Ministry of Finance launches digital public consultation on Corporate Tax
29 April 2022
The Ministry of Finance has issued a Public Consultation Document on proposed Corporate Tax in recognition of the importance of consultation with the business community and other interested stakeholders. Interested stakeholders are welcomed to submit their comments and suggestions by 19 May 2022. The public consultation document sets the background and key principles around certain provisions of the proposed CT Regime. We have summarised some key points mentioned in the Public consultation document.
The United Arab Emirates (UAE) announced the introduction of a federal Corporate Tax (CT) regime to be effective for financial years starting on or after 1 June 2023. To support the introduction of CT, the Ministry of Finance, on 28 April 2022, issued a Public Consultation Document in recognition of the importance of consultation with the business community and other interested stakeholders.
This document does not reflect the final view of the UAE Government and is not intended to address all possible aspects of the proposed UAE CT.
Interested stakeholders are welcomed to submit their comments and suggestions by 19 May 2022. The link for submission of comments on the public consultation is here. Clear and concise comments with data and examples should be provided in the form.
The policy consultation document sets the background and key principles around certain provisions of the proposed CT Regime. Some of these key points are summarized below:
Taxability and Exemptions
- UAE real estate held through private or family trusts on behalf of beneficiaries of natural persons shall be outside the scope of UAE CT.
- Unincorporated joint ventures and associations will be taxed in the hands of the partners or members only. In the case of foreign partners, the UAE CT treatment will be aligned with the respective foreign jurisdiction.
- There are 6 categories of exemption from CT including government, wholly owned government companies, charities, funds and businesses engaged in the extraction of natural resources. Similar to VAT, only the activities carried out in sovereign nature by government and government companies will fall outside the scope of CT. For non-residents, there is an expected exemption for the operation and lease of ships or aircraft to be used for international transportation.
- The most awaited provision is the treatment of free zones. It has been indicated that free zone companies will not be eligible for any tax benefits offered by the free zone if they earn any mainland sourced income. This will not include “passive” income earned from mainland UAE.
- The following income earned by UAE resident companies taxed outside UAE shall be considered for exemption from CT:
- Dividends and capital gains both in UAE and outside UAE (subject to certain conditions)
- Foreign branch profit
Residency for UAE CT
- All legally incorporated persons in UAE are subject to CT. A foreign company may be treated as a resident person if it is effectively managed and controlled in the UAE. The determination of this can be driven by the presence of the directors or other decision makers of the company.
- The UAE CT regimes intends to consider Permanent establishments (PE) in UAE as per the “Fixed place of business test” and “Dependent agent test” designed by the OECD. In brief, a foreign company will be considered to have a PE in the UAE if it has a “fixed place” in the UAE through which the business of the foreign company is wholly or partly carried on or the foreign company has business travellers or UAE based persons who act on its behalf in the UAE and have authority to conclude contracts in the name of foreign company. An exemption to this rule may include investment management firms.
- UAE sourced income will be subject to withholding taxes of 0%. This keeps the window open for increasing the withholding tax rate in the future. Withholding tax will also be applicable on income sourced by free zone companies from UAE Mainland.
- UAE resident groups can form a tax group if they have 95% common shareholding with the parent company. The adjustment of losses between the members of tax groups will be limited to 75%. There may be a provision to allow the transfer of losses between group companies not forming a tax group subject to certain conditions.
- Transfer pricing provisions will be applicable as per OECD guidelines. Businesses will be required to maintain a master and local file for the group company transactions.
- The UAE is working on the Inclusive Framework to implement the Pillar Two proposals and the provisions will be announced in due course.
- It has been confirmed that the introduction of CT will not impact the ongoing Country by Country reporting requirements.
Calculation of CT and other administrative provisions
- The calculation of taxable income will be comparatively simple with the accounting profit/loss as per financial statements forming the base.
- There will be certain limitations on deduction of expenses to arrive at the taxable income for CT. Some of the expected restrictions include interest capping rules, penalties and donations to unauthorized charities.
- The expected set off of losses brough forward is 75% at the maximum with no restriction on the time period for which the losses can be carried forward if the shareholders of the business do not change.
- The filing and payment of CT is expected to be 9 months from the end of the financial year.
- There seems to be no mandatory requirement for audit of financial statements except for free zone entities claiming exemption from CT.
The release of the public consultation document gives business some grounds to evaluate the impact on their business. Businesses should consider the impact of CT on their activities and make representations through the public consultation forms. We will be happy to help businesses to evaluate the impact on their activities. Please contact our Tax team if you need further information or assistance.