The UAE Ministry of Finance has released today, 09th December 2022, the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (‘Law’) and updated related FAQs section.
While the Law follows the framework that was outlined in the first announcement issued by the UAE Ministry of Finance and the Public Consultation Document issued earlier this year, UAE businesses now have legislative basis which would govern their taxation going forward.
We have highlighted below a few key initial observations that might be relevant for your business:
- The Law has confirmed that businesses will become subject to UAE corporate tax from the beginning of their first financial year that starts on or after 1st June 2023 – therefore, for a 31 December year end, the first CIT year is expected to be from 1 January 2024 to 31 December 2024.
- The Law details the definition of Taxable Persons and has confirmed that a UAE branch of a UAE taxable person should be treated as “ONE” taxable person (i.e., once single tax registration and return).
- Certain businesses may be exempt from the corporate tax law. Exemptions will be granted either on the nature of the business activity OR the type of entity. Similarly, certain types of income may also be exempt.
- Businesses engaged in extraction (and in certain non-extractive activities) of natural resources are out of scope of CT and will continue to be subject to separate Emirates CT legislations. However, such businesses will also need to consider their income from non-extractive activities and if these are within the scope of CT. UAE branches of foreign banks will be taxed under the UAE CT regime and not as per emirates decrees once the CT Law is implemented.
- The Law prescribes two rates of CT:
- 0% CT rate for income below certain threshold (likely to be AED 375,000 as provided under the FAQs and to be confirmed by the Cabinet Decision).
- 9% above this taxable threshold
- 0% CT rate on qualifying income of free zone entities;
- We have observed that the Law does not prescribe a special rate for UAE entities belonging to multinational groups in scope of BEPS Pillar 2 aligned with the OECD Global Minimum Tax rate of 15%. Hence, such entities will need to wait for further guidance on how the UAE Corporate Tax Law will interact with the global minimum tax framework to be published by the OECD. They will be however subject to the regular CT regime (9%) until Pillar 2 rules is adopted in the UAE.
- The FAQs provide that large MNEs will be however subject to the regular CT regime (9%) until Pillar 2 rules is adopted in the UAE.
- The law has defined the concept of Permanent Establishment (PE) which is in line with global tax principles (Fixed Place of Business PE and Dependent Agent PE). Similar to international principles, the Law also introduces the Investment Manager Exemption to prevent the inadvertent creation of permanent establishment for foreign funds.
- With respect to Free Zone exemption, the law has specified the conditions for a Qualifying free zone person and hence the applicability of zero rate tax. It is worth mentioning that 9% shall apply on non-qualifying income. However, the definition of qualifying Income has not been set out in the Law and will be further elaborated by the UAE Cabinet.
- The Law did not provide explicitly all tax adjustments/deductions and other details on the basis that they will be specified at a later stage by aCabinet decision.
- The Law provides for a Small Business Relief, but the conditions of such relief will be specified at a later stage by a Cabinet decision.
- Participation exemption conditions in relation to dividends and capital gains have been extended to consider a shareholding period and additional anti-avoidance provisions.
- In relation to Withholding Tax, either 0% rate will apply (or any other rate to be decided by the Cabinet) in relation to certain sources of income defined in the Law.
- Conditions for tax grouping remains generally the same as in the Public Consultation Document.
- Transfer pricing provisions have been included in the Law with an indication of further details to be released through a Cabinet decision. A TP disclosure form might be required to be submitted along with the Tax return containing information regarding the Taxable Person’s transactions and arrangements with its Related Parties and Connected Persons. The conditions for maintaining a TP local file and/or a TP master file will further be provided under a Cabinet decision. Transactions between members of a Tax Group generally do not need to comply with TP rules.
- The Tax Registration procedures and timeline have not yet been prescribed and further guidance is yet to be provided.
- The Law provides for a possibility to apply to the Federal Tax Authority for any clarification needed regarding the application of the Law including Advance Pricing Agreements related to transfer pricing provisions.
- Please note that the Law contains Anti-Abuse provisions which need to be carefully analyzed and considered in case of any planned restructuring.
- Details pertaining to tax compliance and the format of simplified tax returns would be announced later by the Federal Tax Authority.
With the release of the Law, businesses can now start (if not already initiated) assessing the impact the new corporate tax law will have on their operations and legal structure. Businesses should consider the Law carefully and areas that are yet to be clarified by the MoF by way of separate Cabinet Resolutions or Ministerial decisions to obtain a full picture of the Law.
KPMG has a team of experienced corporate tax specialists who can help you in the analysis of the Law and its impact on your business. Please get in touch with your key KPMG contact or any of the tax professionals below.
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