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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.

UAE AND INDIA MARK THE FIRST YEAR UNDER THE LANDMARK AGREEMENT

A year after the UAE-India Cepa deal came into effect, the stage is set for the next big bang in trade and investment flows between the countries – a dirham-rupee payment mechanism.

When that happens, multiple categories – and businesses within them – would benefit from the closing deals in the two currencies and not have to use US dollars to make it happen. What that does is cushion trade between the countries from foreign exchange volatility brought on by the dollar’s movements.

“India is looking to ways that can speed up and smoothen out trade with its biggest economic partners,” said a senior Indian government source. “We have learnt the processes well in using the rupee in financing imports from Russia, and it’s been a major factor in limiting inflationary pressures in the economy.”

“If India and UAE sign a deal confirming rupee-dirham, it will further expand the scope of Cepa.”

Meeting CEPA Targets

It was with India that the UAE entered into its first CEPA – or the Comprehensive Economic Partnership Agreement – that immediately brought down import duty across categories and opened up new investment possibilities for entities in these countries.

What UAE and India are looking for are to go in for immediate benefits from CEPA where possible and then work on those areas where they can make steady progress.

“I’m not aware of any UAE imports that are subject to 0 per cent import duty in India,” said Raju Menon, Chairman and Managing Partner at Kreston Menon, the audit consultancy.

“However, under CEPA, India has agreed to reduce or eliminate tariffs on a range of products imported from the UAE.”

“The UAE has agreed to provide tariff concessions to India on 60 per cent of items traded between the two, including on basmati rice, textiles, and pharmaceuticals.” (India last week reworked the processes involved for the country’s gold trade to source bullion from the UAE under CEPA. This could in the coming months see UAE provide up to 140 tonnes of bullion to India, and which will consolidate its status as the second biggest supplier of gold to that market after Switzerland.)

Trade Is On The Up

Trade gains have been there from the start of the CEPA becoming effective from May 1. Between April to November 2022, two-way movements totalled $57.8 billion from $45.3 billion a year prior to that. That’s a rise of $12.5 billion in value terms and 27.5 per cent in percentage terms.

India’s exports to the UAE went past $20 billion during this period, leveraging a 19.32 per cent increase.

“As per the CEPA agreement, there would be periodic reviews to assess progress and identify areas for further cooperation,” said Menon. “The UAE has set up a dedicated task force to ensure the smooth implementation of the agreement, while India has created a website to provide information about the CEPA and facilitate trade between the countries.”

Beyond $100b In Trade

Boosting two-way trade to $100 billion is the stated aim before the end of this decade, but there is also the greater emphasis on generating more from trade in services, with a target of $15 billion.

The cable-maker Ducab Group recently opened an office in the south Indian metropolis of Bengaluru, and its CEO Mohammed Abdul Rahman Al Mutawa was there on the ground. And he’s liking what’s showing up as possibilities post-CEPA.

“India is our new home market,” said Al Mutawa. “India has always been of interest to us and CEPA made the decision of opening an office in Bengaluru easier.”

“Ducab has been supplying to the Indian market since 1988, with its first project being the Nhava Sheva Port in Mumbai. Ducab has supplied 263,000 MT of of CuEq (copper equivalent) of metals to the market through the years. This is equal to powering approximately 3 million houses.

The other big investments or commitments made by UAE businesses are by the likes of Emaar, LuLu and the Sharaf Group, while DP World is expanding the scope of its already substantial interests in that market.

But business chiefs say it is still too early to fully realise the full possibilities that come with CEPA. “The impact of such agreements can take time to be felt, as businesses need to navigate through the legal and regulatory requirements of investing in a foreign country,” said Abdul Jebbar P. B., Group Managing Director at Dubai-based Hotpack Global, currently on a major expansion in the UAE and Saudi Arabia.

India is becoming one of the most desirable markets for businesses from all over the world due to its sheer size. And the government has been prudent in encouraging investment.”

With CEPA, UAE businesses with an India focus might have that extra edge.

Source: “After Cepa, dirham-rupee trade set to be next big thing” by Manoj Nair, Business Editor, UAE-INDIA CEPA ANNIVERSARY, Business Section, Gulf News newspaper, 1 May 2023 and online article here.

Those with Mainland Operations Await Signal on Extent of their ‘QUALIFYING INCOME'

Businesses operating out of UAE free zones and with a considerable presence on the mainland are thinking of possible restructures to the organization to absorb the upcoming Corporate Tax.

But any such changes to the business must stay on the right side of the ‘anti-abuse rules’ that form part of the UAE CT regulations, top tax consultants add.

“Yes, restructuring existing operations (of free zone enterprises with mainland operations) needs serious consideration,” said Nimish Goel, Partner at Dubai-based WTS Dhriva Consultants. “However, any restructuring or hiving off (of mainland operations) needs to factor in operational and commercial realities.

“The general anti-abuse rules need to be suitably factored.”

The anti-abuse rules are clear enough – businesses in the UAE cannot make changes solely to gain a tax advantage and thus hope to pay less on their annual income.

Hiving Off Mainland Operations

In their consultations ahead of registering for the UAE CT regime, free zone businesses have talked of the possibility of hiving off their mainland operations to be standalone enterprises. Especially where these businesses operate separate licenses for their free zone and mainland operations.

Free zones represent one of the more significant contributors to the UAE GDP, and the UAE CT rules gives businesses there ample flexibility.

‘Qualifying Income’

Under these rules, pure-play free zone businesses/their owners are exempt from the 9 per cent tax payment commitment based on their ‘qualifying income’. And this is to be confirmed by a UAE Cabinet decision that is expected shortly. (The UAE Corporate Tax comes into effect June 1, 2023.)

Raju Menon, Chairman and Managing Partner at Dubai-based consultancy Kreston Menon, emphasizes the point about ‘qualifying income’. “The UAE federal decree stipulated that free zone ‘persons’ could benefit by incurring a 0 per cent corporate tax only on the ‘qualifying income’, which is still to be defined,” said Menon. “Based on available guidance from the UAE Ministry of Finance, the qualifying income should include offshore as well as onshore sources of income of free zone persons (but) subject to strict conditions.

“Hence, there should be detailed guidance forthcoming on this aspect.” (When the decision comes on qualifying income, tax specialists hope it will also address ‘transfer pricing’ issues, which is ‘relevant as entities restructure to have standalone operations between free zone and mainland enterprises’.)

Fairly Big Incentive For Free Zone Businesses

The ‘free zone person’ incentive is a substantial tax break for eligible businesses, according to Menon. (Apart from businesses engaged in extracting natural resources, government, and government-controlled entities also enjoy exemptions under the Federal Decree Law subject to eligibility criteria and conditions.)

Relief for Small Businesses

In addition, the Federal Decree Law does contain relief for small businesses ‘where a resident taxable person generating revenue up to a threshold – to be decided by the UAE Minister of Finance – may elect to be regarded as not having derived any taxable income for the relevant tax period,” said Menon. “Accordingly, there will not be any tax cost for such small businesses.

“Any new substantive legislation necessitates businesses to take cognizance of its applicability and plan for efficient change management. Businesses in the UAE should consider undertaking a deep review and documentation of revenue operations, assessing the impact of corporate tax, and completing requisite changes well in time of the effective date.” 

Source: “UAE’s free zone companies have lots of tax planning to do”, by Manoj Nair, Business Editor, Business Section, Gulf News newspaper, 4 April 2023 and online article here.