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Background

According to the UAE Federal Decree-Law No. 47 of 2022 on taxation of corporations and businesses (UAE CT Law), businesses will become subject to Corporate Tax UAE (CT) from the beginning of their first financial year which starts on or after 1 June 2023. Executive Regulations of the Decree Law containing interpretations and implementation guidelines of the Articles are forthcoming from the Ministry in the form of various Cabinet Decisions.

A few key areas have been reproduced below.

Registration of Taxable Persons

Who is liable to register for UAE CT Law?

All Taxable Persons (Persons subject to CT), including Free Zone Persons and Taxable Persons eligible for Small Business Relief are liable to register for UAE CT Law. It has been clarified by way of various Decisions that the following Persons need not register under UAE CT Law:

• A Government Entity
• A Government Controlled Entity
• A Person engaged in Extractive Business
• A Person engaged in Non-Extractive Natural Resources Business
• A Non-Resident Person that derives only State Sourced Income and has no Permanent Establishment in the UAE
• A Natural Person deriving income less than AED 1 million from Business or Business Activities

When can one register for UAE CT?

The Federal Tax Authority (FTA) is adopting a staggered approach with respect to registration. In early January, the FTA launched an early bird registration drive for CT through the EmaraTax platform. Subsequently, The FTA vide a press release on 14 May 2023 has announced the launch of registration for CT for Public Joint Stock Companies and Private Companies from 15 May 2023.

It should be noted that the Frequently Asked Questions (FAQs) published on the website have clarified that taxpayers are required to register before the prescribed due date of the first CT return without any penalties.

Tax Period

What is my first Tax Period?

For the purposes of the UAE CT Law, the Tax Period is the Financial Year of a Person which shall be the calendar year or the 12-month period for which the Taxable Person prepares financial statements.

The Decree Law applies to all financial years commencing on or after 1 June 2023. For most businesses, the financial year commences either on 1 January or 1 April. Accordingly, a bulk of the first tax years would either be

1 January 2024 to 31 December 2024, or 1 April 2024 to 31 March 2025, respectively. Further, the due date of filing returns is within 9 months from the end of the tax period i.e., 30 September 2025 and 31 December 2025, respectively.

Can a Taxable Person change their Tax Period?

It has been clarified by a recent decision that the Taxable Persons are eligible to change their Tax Periods for extending the same to up to 18 months or shortening the same to 6 to 12 months subject to meeting specified conditions.

Qualifying Free Zone Persons (QFZPs)

What are the conditions under which a Free Zone Person qualifies to be a Qualifying Free Zone Person (QFZP)?

A Free Zone Person who meets the pre-conditions for availing of the incentive mentioned under the law is termed QFZPs.

The pre-conditions to be regarded as a QFZP include:

• Maintaining adequate substance in the UAE.
• Complying with the transfer pricing requirements
• Electing not to be taxed under the normal UAE CT regime i.e., at 9%.
• The QFZPs would incur 0% UAE CT on ‘Qualifying Income’ and 9% on ‘Non-Qualifying Income’.

What is Qualifying Income?

While the term ‘Qualifying Income’ is expected to be clarified in specific regulations, the overview of the Decree published in the UAE Government Portal indicates that all income earned by the Free Zone Person which is in compliance with the restrictions on business by the Free Zone Authority particularly on transactions with the Mainland could constitute ‘Qualifying Income’.

Are there special considerations that are likely to apply to QFZPs?

It may also be noted that since the QFZPs are eligible for a tax incentive, the FTA is likely to monitor the returns and documents of such taxpayers closely. Accordingly, despite payment of Nil tax, there would be a need to maintain adequate documentation. Further, it has also been clarified that all QFZPs, irrespective of turnover, must maintain audited financial statements.

Small Business Reliefs

Are there special measures that have been introduced for small businesses including startups?

Resident small businesses having an annual revenue of less than AED 3 million in the relevant tax period or any preceding tax periods can avail themselves of Small Business Relief (SBR). Under this relief, such Taxable Person can elect to be treated as not having any Taxable Income. It may be noted that this relief is available for financial years commencing from 1 June 2023 and continues for subsequent tax periods ending up to 31 December 2026. Further, it may be noted that such relief is not available for a QFZP or a component of a Multinational Enterprises Group i.e a group with a consolidated revenue of more than AED 3.15 billion.

Are there any disadvantages of claiming such relief?

The Taxable Person claiming SBR would not be eligible to carry forward unclaimed interest costs or taxable losses in such tax periods where SBR is availed. Accordingly, it is pertinent to evaluate the claiming of this relief holistically and not in isolation.

Are there reliefs provided for small businesses with respect to Transfer Pricing (TP)?

By way of a recent Ministerial Decision, the requirement for maintaining a Master file and a Local file has been restricted to the following category of Persons:

• Component of a Multinational Enterprises Group that has a total consolidated revenue of AED 3.15 billion or more in the relevant tax period; or
• A Taxable Person whose revenue in the relevant Tax Period is AED 200 million or more.

This provides significant relief to small businesses with regard to the maintenance of extensive TP documentation. However, it may be noted that the requirement for application of the Arm’s Length Principle would continue to be applicable to international as well as local controlled transactions for all Taxable Persons.

Are there reliefs provided to small businesses pertaining to Accounting Standards and methods of accounting?

In a recent decision, relaxations have been granted to small businesses with regard to the Accounting Standards and method of accounting wherein a taxable person whose revenue does not exceed AED 3 million is allowed to maintain accounts on a cash basis and a taxable person whose revenue does not exceed AED 50 million may apply IFRS for SMEs.

Tax Grouping

What is a Tax Group?

A UAE CT Tax Group, in short, can be constituted by two or more resident juridical persons (other than a QFZP or an Exempt Person) having a parent-subsidiary relationship with at least 95% shareholding and control among other criteria. The conditions for UAE CT Tax Grouping are very different from tax grouping provisions available under UAE VAT Law wherein entities under common ownership, even if the shareholders are natural persons, are eligible to be grouped.

Is a Tax Group the same as a Qualifying Group?

The CT Law introduced two distinct grouping structures – ‘Qualifying Group’ and ‘Tax Group’. A fine reading of the relevant provisions identifies the following differences:

• While a ‘Qualifying Group’ is a de-facto status i.e., requires no application or election, a ‘Tax Group’ can be formed only through an application to the FTA.
• A qualifying group may also be constituted even if the common shareholder is an individual. The Tax Group can only be constituted of Juridical Persons.
• The constituents of the qualifying group will continue to be different taxpayers and file separate returns which will be assessed separately. In the case of a tax group, the ‘Parent company’ files one return on behalf of the group i.e., the group is assessed as a single entity basis consolidated financial statements.
• The basic exemption of AED 375,000 will apply to the tax group as an entity and not to each of its components.

Key Business Considerations

What are the key areas of the UAE CT Law that businesses will have to consider in their day-to-day operations and for making long-term strategic decisions?

CT, unlike VAT, would have a direct effect on the profits of the businesses and requires due consideration. Further, being a new introduction, the Decree Law also would introduce new concepts which would mandate businesses to recalibrate their traditional business practices.

The businesses should take due cognizance of the following major aspects introduced by the Decree and closely monitor the developments in these areas:

• Conformity to OECD Transfer Pricing (TP) guidelines for transactions with related parties and connected parties, including capturing the same in the opening balance.
• Maintenance of records supporting the information provided in the returns.
• Evaluation of any arrangement or agreement in the light of the General Anti-Abuse Rules (GAAR) prescribed by the Decree.
• The provisions relating to Place of Effective Management, Permanent Establishment or State Sourced Income may result in a business falling within the purview of this Decree, even if registered outside the UAE.
• Careful evaluation of various elections or applications prescribed under various provisions.

Are further decisions awaited from the Ministry and/or the Authority?

While a large trench of clarifications has been received over the last few weeks, the impending Cabinet Decision and regulations can add new requirements and provisions leading to multiple new interpretations and discussions.

A few key clarifications that are expected from the Ministry include:

• Specific requirements and format of documentation for transfer pricing.
• Definitions and procedures associated with QFZPs.
• Penal provisions and quantum of such penalty.
• Formats for annual returns, applications, and other statements.

Conclusion

UAE has always been known for its ease of doing business and business friendly ecosystem. The introduction of CT is a radical change, albeit essential. Apart from the effect of the additional expenditure in the Income Statement, the businesses are also concerned about the burden of compliance that they would be expected to bear.

The inclusion of provisions facilitating seeking clarifications from the FTA indicates the commitment of the Ministry and the Authority in undertaking this radical change in partnership with all the stakeholders, including all the taxpayers. This is a source of massive reassurance to the taxpayers

Businesses, their owners, and auditors in the UAE are awaiting the next big update on the corporate tax – the one related to ‘qualifying income’ for free zone entities and on which they get the 0 per cent tax benefit. A decision on this is ‘imminent’, according to multiple audit industry sources.

Any income that these free zone-based businesses generate outside of that qualifying income will come under the 9 per cent corporate tax coverage. And there lies the crux, which is why these businesses are awaiting the guidelines on QI with such a heightened sense of anticipation.

The confirmation of the qualifying income benchmark will also be of significance to the many UAE free zones, given the clarity it brings in their dealings with existing entities licensed by them and prospective ones they are looking to sign up.

The UAE Corporate Tax Comes Into Effect on June 1.

What could make up the qualifying income?

Raju Menon, Chairman and Group Managing Partner at Kreston Menon, says : “Income that conforms to business ‘restrictions’ of each free zone authority should be regarded as QI.

“Accordingly, export of goods from a free zone, the trade in goods within a free zone or between free zones – and without any ‘contamination’ in the UAE mainland – may be regarded as qualifying income for the ‘qualifying free zone person’.”

“So would any ‘passive income’ earned by free zone companies.”

These are the confirmations that all stakeholders are looking to from the Ministry of Finance. In recent weeks, debates have intensified over whether businesses should retain their free zone status or go for a full license from the mainland. Particularly among those businesses with a heavy chunk of their income derived direct from operations or services rendered on the mainland.

Deepak Bansal of Ask Pankaj Tax Advisors says, “The scope of qualifying income is an evolving issue. The crucial point is to understand the subtle difference between honoring the promised tax incentives (given to free zone licensed companies) and offering a new set of tax incentives.”

What Makes Up A ‘Qualifying Free Zone Person’?

The entity must maintain ‘adequate substance’ in the UAE, or in other words have a definable direct exposure in the local market.

Derive qualifying income as specified in a Cabinet Decision.

Comply with ‘transfer pricing’ rules and maintain relevant transfer pricing documentation.

Not have made an election to be subject to corporate tax in full.

‘Proportionate’ or ‘Activity’ Based Incentives?

“The concept of proportionate taxation is prevalent in India for tax incentives to companies based in Special Economic Zones (SEZs) and certain other countries,” said Bansal. Singapore offers ‘activity-based’ tax incentives as compared to ‘entity-based’ incentives, requiring a proportionate determination of eligible/ineligible taxable income.”

The UAE model on qualifying income – and subsequent free zone incentives – would be based on best-of-breed regulations from other jurisdictions on how they treat income generated by such entities.

“Free zones were conceptualized as international trading/manufacturing hubs,” said Bansal. “The income from exports (goods and services), and trading within free zones, is likely to be treated as QI. “The fenced areas of free zones (connected to ports) are treated as outside UAE for VAT/custom purposes. Import of goods from such areas to the mainland may also be categorized as QI, i.e., at par with non-resident suppliers’ income from goods imported into mainland UAE.

“Certain passive incomes may also qualify as QI. Any other income may be taxed at 9 per cent resulting in proportionate taxation principles. The concept of ‘disqualifying income’, if introduced, could, however, have ramifications on business operations.”

Read more from our Taxation Services.

Source: “UAE’s free zone businesses await 0% ‘qualifying income’ ’” by Manoj Nair, Business Editor, Business Section, Gulf News newspaper, 9 May 2023 and online article here.