Taxable persons
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Legal persons:
- UAE CT will apply to UAE companies and other legal persons incorporated in the UAE, as well as to foreign legal entities that have a permanent establishment in the UAE.
- Limited liability partnerships will be subject to UAE CT in the same manner as a UAE company.
- On the other hand, limited and general partnerships will be treated as ‘transparent’ for UAE CT purposes; their income will be taxed in the hands of the partners or members only.
Exempt persons: the following persons shall be exempt from UAE CT: Federal and Emirate governments; wholly government-owned UAE companies carrying out a sovereign activity; businesses engaged in the extraction and exploitation of UAE natural resources that are subject to Emirate-level taxation; charities and other public benefit organizations; pension funds; investment funds.
Free Zones: Free Zone companies/branches (“Free Zone Persons”) will be subject to UAE CT. However, a 0% CT rate may apply subject to conditions:
- The 0% CT rate will apply on income earned from transactions with businesses located outside the UAE, or located in the same or any other Free Zone.
- The 0% CT rate also applies to ‘passive’ income (e.g. interest, royalties, capital gains from owning shares in mainland UAE companies) from mainland UAE.
- The 0% CT regime will also apply to transactions between Free Zone Persons and their mainland group companies located in mainland UAE. However, such payments made to the Free Zone will not be a deductible expense.
- Free Zone Persons located in a Designated Zone for Value Added Tax (VAT) purposes can benefit from the 0% CT rate on income from the sale of goods to UAE mainland businesses that are the importer of record of those goods.
- Any other mainland sourced income will disqualify a Free Zone Person from the 0% CT regime in respect of all their income.
Natural persons:
- UAE CT will also apply to natural persons engaged in a business or commercial activity in the UAE.
- Employment income and other personal income earned by UAE and foreign individuals such as dividends, rental receipts from UAE real estate investments, and other investment income will not be within the scope of the
proposed UAE CT regime.
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Basis of taxation
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Residents:
- A UAE resident is a legal person incorporated in the UAE or a foreign company that is effectively managed and controlled in the UAE.
- UAE resident legal persons are in principle taxable on their worldwide income.
Non-residents:
- Non-residents will be subject to UAE CT on taxable income from their Permanent Establishment (PE) in the UAE.
- The concept of a PE under the proposed UAE CT regime will be based on Article 5 of the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention, notably:
- Fixed place of business test;
- Dependent agent test;
- Exemption is available for Investment Managers subject to conditions.
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Calculation of
taxable income
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Basis of calculation:
- The starting point for determining taxable income is the accounting net profit (or loss) as stated in the financial statements of a business with limited book to tax adjustments.
- The financial accounting period should be used as the tax period.
Participation exemption:
- Dividends paid by a foreign subsidiary, and capital gains on sale of shares in a foreign subsidiary are exempt provided that the shareholding is at least 5% and the subsidiary subject to CT of at least 9%.
- Domestic dividends from UAE companies including dividends from Free Zone Persons are exempt from Corporate Income Tax (CIT) in the UAE.
- Capital gains on the disposal of shares in a Free Zone Person will be exempt if it is a holding company and substantially all of its income is derived from shareholdings in subsidiary companies that meet the participation exemption condition.
Foreign branch exemption:
- Where a UAE company has a foreign branch, it is possible to elect to (i) claim a foreign tax credit for taxes paid in the foreign country, or (ii) claim an exemption for foreign branch profits.
Interest deductibility cap:
- Deductibility of interest expenses capped at 30% of the EBITDA adjusted for CT purposes. Safe harbour or de minimis threshold maybe introduced to reduce administrative burden.
- Interest capping is not to apply to banks, insurance businesses and other regulated financial services entities.
- Consolidated groups to apply a different interest capping threshold.
- Interest paid on related party borrowings to be at arm’s length.
Non-deductible expenses:
- Deductibility of entertainment expenses are capped at 50%.
- No deductions for penalties, recoverable VAT, donations to unapproved organizations/charities.
Losses:
- Businesses can offset loss incurred against the taxable income of future periods, up to a maximum of 75% of the taxable income in each of the future periods.
- Tax losses maybe carried forward indefinitely provided the same shareholder owns at least 50% of the share capital.
- If there is a change in ownership, tax losses may still be available provided the new owners carry out same/similar business.
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Groups
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Tax groups:
- UAE resident group of companies may elect to form a tax group and be treated as a single taxable person where the parent company directly or indirectly holds at least 95% of a subsidiary’s shares. UAE branches of companies within the tax group may be included.
- Tax group’s will be treated as a single taxable person with the parent company responsible for the administration and payment of CT on behalf of the tax group.
Transfer of losses:
- Tax losses may be transferred to another UAE group company with profits, provided the companies are at least 75% commonly owned.
- Tax losses will be limited to 75% of the taxable income of the company receiving the transferred losses in the relevant period.
- No losses may be transferred from exempt companies or those which benefit from a 0% Free Zone CT regime.
Group relief:
- Intra-group transfer relief will be available for transfers of assets and liabilities between UAE resident companies that are at least 75% commonly owned, provided the asset/liability remains within the same group for a minimum of three years.
- The regime will exempt or allow for a deferral of taxation where a whole business, or independent parts of a business, are transferred in exchange for shares or other ownership interests. Any relief will be ‘clawed back’ if within three years of the restructuring, there is a subsequent transfer of the business to a third party.
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Transfer Pricing
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- All Related Party transactions and transactions with Connected Persons will need to comply with transfer pricing rules and the arm’s length principle as set out in the OECD Transfer Pricing Guidelines.
Transfer Pricing documentation:
- Business will be required to submit a disclosure containing information regarding their transactions with Related Parties and Connected Persons.
- A business will also need to maintain a master and local file (with format and content consistent with the requirements prescribed under OECD BEPS Action 13) where the arm’s length value of their Related Party transactions exceeds a certain threshold in the relevant tax period.
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Calculation of CT
liability
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Tax rate:
- The proposed CT rate remains and applicable thresholds will be as communicated earlier in the year.
Small business relief:
- The UAE CT regime intends to provide relief for small businesses in the form of simplified financial and tax reporting obligations.
Calculation of CT payable:
- The amount of CT payable will be based on the taxable income for the relevant financial period (tax period) less foreign tax credits.
- Tax Credits:
To avoid double taxation, the UAE CT regime will allow a credit for the tax paid in a foreign jurisdiction against the UAE CT liability on the foreign sourced income that has not been otherwise exempted.
- Foreign Tax Credit available will be the lower of:
- The amount of tax that paid in the foreign jurisdiction; or
- The UAE CT payable on the foreign sourced income.
- Any unutilised Foreign Tax Credit will not be able to be carried forward or back to other tax periods, nor refunded.
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International tax
developments
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- Further announcements on how the Pillar Two rules will be embedded into the UAE CT regime will be made in due course.
- The introduction of the UAE CT regime will not impact the existing country-by-country reporting requirements and relevant regulations.
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Administration
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Registration:
- A business subject to CT will need to register with the Federal Tax Authority (FTA) and obtain a Tax Registration Number within a prescribed period.
Filing and payment:
- A business will only need to prepare and file one tax return and other related supporting schedules with the FTA for each tax period. There will be no requirement for a business to file a provisional CT return and make advance payments of CT.
- Each tax return and related supporting schedules will need to be submitted to the FTA within nine months of the end of the relevant Tax Period.
- Payments to settle a taxpayer’s CT liability for a Tax Period will need to be made within nine months of the end of the relevant Tax Period.
Assessment:
- The UAE CT regime will be based on a self-assessment principle.
Clarifications:
- Where there is uncertainty in relation to a proposed or entered into arrangement or transaction, a business may apply to the FTA for a clarification with regards to the correct or intended CT treatment.
Document requirements:
- A business will be required to maintain financial and other records that explain the information contained within the CT return and other documents submitted to the FTA.
- The UAE CT regime will require a Free Zone Person to have audited financial statements if it wants to benefit from the 0% CT regime.
Transitional rules:
- The UAE CT regime is not intending to require businesses to restate their balance sheet upon entering into the CT regime: a taxable person's opening balance sheet for CT purposes would generally be their closing balance sheet for financial reporting purposes for the period that ends immediately before their first tax period begins.
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