FAQs Article 2     Imposition of Corporate Tax

Source: https://mof.gov.ae/corporate-tax-faq/

1. What is CT?

CT is a form of direct tax levied on the net income or profit of corporations and other businesses. CT is sometimes also referred to as “Corporate Income Tax” or “Business Profits Tax” in other jurisdictions.

2. Why is the UAE introducing CT?

A competitive CT regime based on international best practices is expected to cement the UAE’s position as a leading global hub for business and investment and accelerate the UAE’s development and transformation to achieve its strategic objectives.

Introducing a CT regime also reaffirms the UAE’s commitment to meeting international standards for tax transparency and preventing harmful tax practices.

3. Is the UAE the first country to introduce CT?

Most countries in the world have a comprehensive CT regime, including most of the countries in the Middle East.

4. When will the UAE CT regime become effective?

The UAE CT regime will become effective for financial years starting on or after 1 June 2023.

Examples:
● A business that has a financial year starting on 1 July 2023 and ending on 30 June 2024 will become subject to UAE CT from 1 July 2023 (which is the beginning of the first financial year that starts on or after 1 June 2023).
● A business that has a financial year starting on 1 January 2023 and ending on 31 December 2023 will become subject to UAE CT from 1 January 2024 (which is the beginning of the first financial year that starts on or after 1 June 2023).

5. Who will be subject to UAE CT?

UAE CT applies to juridical persons incorporated in the UAE and juridical persons effectively managed and controlled in the UAE, as well as to foreign juridical persons that have a permanent establishment (see “Foreign persons”) in the UAE (see question 20 ‘Who is considered resident for UAE CT purposes?’).

Individuals will be subject to CT only if they are engaged in a business or business activity in the UAE, either directly or through an unincorporated partnership or sole proprietorship. A Cabinet Decision will be issued in due course specifying further information on what would bring a natural person within the scope of UAE CT.

 

6. Will UAE entities owned by UAE or GCC nationals be subject to UAE CT?

Yes – the UAE CT does not differentiate between nationality or residence. Juridical persons that are incorporated or resident in the UAE, or that have a permanent establishment in the UAE, will be subject to UAE CT. This applies irrespective of the residence and nationality of the individual founders or (ultimate) owners of the entity.

7. Will UAE CT be applicable to businesses in each Emirate?

Yes. The UAE CT is a Federal tax and will therefore apply across all the Emirates.

8. Will I have to pay UAE CT alongside Emirate level taxes?

Businesses engaged in the extraction of the UAE’s natural resources and in certain non-extractive activities that are subject to Emirate level taxation will be outside the scope of UAE CT, subject to meeting certain conditions.

Other businesses may be subject to both CT and Emirate level taxation. Emirate level taxes paid will not be able to be credited against or otherwise reduce the amount of CT payable.

9. Will UAE CT replace VAT in the UAE?

No, CT and VAT are two different types of taxes. Both will continue to apply in the UAE.

10. Will I have to pay UAE CT alongside VAT in the UAE?

If you are a registered business for VAT, you will have to pay VAT and CT separately. If your business is not VAT registered you may still have to pay CT.

11. Will UAE CT replace Excise Tax in the UAE?

No, CT and Excise Tax are two different types of taxes. Both will continue to apply in the UAE.

12. Will I continue to pay service fees to local and Federal Governments now that the UAE has introduced CT?

Yes. Applicable service fees will continue to be payable to the relevant Emirate and Federal Governments.

Business set up, license renewal and other Government fees and charges incurred wholly and exclusively in the ordinary course of business are deductible expenses for UAE CT purposes.

13. Will I need to consider the UAE’s international agreements for UAE CT purposes?

In-force International agreements (including international agreements for the avoidance of double taxation) to which the UAE is a party should be considered under the UAE CT regime. In case of a conflict between the Corporate Tax Law and an international agreement with respect to the right to tax a certain item of income, the relevant international agreement may limit the application of UAE CT.

14. What will be the role of the Federal Tax Authority?

The Federal Tax Authority will be responsible for the administration, collection and enforcement of UAE CT and other federal taxes. For the purpose of the administration, collection and enforcement of CT, the Federal Tax Authority will issue guides, respond to clarifications and provide awareness as required.

15. What will be the role of the Ministry of Finance?

The Ministry of Finance will remain the ‘competent authority’ for purposes of bilateral/multilateral tax agreements and the international exchange of information for tax purposes. The Ministry of Finance also has the authority to issue further guidance and implementing regulations for UAE CT and other federal taxes.

16. What should I be doing to prepare for UAE CT?

To assess what the UAE CT regime means for your business, as a starting point, you should:

1. Read the Corporate Tax Law and the supporting information available on the websites of the Ministry of Finance and the Federal Tax Authority.
2. Use the available information to determine whether your business will be subject to UAE CT and if so, from what date.
3. Understand the requirements for your business under the Corporate Tax Law, including, for example:
   1. Whether your business needs to register for UAE CT.
   2. What is the accounting / Tax Period for your business.
   3. By when your business would need to file a UAE CT return.
   4. What elections or applications can or should your business make for UAE CT purposes.
   5. How UAE CT may impact your business’ obligations and liabilities under contracts with customers and suppliers.
   6. What financial information and records your business will need to keep for UAE CT purposes.
4. Regularly check the websites of the Ministry of Finance and the Federal Tax Authority for further information and guidance on the UAE CT regime.

17. Where can I find the Corporate Tax Law?

The Corporate Tax Law can be found at this link

18. What is a “Business” or “Business Activity”?

The terms “Business” and “Business Activity” as defined in the Corporate Tax Law identify when the activities of certain persons give rise to a UAE CT liability by considering the person to be a taxable person.

“Business” means any economic activity, whether continuous or short term, conducted by any person. It is implied that a business is conducted with a profit motive, and that there is the existence of some system and organisation to the activity conducted. However, a business or business activity for UAE CT purposes does not lose its identity simply because it does not make a profit.

For the application of the Corporate Tax Law to companies and other juridical persons, all activities conducted and assets used or held will generally be considered activities conducted, and assets used or held, for the purposes of a “Business”.

Individuals can earn income from wages and salaries, investments or from practising a commercial, industrial or professional activity, either directly or as sole proprietor of a business. For natural persons, a Cabinet Decision will be issued in due course specifying further information on what
would bring a natural person within the scope of UAE CT.

19. Who is exempt from UAE CT?

The following persons are exempt from UAE CT, either automatically or by way of application:

1. The UAE Federal and Emirate Governments and their departments, authorities and other public institutions;
2. Wholly Government-owned companies that carry out a mandated activity, and that are listed in a Cabinet Decision;
3. Businesses engaged in the extraction of UAE natural resources and related non-extractive activities that are subject to Emirate-level taxation after meeting certain conditions;
4. Public Benefit Entities that are listed in a Cabinet Decision;
5. Investment Funds that meet the prescribed conditions;
6. Public or private pension or social security funds that meet certain conditions; and
7. UAE juridical persons that are wholly-owned and controlled by certain exempted entities after meeting certain conditions.

20. Who is considered resident for UAE CT purposes?

UAE incorporated companies such as LLCs, PSCs, PJSCs, and other UAE juridical persons will be subject to CT as resident persons.

An entity that is incorporated in the UAE will automatically be considered a ‘resident’ person for UAE CT purposes. Equally, an individual who is engaged in a business or business activity in the UAE will also be considered a resident person for UAE CT purposes.

A foreign company may be treated as a resident person for UAE CT purposes if it is effectively “managed and controlled” in the UAE. All facts and circumstances must be considered in determining where a company is effectively managed and controlled, but a relevant indicator may include the place where the strategic decisions affecting the business are made.

21. Who is considered non-resident for UAE CT purposes?

Under the Corporate Tax Law, a juridical person is considered a non-resident if it is incorporated in a foreign country and is effectively managed and controlled outside the UAE. A natural person is considered a non-resident for UAE CT purposes if he or she is not engaged in a taxable business or business activity in the UAE.

22. How are UAE tax residents subject to UAE CT?

UAE resident juridical persons will be subject to UAE CT on their income source from both the UAE and from abroad, although certain income earned through foreign subsidiaries and income of foreign branches that is subject to tax in another jurisdiction will generally be exempt from UAE CT. Further details of these exemptions are set out under questions 64 ‘Will the income of foreign branches of a UAE business be subject to UAE CT?’ and 88 ‘What is the participation exemption regime?’.

Where income earned from abroad is not exempt, relief for income taxes paid in the foreign jurisdiction can be taken as a credit against the CT payable in the UAE on the relevant income to prevent double taxation. (see below under ‘Tax Credits’).

23. How are non-residents subject to UAE CT?

Non-resident persons will only be subject to UAE CT on:

• income from their Permanent Establishment in the UAE; or
  ● income sourced in the UAE (subject to a 0% withholding tax).

24. How do you determine taxable income for UAE CT?

The taxable income for a Tax Period will be the accounting net profit (or loss) of the business, after making adjustments for certain items specified in the Corporate Tax Law.

The accounting net profit (or loss) of a business is the amount reported in its financial statements prepared in accordance with internationally acceptable accounting standards.

Adjustments to the accounting net profit (or loss) will need to be made for the following items:

1. Unrealised gains and losses (subject to the election made regarding the application of the realisation principle);
2. Exempt income such as qualifying dividends and capital gains;
3. Income arising on intra-group transfers;
4. Deductions which are not allowable for tax purposes;
5. Transactions with Related Parties and Connected Persons;
6. Transfers of tax losses within the group where relevant;
7. Incentives or tax reliefs; and
8. Any other adjustments as specified by the Minister.

25. What is a Tax Period?

Given CT is imposed on an annual basis, it is necessary to specify the “Tax Period”. The Tax Period will normally be the Gregorian calendar year (i.e. from 1 January to 31 December), unless the business applies a different 12-month period for preparing its financial statements.