Taxation of corporations and businesses under the new federal law 47 of 2022
The UAE announced a new Federal Decree Law No. 47 of 2022 concerning the taxation of corporations and businesses on Friday, 9th December 2022. This article will provide an overview of some of the key features of the Decree.
Corporate Tax Rate:
Corporate Tax shall be imposed on the Taxable Income at the following rates:
- 0% on the portion of the Taxable Income not exceeding the amount specified in a decision issued by the Cabinet at the suggestion of the Minister.
- 9% on Taxable Income that exceeds the amount specified in a decision issued by the Cabinet at the suggestion of the Minister.
- Incorporated UAE companies and companies effectively managed and controlled in the UAE.
- Individuals with non-qualifying incomes in the free zones.
- Individuals who operate a business activity in the UAE, as specified by the Cabinet decision to be issued shortly.
- Non-resident corporate individuals (i.e., foreign legal entities);
- Obtain a permanent establishment (as stipulated in Article 14 of CT Law)
- Income derived from the UAE.
- Government entities
- Those entities controlled by the government that will be specified in due course by a Cabinet decision.
- Business activities involving extraction.
- Non-extractive natural resource businesses.
- A qualified public benefit entity, as defined in Article 9 of the CT Law.
- Those that provide pensions and social security benefits to the public or the private sector.
- Investment funds that qualify under Article 10 of the CT Law.
- UAE subsidiaries wholly owned and controlled by a government entity.
- A free zone resident with a qualifying income (as per Article 18 of the CT Law).
In determining taxable income, the following expenditures will not be considered:
- Dividends and other distributions received by residents and foreign shareholders.
- A participant’s interest income, as defined in Article 23 of CT Law.
- An income from a foreign permanent establishment that meets the CT Law’s 24 conditions.
- Non-residents’ income from operating aircraft or ships that meet Article 25 of the CT Law.
Qualifying Free Zone Individuals:
Those who qualify for a free zone are subject to 0% CT based on their qualifying income.
To qualify as free zone companies, these companies must meet the conditions and requirements outlined in Article 18 of the CT Law.
- Deductible expenses include expenses incurred wholly and exclusively for business purposes;
- Among the non-deductible expenses are bribes, fines, donations to an entity not meeting the public benefit criteria, dividends and other profit distributions, and expenditures on generating CT-exempt income;
- A partial deduction of 50% of entertainment expenditures;
- Deduction of 30% of net interest expenditure (excluding certain activities) from EBITDA.
A corporate tax return must be filed and paid within nine months of the end of the financial period for each tax period.
- For each tax period, the taxable person must prepare financial statements for twelve (12) months.
- Taxable persons can change their tax periods upon application to the FTA, subject to conditions that must be met.
After the end of the tax period to which they relate, records and documents related to the CT are required to be maintained for (7) years.
Withholding Tax Rate
- Non-residents who do not have a permanent establishment in the UAE or who earn income from the UAE that is not related to their permanent establishment may be subject to withholding tax (at 0%).
- Most cross-border payments of dividends, interests, royalties, and other types of income are subject to withholding tax.
- Transactions between UAE residents are exempt from withholding tax.
- Tax groups are required to meet certain requirements and conditions under the CT Law.
- The CT Law provides that any two or more taxable persons who meet the conditions and requirements set forth in Article (40)(1) may make an application to the FTA to form a tax group. Accordingly, they are treated as a single taxable person by the parent company for corporate tax purposes.
- It is important that the parent company and its subsidiaries are UAE-resident juridical persons, have the same financial year and use the same accounting standards when preparing their financial statements.
- A tax group cannot include an exempt individual or a person who qualifies for a free zone.
Taxable Income of a Tax Group
- In order to calculate the taxable income of a tax group, a parent company must prepare a consolidated financial account for the relevant tax period that includes all subsidiaries that are members of the tax group.
- When calculating the taxable income of a tax group, all transactions between the parent company and each of its subsidiaries are excluded.
- In accordance with Article (26) of the CT Law, CT relief (no gains and no losses) is granted to business transfers within a qualifying group and to business restructurings.
- The CT Law stipulates that residents may qualify for small business relief under Article (27) of the law.
- Tax losses can be offset against taxable income in subsequent tax periods to compute taxable income.
Foreign Tax Credits
A UAE business that incurs tax on income earned outside the UAE is eligible for foreign tax credits, which cannot exceed the amount of UAE corporation income tax due on the relevant income.
Article (34) of the CT Law specifies arm’s length standards for determining transfer pricing.
In order to comply with the new CT Law, it is crucial for all UAE businesses (both onshore and in free zones) to analyze their financial records, establish whether they will be governed by the CT Law, register for corporate income tax, and receive a Corporate Tax Registration Number, if necessary.
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