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Focus on UAE Corporate Income Tax Law

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On December 9, 2022, the UAE Ministry of Finance issued the long-awaited Corporate Tax Law (Federal Decree No. 47 of 2022, “CTL”). It will become effective 15 days after publication and will apply to tax periods beginning on or after June 1, 2023. This legal brief will outline key points and recommended action points.

General and Administrative Affairs

Corporate Income Tax (CIT) will apply Beginning with a financial year beginning on or after 1 June 2023. Businesses whose financial year begins on January 1 will start paying corporate income tax on January 1, 2024.

All taxpayers (see definition below) must register with the Federal Tax Service to Obtain a tax registration number (different from the TRN currently used for VAT purposes) and login credentials for the online portal.

Tax returns must be filed within 9 months From the end of the corresponding financial year/tax period. CIT (if any) must be paid – also – within 9 months From the end of the corresponding financial year/tax period. All records and documents related to CIT must be kept for 7 years (after the year they relate to).

The taxpayer must prepare and provide to the Federal Tax Office (upon request) Audited financial statements.

CTL clarified many items related to the introduction of CIT in the UAE.However, many details are still subject to additional terms, which will be contained in the CTL Implementation Rules. These implementing rules have not yet been issued.

taxpayer

The CTL defines the following residents and non-residents who will be taxed by law

resident:

Non-residents:

  • Any entity incorporated in the UAE (including free zone entities)
  • Entities duly established under a foreign jurisdiction but effectively managed and controlled by the UAE
  • Natural persons (freelancers, sole proprietorships) carrying out business activities in the UAE(?)
  • Unincorporated partnership (if elected as taxpayer)
  • Foreign entities or individuals with a permanent establishment (including a branch, office, factory, factory, real estate, building or construction site) in the UAE for at least 6 months
  • Foreign entities deriving income from the UAE
  • Foreign entities with ties in the UAE

free zone company

Companies incorporated in a free zone may choose to be exempt from corporate tax in the following cases:

  • Sufficient substances maintained in the UAE (ESR compliant);
  • receive qualifying income;
  • has elected not to pay corporate tax;
  • Adhere to arm’s length principles and transfer pricing documentation.

Unfortunately, the CTL does not specify what income will be classified as “qualified income”; that definition will be provided in yet-to-be-released implementing rules.

The benefit of this exclusion is that the corporate income tax rate on taxable income is 0%. Income that does not qualify for the exclusion will be taxed at a rate of 9%. However, a free zone company that elects to be excluded from corporate income tax cannot be part of a tax group and/or benefit from any transfer of tax losses between group companies.

Taxable income

Under CTL, the definition and calculation of taxable income as the basis of CIT calculation is as follows:

accounting profit and loss

– Unrealized gains or losses

– exempt income (dividends

from residents)

– Relief

– Deductions (expenses)

– with related transactions

Parties and connected persons

– tax loss

= taxable income

Summary and Recommendations

While the long-awaited CTL was finally released and brought some clarity, one of the central questions remains unanswered: How exactly the income of free zone companies will be taxed remains unclear. respective – unpublished – Implementing Regulations Expect to shed more light on this topic.

Foreign companies operating in the UAE through a branch or other form of permanent establishment are subject to corporate income tax. In particular, structures in which consultants and freelancers have been working for foreign companies in the UAE are now subject to corporate income tax.

Companies must get their accounting/finance department ready for the upcoming tax registration, filing and payment as this will be independent of VAT. Entities that are not required to prepare and/or file audited financial statements until now must start doing so by the 2023 financial year at the latest (as this will be the opening balance for the first tax period in 2024).

Furthermore, companies operating in the UAE are advised to review their corporate structure and existing inter-company agreements to understand their activities in the UAE.

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