entity at the following rates:
- 0 per cent for taxable income up to AED 375,000.
- 9 per cent for taxable income above AED 375,000.
The CTL is not very voluminous, but it is able to address myriad aspects of corporate taxation, with special consideration for the UAE's business landscape. The provisions are easy to understand, and wider compliance windows have been permitted with a view to making it easier for businesses to transition smoothly and without hassles.
It may not, however, be possible to cover all aspects of corporate taxation vis-à-vis the CTL in one write-up. Perhaps it would best serve the readers' interests if such aspects were dealt with separately in different articles. I hope to address the relevant topics in subsequent editions.
Ashish Mehta is the founder and managing partner at Ashish Mehta & Associates, Solicitors amalawyers.com