New income Tax came into force in the United Arab Emirates (including Dubai) on 1 June 2023 – till then no income tax was imposed on businesses and residents in the country, except for activity of oil and banking.
It shall be noted that there still be many kinds of income that will continue to be exempted from the new tax – as detailed below.
The New Tax Law has positive impact on business since it is expected to improve the UAE position as legitimate business destination for actual business the work in UAE not only as tax heaven and ease money transfer to and from the UAE.
Pay attention that, Till 31 December 2026, Taxable UAE residents with revenues not exceeding AED 3 million during tax year and previous years are entitled to apply for ” Small business relief” and to be exempted from paying the 9% tax during such year. This threshold refers to revenues (gross income) and not to the profits (net income) – see more details about this exemption.
In this Guide we will elaborate, deeply and widely, the new tax system.
Corporate tax rate is 9% which is imposed on the net profit of companies (i.e. revenues after deductible expenses and losses) – subject to several exemptions included in the new tax act.
For example:
1. Freezone companies may be exempted from this tax – see below.
2. Annual Profits till 375,000 AED are exempted from this tax (it shall be noted that this exemption does not apply to exempted freezone companies)
Individuals are also subjects to income tax of 9% which is imposed mainly on their income related to business income generated from UAE.
Which companies are subject to the new tax?
· Companies that are incorporated in the UAE (including free zone companies):
Such companies are classified as resident company. According to the new tax act, Any Resident company (including – free zone company) is subject to the new Corporate Tax on its total net income from inside and outside the UAE – subject to several exemptions set out in the law.
See below more details regarding the exemptions granted to free zone companies.
· Companies that are registered outside UAE but effectively managed and controlled from the UAE:
Such companies are also classified as resident companies and subject to the new Corporate Tax .
· Other Foreign companies subject to tax only regarding income that related to:
1. Permanent Establishment in the UAE. “Permanent establishment” is a broad term which includes business activity even without an office within UAE- see explanation below. or
2. to Immovable Property in the UAE)- as elaborated below.
It shall be noted that according to the new tax act Non-Resident company that receive other income sourced in the country shall be subject to withholding tax. However, currently the withholding tax rate regarding such income (that is not related to business or to real estate in the UAW) is zero – which may be changed on the futur.
Tax residency – companies:
As mentioned above, resident juridical person shall be subject to corporate tax on its worldwide income- unless such income is exempted by law.
For this purpose, Company can be classified as tax resident if it meet one of these conditions:
3. It is incorporated in the UAE (including free zone companies)
4. It is incorporated outside of the UAE but effectively managed and controlled in the UAE:
Whether a corporate is effectively managed and controlled in the UAE needs to be determined regarding the specific facts and circumstances of the juridical person and its activities. A key factor is where key management and commercial decisions that are necessary for the conduct of the juridical person’s Business are in substance made. This could be the place where the highest level of decisions that are essential for the management of the juridical person are made, or where decisions that play a leading part in the management of a company from an economic and functional perspective are made. Typically, this will be where a company’s board of directors (or any equivalent body for other types of juridical persons) makes these decisions.
Liable Companies are subject to tax on their total income and profits according to the Financial Statements that are produced in accordance with accepted accounting standards. Accounting standards that are accepted in the UAE for Corporate Tax purposes are the International Financial Reporting Standards (IFRS), or IFRS for small and medium-sized entities (IFRS for SMEs) for a Taxable Person with Revenue of AED 50,000,000 or less in the relevant Tax Period.
However, the following adjustments should be considered in relation to a Taxable Person’s Accounting Income to determine their Taxable Income:
· Exempted Income) such as dividend income which may exempted from tax or income from foreign branches – see below “exempted income”)
· Deductions;
· Tax Losses
· Unrealised gains or losses;
See below more details about such adjustments.
Natural persons (residents or foreigners) who conduct Business or Business Activities in the UAE and have a Turnover over AED 1,000,000 per year resulted from such Business or Business Activities.
Such personal tax is applicable on net Income related to the Business Activity.
Pay attention that according to cabinet decision no 49 of 2023, salary income, income from real estate investments (personal investments) and income from other personal investments are not subject to personal tax.
Any individual conducting Businesses or Business Activities in the UAE are Resident Persons for Corporate Tax irrespective of their nationality, whether they hold a residency visa in the UAE, whether their income is sourced in the UAE or from abroad, or how much time they may physically spend in the UAE – provided that the individual earn Turnover from these Businesses or Business Activities in excess of AED 1,000,000 during the tax year.
i.e Residence of individuals is not determined by where he resides or is domiciled. For natural persons, residence for Corporate /personal Tax purposes is concerned with the person’s business connection to the UAE
Business is defined as any economic activity (including commercial or professional services activity), whether continuous or for a set period of time, conducted by any Person.
However, the activity shall be conducted and shall comprise a system and organization exist for the activity conducted. i.e – not any transaction leads to profit is considered as business. short term activity conducted in UAE (by digit nomad for example) may be classified as business activity in the UAE and therefore subject to the tax.
Natural persons who are not conducting a Business or Business Activity are not subject to tax and not required to register for Corporate Tax.
For this purpose, professional or business activity (that is subject to tax) does not include:
1. Employment income :
Corporate Tax does not apply to salary, wages, and other employment income.
2. income from Personal Investments:
In this regard, Personal Investments are activities that a natural persons undertakes in their personal capacity and not through a license or on behalf of other investors and the activity is not considered a commercial business under Federal Decree-Law No. 50 of 2022.
3. Income from personal real estate investments
Any income resulted from activity conducted by the individual in relation to the sale, leasing, sub-leasing, and renting of land or real estate in the UAE is not subject to tax (provided that the investments are not related to a business of managing other people`s investments, not conducted through a License or requiring a License from a Licensing Authority in the UAE).
Pay attention that conducting investments or real estate investments for others will be deemed a Business or Business Activity under the CT law.
Individuals are subject to tax on profit from business activity within the UAE only.
Therefore, Employment income and other types of income earned by natural persons based in the UAE are not within the scope of the UAE Corporate Tax regime. As well as income and other specific types of income earned by natural persons based in foreign jurisdictions, are not within the scope of the UAE Corporate Tax regime.
Till 31 December 2026, Taxable UAE residents with revenues not exceeding AED 3 million during tax year and previous years are entitled to apply for ” Small business relief” and to be exempted from paying the 9% tax during such year. This threshold refers to revenues (gross income) and not to the profits (net income).
However, Tax reports shall be submitted to the tax authorities.
Taxable Person who has elected to benefit from the small business Relief, still be able to carry forward Tax Losses and Interest Expenditure to tax Periods in which small business relief no longer applies.
This relief is not applicable for:
1. Qualifying Free Zone Persons.
pay attention that Small business relief exemption is more inclusive than the free zone exemption – therefore, it shall be considered which exemption to choose.
2. Foreign companies and individuals.
3. company who is member of a large Multinational Enterprise.
in case a taxable person intentionally separates its business to different companies solely to meet the threshold of AED 3,000,000, the Federal Tax Authority may use the General Anti Abuse Rule (“GAAR”) to prevent such tax avoidance.
The following types of income/persons are exempted from tax:
1. Free zone exemption – see below.
2. Mainland Companies are exempted on annual income up to 375,000 AED.
3. Small business relief – see below.
4. Domestic dividend:
Dividend income received from another Resident company is exempted from Corporate Tax.
5. Foreign Dividend -Participation exemption:
Dividends received from foreign company are exempted if the recipient has met all the following conditions are met:
1. The recipient has an ownership of 5% or more in the shares or capital of the Participation which has been held, or is intended to be held, for a period of at least 12 months.
2. The Taxable Person is entitled to at least 5% of distributable profits and at least 5% of liquidation proceeds of the Participation.
3. the jurisdiction at which the subsidiary company is taxes has a headline statutory tax rate of at least 9% or
the subsidiary company is subject to effective income tax of at least 9% in its residence country
4. No more than 50% of the Participation’s assets consist of ownership interests that would not have qualified for an exemption from Corporate Tax if they were held directly by the Taxable Person.
In addition, dividend income shall be exempted from tax in case the dividend is paid by other company with a historical acquisition cost of AED 4,000,000 or greater.
Pay attention that:
1. The above exemption will not apply if, under the Corporate Tax legislation applicable in the foreign jurisdiction, the distributing company can claim a deduction for the dividend or other distributions made to the Taxable Person.
2. Only income received by the Taxable Person in their capacity as a shareholder (i.e. as an owner of the ownership interest) can be exempt. Other income earned from the Participation from other relations, such as that of a debtor-creditor (e.g. Interest income received) or buyer-seller (e.g. service fee received), will remain subject to Corporate Tax.
5. Capital Gains from the transfer, sale, or other disposition of shares:
Capital gains from the transfer, sale, or other disposition of shares in another company/entity may also be exempted from tax if the conditions mentioned above (regarding dividend income) is met and the seller holds the sold shares for a period of at least 12 months, or has the intention to do so.
This exemption applies to holdings in both Resident and Non-Resident companies. The requirements for a Participating Interest in both a Resident and Non-Resident are the same.
in relation to a Participation Interest in a Resident, a Participation in a Qualifying Free Zone Person or an Exempt Person is considered to meet the subject to tax requirement.
6. Foreign Permanent Establishment:
Resident Person can elect to be exempted from tax regarding income derived from Foreign Permanent Establishments. the election applies to Foreign Permanent Establishments which are subject to Corporate Tax, or a tax of a similar Tax, in the relevant foreign country at a rate of not less than 9% . The election must apply to all foreign Permanent Establishments that meet this requirement. A Resident Person may not elect to apply the exemption for specific Permanent Establishments
Where such election is made, the Resident Person will not need to include the following items in its Taxable Income:
· Income, and associated expenditure, in any of its Foreign Permanent Establishments; and
· Losses in any of its Foreign Permanent Establishments.
· Foreign Tax Credit
In determining income and associated expenditure, a Resident Person and its Foreign Permanent Establishments must be treated as separate and independent Businesses. Any transactions which take place between them must be treated as having taken place at Market Value.
7. Income from operating aircraft or ships in international transportation.
Generally, any free zone company or self-employed person (registered in free zone) is subject to the new tax as any other company or person resident in the UAE and shall pay the new 9% tax as explained above.
However, free zone persons are exempted on their income that is classified as “Qualifying Income”- (see below). Income that is not classified as qualifying income is not exempted- until the expiry of the tax incentive period provided for in the legislation of the relevant Free Zone (unless such period renewed by law).
On other words, the total income of free zone person shall be divided to three categories:
1. untaxable income ; i.e – income that is not subject to tax at all (for example, salaries and personal investments as mentioned above) – 0% tax.
2. taxable income which is classified as “qualifying income” – 0% tax.
3. taxable income which is not classified as “qualifying income” – 9% tax.
It is important to pay attention to the following comments:
1. Free Zone Persons are not entitled to a 0% rate on their first AED 375,000. Therefore, any Taxable Income that is not considered as Qualifying Income will be taxed at the general rate of 9% from the first $.
2. Any taxable income which is attributable to Permanent Establishment outside the relevant freezone (even if it located within UAE ) shall be subject to the 9% tax with no exemption. Therefore, taxable income related to office in Dubai (but outside the specific freezone) is subject to the 9% tax with no exemption.
see definition pf “permanent establishment” above.
3. Any taxable income generated from outside UAE (and not related to Permanent Establishment in the freezone) is taxed at 9% with no exemption (subject to foreign tax credit rules which applies to foreign business income).
Qualified income – exempted income:
Qualifying Income includes the following types of income – provided that the income is not resulted from “excluded activity” (see below):
1. Income paid by another Free Zone Persons is mainly exempted, except for income derived from excluded income (see below).
2. Income paid by non-free zone persons (locals or foreigners) is not exempted unless if the income derived from the following activities:
· Manufacturing and/or Processing of goods or materials for other companies (if the client is individual, the exemption does not apply)
· Distribution of goods or materials in or from a free Zone to a customer who resells or alters such goods or materials for the purposes of sale or resale;
· Logistic services; and
· Holding of shares and other securities.
· Ownership, management and operation of Ships.
· Reinsurance
· Fund management services.
· Wealth and investment management services
· Headquarter services to Related Parties.
· Treasury and financing services to Related Parties.
· Financing and leasing of Aircraft
· Any ancillary activities to the above activities.
Excluded Activities/ income –
these types of income are not exempted (except special exemptions):
1. Most Transactions with natural persons (individuals) are not exempted, Except income paid for fund and wealth services and services related to ships or aircraft).
2. Banking, insurance, finance and leasing activities,
3. Income from immovable property located in UAE, except some exception.
4. Income related to intellectual property assets; and
5. Activities that are ancillary to the above activities (which serve no independent function).
De minimis exemption:
The de minimis requirement allows a Qualifying Free Zone Person to earn a small or incidental amount of non-qualifying Income without being disqualified from the Free Zone Corporate Tax exemption. According to this rule- In case the non-qualifying Revenue in a Tax Period is minimal and does not exceed 5 million AED and 5% of the total revenue of the business – then even the non-qualifying income will be exempted.
Conditions for exemptions:
To be considered as a Qualifying Free Zone Person, a Free Zone Person must meet the following requirements:
1. Maintains adequate substance in the free zone:
Free Zone Person must have its/his core-income generating activities (e.g. the activities that are of central importance) performed within the Free Zone .
Performing the core activity outside UAE or outside the freezone (even if the activity performed from within UAE) terminates the exemption entitlement.
The core activity can be undertaken by the Free Zone Person itself or outsourced to a Related Party or third party who is located in a Free Zone. In case the activity is performed by third party – then the Qualifying Free Zone Person shall have adequate supervision over any activities that are outsourced to a Free Zone Related Party or third party.
The Qualifying Free Zone Person (or its outsourced party) shall demonstrate that it has adequate staff and assets within the freezone, and that it incurs adequate operating expenditures within the Free Zone.
As businesses vary from case to case, ‘adequate substance’ is determined on a case-by-case basis, following the test criteria. This may include the number of qualified full-time employees, adequate operating expenditure, and physical assets. In any case, the analysis also takes into account the nature and level of activities performed by the Qualifying Free Zone Person, the Qualifying Income earned, and any other relevant facts and circumstances.
Pay attention that formal registration as free zone company is not meet the mentioned above condition. To get the exemption, the free zone company shall hold (directly or through third party) the core business activity within the freezone subject to the other conditions.
2. Satisfies the de minimis requirement:
The free zone person shall show that its/his non-qualifying Revenue during a Tax Period does not exceed 5 million AED or 5% of the total revenue of the business.
3. Prepares and maintain audited Financial Statements.
4. Complies with the transfer pricing rules and documentation requirements under the Corporate Tax Law
5. Has not elected to be subject to Corporate Tax-
A Qualifying Free Zone Person is entitled to elect to be taxed at the general rates of Corporate Tax and waive the exemption. the election will be effective from either the commencement of the Tax Period in which the election is made (or the commencement of the following Tax Period) and for the following four Tax Periods.
Foreign person that is not classified as tax resident (see above) shall pay corporate Tax under one of the following conditions.
1. Permanent Establishment in the UAE:
A Non-Resident Persons may have a Permanent Establishment in the UAE if they conduct a Business through a fixed or permanent establishment in the UAE.
Permanent establishment definition:
“Permanent establishment” is a broad tax concept which include:
1. Office, factory or a building site lasting for more than 6 months where the Business is wholly or partly conducted; or
2. Person who has and habitually exercises an authority to conduct a Business
or Business Activity in the UAE on behalf of the Non-Resident Person. This includes situations where the Person concludes contracts in the UAE on behalf of the Non-Resident Person or negotiates contracts without the need for any material modification by the Non-Resident Person. For example, where a Business regularly sends out sales representatives to the UAE who agree and sign contracts in the UAE.
on the other hand, Permanent Establishment does not include preparatory and auxiliary nature activities. For assessing whether the activities of a Non- Resident Person are of a preparatory and auxiliary nature, the mere physical presence of a natural person in the UAE will not automatically create a Permanent Establishment for a Non-Resident Person.
The circumstances in which the physical presence of a natural person would not result in a Permanent Establishment include situations where such presence in the UAE is a consequence of a temporary and exceptional situation. For this purpose, and Without derogating from the definition above, the presence of an individual in the UAE shall be considered a consequence of a temporary and exceptional situation where all of the following conditions are met:
1. The presence of the natural person in the UAE is a consequence of exceptional circumstances of a public or private nature.
2. The exceptional circumstances cannot reasonably be predicted by the natural person or the Non-Resident Person.
3. The natural person did not express any intention to remain in the UAE when the exceptional circumstances end.
4. The Non-Resident Person does not have a Permanent Establishment in the UAE before the occurrence of the exceptional circumstances.
5. The Non-Resident Person is not considered as creating a Permanent Establishment or deriving income in the UAE as per the tax legislation applicable in other jurisdictions.
2. Income from real estate in the UAE (Nexus):
Non-Resident juridical persons (such as companies) are subject to Corporate Tax on income attributable to Immovable Property (and other assets and rights that are permanently attached to real estate) in the UAE.
Such income includes lease income and capital gain from selling real estate in the country.
shares in foreign company that hold real estate in UAE do not create the required nexus for taxation.
3. Other Income sourced from the UAE:
this condition does not result in paying actual taxes yet, since the new tax law grants full exemption for foreigners who generate income sourced in the UAE unless such income related to permanent establishment or real estate in the UAE. it seems that the new law prepare the market and the system to imposing income tax on such income in the future -so it is important to explain this rule as well.
According to the new law – Any foreign Person who receives State Sourced Income is subject to Corporate Tax by way of Withholding Tax ( currently – zero tax was imposed as explained above).
Income is considered to be State Sourced if:
· it is paid by a Resident Person; or
· it is paid by a Non-Resident Person but in connection with Permanent Establishment in the UAE; or
· it is derived from activities or contracts performed in assets located in UAE, capital invested, rights used, or services performed or benefitted from in the UAE.
i.e. State Sourced Income include: income from the sale of goods in the UAE; income from movable or Immovable Property in the UAE and income from the disposal of shares in Resident companies.
Taxable person is allowed to deduct all the expenses that are related to the taxable income, subject to the following conditions and restrictions:
1. Expenditure must be incurred wholly and exclusively for the purposes of the Business/income.
If expenditure is incurred partly for Business purposes and partly for some other purposes, the amount must be apportioned so that only the part relating to the derivation of Taxable Income will be allowed as a deduction.
Expenditures which are not incurred for the purposes of the Taxable Person’s Business are not allowed.
2. Expenditure must not be capital in its Nature.:
Capital expenditure is expenditure that creates an enduring benefit to a business. Only revenue expenditure which supports the day-to-day operations of the business are allowed.
For example, purchasing a long-term asset like machinery would be a capital expense (nondeductible) but paying for routine maintenance to keep the machinery running would be a revenue expense (deductible).
The question of whether expenditure is of a capital or revenue nature will depend on the particular facts and circumstances and will need to be determined on a case-by-case basis.
However, while capital expenditure is not deductible, the depreciation of the costs of capital assets is a deductible expense for Corporate Tax purposes. Depreciation is an accounting concept which allows for the cost of an asset to be spread over the life of the asset (representing the reduction of the asset’s value), even though there is no cash outlay to the business.
3. Non-deductible expenses:
The following expenses are not allowed to be deducted:
1. Donation, grant or gift made to any organization that is not a Qualifying Public Benefit Entity
2. Any fines and penalties, other than amounts awarded as compensation for damages or breach of contract.
3. Bribe
4. Dividends, profit distributions or benefits of a similar nature paid to an owner of the Taxable Person.
pay attention that high salary /fees paid to the owner, may be classified as dividend nature, and not be deducted.
5. Corporate Tax is not a deductible expense.
6. Recoverable input VAT
7. Foreign Tax paid abroad is not deducted (foreign tax relief may be available).
8. Contributions made by employer to a private pension fund in respect of its employees which are not paid in the Tax Period are not allowed.
9. Contributions made by employers to a private pension fund in respect of its employees which exceed 15% of the employee’s total remuneration in the relevant Tax Period are not allowed.
10. interest and entertainment expenditure shall meet these additional conditions to be deducted:
Interest expenses -rules:
Interest expenses are deductible subject to the following two limitations:
General limitation:
if the Net Interest Expenditure exceeds AED 12,000,000 in a Tax Period, the deductible Interest Expenditure shall not exceed 30%of EBITDA (earnings before the deduction of Interest, tax, depreciation and amortization) for a Tax Period.
Specific Interest deduction limitation:
No deduction is allowed for Interest expenditure incurred on a loan obtained, directly or indirectly, from a Related Party in respect of any of the following transactions:
· Paying dividends or profit distribution to a Related Party;
· Redemption, repurchase, reduction or return of share capital to a Related Party;
· Capital contribution to a Related Party; or
· Acquisition of an ownership Interest in a Business that is, or becomes, a Related Party following the acquisition.
However, the above deduction restriction does not apply if the Taxable Person can demonstrate that the main purpose of obtaining the loan and carrying out the transaction is not to gain a Corporate Tax advantage – based on the specific facts and circumstances applicable to each transaction. if it can be demonstrated that the Related Party receiving the Interest is subject to Corporate Tax or a similar tax in a foreign country at a rate of at least 9% on the Interest income, then no Corporate Tax advantage will be deemed to have arisen.
Entertainment expenses:
Only 50% deduction is allowed for Corporate Tax purposes in all cases of this type of expenditure – unless the expenses is related to staff entertainment. for example, the cost of internal entertainment can be fully deducted for Corporate Tax purposes unless the staff are family members, and the event is private in nature (such as a wedding)
To ensure that Related Parties do not manipulate the values of transactions between themselves to obtain a Corporate Tax advantage, transfer pricing rules where adopted.
Related Parties must apply the “arm’s length principle” when entering into a transaction or arrangement with each other. This means that the price of a transaction between Related Parties should be the same as if the transaction had taken place between two unrelated independent parties.
Where the price of the transaction or arrangement between Related Parties is not considered to be at arm’s length, the FTA (Federal tax authority) will adjust the Taxable Person’s Income to achieve the arm’s length result that best reflects the circumstances of the transaction or arrangement.
Pay attention, that transfer pricing rules apply also to domestic transactions carried out by juridical persons and individuals and not only to cross-border transaction. Therefore, unreasonable, or high salaries paid to shareholders (for minimizing the taxable profits of the company) may be rejected / classified as taxable profits by tax authorities according to these rules.
FTA may require any Taxable Person to disclose information regarding their transactions and arrangements with their Related Parties and Connected Persons and such person shall comply (withing 30 days) with a request issued by the FTA to provide information which supports the arm’s length nature of its transactions or arrangements with its Related Parties and Connected Persons.
In case the FTA makes an adjustment to a transaction or arrangement involving a Taxable Person to meet the arm’s length standard, it shall also make a corresponding adjustment to the Taxable Income of the Related Party that is a party to the relevant transaction or arrangement.
If a foreign tax authority in foreign country makes an adjustment to a transaction or arrangement involving a Taxable Person to meet the arm’s length standard at such country, the Taxable Person can make an application to the FTA to make a corresponding adjustment to its UAE Taxable Income- so that the allocation of profits by both jurisdictions is consistent. The purpose of such an adjustment is to prevent double taxation (or double non-taxation) which could arise because of the primary transfer pricing adjustment.
Master file and local file:
Taxable Persons shall maintain a ‘master file’ and a ‘local file’ if their Revenue in the relevant Tax Period is AED 200,000,000 or more, or they are part of a Multinational Enterprise Group (MNE) with total consolidated group revenue over or equal to AED 3,150,000,000 in the preceding Financial Year.
Generally, a master file is a ‘blueprint’ of a group’s activity, containing information on its economic activities in different jurisdictions and its overall transfer pricing policy. Local file contains more detail than a master file, specifically in relation to Related Party and Connected Persons transactions undertaken by group members. The purpose is to provide functional and economic analysis to support the arm’s length basis of its transactions.
Taxable Person can carry forward Tax Losses and offset them against Taxable Income in subsequent Tax Periods, subject to meeting certain conditions. Tax Losses cannot be carried back to previous Tax Periods
Tax Losses carried forward can be used to reduce the Taxable income up to 75% of the annual Taxable Income. Remaining Tax Loss can be carried forward to the next period (or transferred to another Taxable Person under the same group, subject to meeting the required conditions).
Change of control:
Tax Loss can be carried forward by a Taxable Person provided that the owners of the Taxable Person continuously hold at least 50% ownership from the start of the tax period in which the Loss is incurred to the end of the Tax Period in which the Tax Loss is used to offset against Taxable Income. If there is a change in ownership of more than 50%, Tax Losses can still be carried forward provided that the same or similar Business is carried on following the change in ownership. these limits do not apply where the Taxable Person’s shares are listed on a Recognized Stock Exchange
Consolidation – Tax Losses in same group:
Tax Losses may be transferred between Resident companies, where all the following conditions are met:
1. the transferred loss is limited to 75% of taxable income.
2. one entity has a direct or indirect ownership interest of at least a 75% in the other, or a third entity has a direct or indirect ownership interest of at least 75% of the shares in both.
3. Both companies share the same Financial Year.
4. Both companies prepare their Financial Statements using the same accounting standards.
5. none of the companies are Exempt Persons or Qualifying Free Zone Persons.
6. Taxable Persons must meet the qualifying common ownership conditions (see above) from the start of the Tax Period in which the Tax Loss is incurred to the end of the Tax Period in which the transferred Tax Loss is used before they are able to transfer Tax Losses.
Any single Taxable Person may transfer its Tax Losses to more than one Taxable Person provided that in each case the relationship of the recipient Taxable Person with the Taxable Person transferring their Tax Losses meets the mentioned conditions. Similarly, a recipient company can claim Tax Losses from more than one transferring company provided that the total Tax Loss offset does not exceed 75% of the recipient’s Taxable Income and that all other conditions for the transfer of Tax Losses are met.
Any taxable person who receives foreign sourced taxable income is entitled to deduct foreign taxes paid regarding such income against the applicable tax in the UAE during the same period.
This relief is unilateral and does not rely on a Double Taxation Agreement or any other reciprocal action from the foreign taxing jurisdiction.
The amount of Foreign Tax Credit cannot exceed the amount of Corporate Tax due on the foreign source income..
Taxable Persons must maintain all necessary records for the purposes of claiming Foreign Tax Credit. This could include, for example, Withholding Tax certificates, statements of payments or assessments by the relevant foreign tax authority.
Tax Period for taxable persons is usually the 12-month period for which they prepare their Financial Statements. If the Taxable Person does not prepare Financial Statements, their Financial Year will be the Gregorian calendar year (i.e. 1 January – 31 December).
The Tax Period of natural person is always the Gregorian calendar year.
If a Taxable company wishes to change its Tax Period, it can make an application to the FTA to change the start and end date of its Tax Period.
any Taxable Persons should register for Corporate Tax with the FTA and obtain a Tax Registration Number as soon as it become taxable person. FTA can, at its discretion, register any Person for Corporate Tax if, based on information available to it, it believes the Person is a Taxable Person.
Deregistration:
If a registered Person ceases to be a Taxable Person for any reason, he should file a Tax Deregistration application with the FTA. Tax Deregistration will be completed once all Tax liabilities due have been paid and all Tax Returns have been filed.
If the Tax Deregistration application is approved by FTA, FTA will deregister the Person for Corporate Tax purposes, with effect from the date of cessation of the Business or from such other date as may be determined by the FTA.
Failure to submit a deregistration application within 3 months of the date the entity ceases to exist, cessation of the Business, dissolution, liquidation or otherwise, will result in a penalty of AED 1,000, and a further AED 1,000 on the same date monthly, up to a maximum of AED 10,000.
Where a Person does not comply with the Tax Deregistration requirements, the FTA may, at its discretion and based on the information available to it, deregister the Taxable Person. This Tax Deregistration will be effective from the later of the last day of the Tax Period that the Taxable Person satisfied their Corporate Tax obligations or the date the Taxable Person ceases to exist.
Taxable Persons shall prepare Financial Statements in accordance with IFRS to calculate their Taxable Income. Taxable Persons that earn Revenue does not exceed AED 50,000,000 may apply IFRS for SMEs.
FTA can, by notice or by issuing a decision, request any Taxable Person to submit Financial Statements used to determine the Taxable Income.
Cash basis:
Taxable Persons that earn Revenue that does not exceed AED 3,000,000 in the Tax Period may use the Cash Basis of Accounting. Once a Taxable Person’s Revenue exceeds AED 3,000,000 during Tax Period, he/it shall prepare Financial Statements using the Accrual Basis of Accounting except if FTA approves to report according to cash basis.
Audited financial statements:
The following Persons are required to maintain audited Financial Statements:
1. A Taxable Person deriving Revenue exceeding AED 50,000,000 during the relevant Tax Period; and
2. Qualifying Free Zone Person.
Tax Returns and payments:
Taxable Persons should pay Corporate Tax and file their Corporate Tax Return within 9 months from the end of the relevant Tax Period. For example, a Taxable Person with a Financial Year ending on 31 December is required to file their Tax Return and pay Corporate Tax on or before 30 September the following year.
Delay of Submitting a Tax Return or payment of the Tax Payable will result in a penalty of:
1. AED 500 for each month of delay, or part thereof, for the first twelve months;
2. AED 1,000 for each month of delay, or part thereof, from the thirteenth month onwards
Where a Tax Group has been formed, the Parent Company will be required to file Tax Returns on behalf of the whole Tax Group instead of separate returns.
Records keeping:
the Corporate Tax Law does not specify which records or documentation should be maintained, or the format in which they should be kept. This reflects the fact that the records and documentation required will differ according to the type and complexity of the Business that the Taxable Person conducts.
Mainly, Taxable Persons are required to maintain records and documentation that:
1. support any information provided in a Tax Return.
2. Show Taxable Person’s transactions in the Tax Period;
3. Show Taxable Person’s assets, including details of any purchases or disposals
4. Taxable Person’s liabilities; and
5. stock held at the end of the Tax Period
6. Financial Statements used to determine the Taxable Income for a given Tax Period.
Exempted Persons must maintain records that enable the Exempt Person’s status to be readily ascertained by the FTA. The documentation required will depend on the reason that a Person is exempt from Corporate Tax .
There is no requirement that documents are maintained in their original format, and it may be possible to keep them in an alternative format. For example, paper receipts could be scanned and stored electronically.
Failure of a Taxable Person to keep the required records and other information specified in the Tax Procedures Law and Corporate Tax Law will result in one of the following penalties:
1. AED 10,000 for each violation.
2. AED 20,000 in each case of repeated violation within 24 months from the date of the last violation.
How long should records be kept?
Records and documents shall be kept for seven years following the end of the Tax Period to which they relate.
To achieve Certainty regarding tax position, the new tax law allows any person to refer to FTA to get a tax clarification and obtain certainty on its/his taxes.
The following is a non-exhaustive list of aspects of the Corporate Tax Law which person can make application to the FTA:
1. To continue to be exempt from Corporate Tax if the Person temporarily fails to meet the conditions of exemption.
2. To treat an Unincorporated Partnership as a single Taxable Person;
3. To treat a Family Foundation as an Unincorporated Partnership;
4. To request a refund from the FTA;
5. To adjust Taxable Income following an adjustment by a foreign tax authority
6. To move from the Cash Basis of Accounting to Accrual Basis of Accounting
7. To form, join or leave a Tax Group, replace a Parent Company in a Tax Group, or cease to be a Tax Group;
8. To deregister for Corporate Tax;
9. To change Tax Period.
It is important to remember that if the tax position reported by the Taxable Person is not accurate, or administrative requirements have not been fulfilled, the pre ruling may be terminated and the Taxable Person may be liable for penalties under the Tax Procedures Law and the Corporate Tax Law
A general anti-abuse rule is used to prevent the use of ‘abusive’ transactions or arrangements, which may be legal within the parameters of the Law, but are not in- line with the tax Law’s intended spirit and purpose.
This rule allows the FTA to counteract or adjust Corporate Tax advantages obtained as a result of transactions or arrangements which are considered to be abusive. The main test is whether, having regard to all of the relevant circumstances, it can be reasonably concluded that the transactions and arrangements were entered into without a valid commercial reason and their main purpose is to obtain a Tax advantage that is not consistent with the intention of the Law.
European Commission’s proposal to remove the United Arab Emirates (UAE) from the list of high-risk third countries with strategic deficiencies in their Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) regimes
Cabinet Decision No. 55 of 2023 on Determining Qualifying Income for the Qualifying Free Zone Person Corporations and Businesses –
