Federal Decree-Law No. (47) of 2022 regarding corporate and business tax (hereinafter referred to as the “corporate tax law”) was issued on December 09, 2022.The Corporate Tax Law provides the legislative basis for imposing and applying a federal corporate tax (“corporate tax”) in the country and applies to fiscal years beginning on or after June 1, 2023.The introduction of the corporate tax aims to support the state in achieving its strategic objectives and to accelerate the pace of its development and growth. The certainty of a competitive corporate tax system that adheres to international standards, coupled with an extensive network of agreements to avoid double taxation of the country, will enhance the country's position as a leading hub in the field of business and investment.
The following is an overview of what was stated in the Federal Decree-Law:
1. What is corporate tax?
Corporate tax is a form of direct tax levied on the net income of corporations and other businesses.In some other countries, corporate tax is referred to as "corporate income tax" or "business profit tax".
2. Taxable Persons or Establishments:
a. Companies residing in the country and other legal persons established in the country or who are effectively managed and controlled in the country.
b. Natural persons (individuals) who carry on business or business activity in the country as specified in a decision to be issued by the Council of Ministers in due course.
c. Non-resident legal persons (foreign legal entities) who have a permanent establishment in the country.
3. Establishments or persons exempt from tax:
Certain types of businesses or establishments are exempt from corporate tax due to their importance and contribution to the UAE economy and society. These are known as exempt persons and include:
a. Automatically exempted persons: a- They are government agencies, b- And agencies affiliated with the united government in the decision of the Council of Ministers.
b. Exempted if a notification is submitted to the Ministry of Finance (and subject to fulfillment of certain conditions): Extractive and non-extractive natural resource businesses.
c. Exempt if it is included in the Cabinet's decision.
d. Exempt if an application is submitted to the Federal Tax Authority and it is approved (and subject to fulfillment of certain conditions): a- Public or private pension or social security funds. b- Qualified investment funds. c- Subsidiaries in the country that are wholly owned and wholly controlled by a government entity, a government entity, a qualified investment fund, or a public or private pension or social insurance fund.
4. How will corporate tax be imposed on the taxable person?
The corporate tax law imposes a tax on income based on residence and origin. The applicable basis depends on the classification of the taxable person.
A “resident person” is subject to tax on income generated from both domestic and foreign sources (i.e. on the basis of residence).
A “non-resident person” is subject to tax only on income generated from sources within the country (ie on the basis of origin).
Residence for corporation tax purposes is not determined by where a person resides or has his registered office but rather by specific factors provided for in the Corporation Tax Act. If a person does not fulfill the conditions necessary to be treated as a resident person or a non-resident person, then he will not be subject to tax and therefore the corporate tax will not apply to him.
5. What is a permanent establishment?
The concept of a permanent establishment is an important tenet of international tax law used in corporate tax systems around the world. The main purpose of the concept of permanent establishment in a country's corporate tax law is to determine whether (and when) a foreign person has a sufficient presence in the country to warrant the business profits of that foreign person being subject to corporate tax.
The definition of a permanent establishment in the corporate tax law was formulated based on the definition contained in Article 5 of the OECD model tax agreement related to income and capital taxes and the position adopted by the UAE under the multilateral agreement to implement measures related to tax agreements to prevent erosion of the tax base and transfer profits. This will allow a foreign person to use the relevant explanation of Article 5 of the OECD Model Tax Agreement on Income and Capital Taxes when assessing whether or not he has a permanent establishment in the country. In this assessment, the provisions of any bilateral tax agreement between the country of residence of the non-resident person and the UAE must be considered.
6. What is the tax imposed on?
Corporate tax is levied on the taxable income earned by a taxable person in a tax period.
Corporate tax will generally be levied on an annual basis, and the corporate tax liability will be calculated by the taxable person on a self-assessment basis. This means that the corporate tax will be calculated and paid through a tax return submitted by the taxable person to the Federal Tax Authority.
The starting point for calculating taxable income is the accounting income (i.e. net profit or loss before tax) of the taxable person according to their financial statements. The taxable person will then need to make certain adjustments to determine their taxable income for the relevant tax period. For example, adjustments may need to be made to accounting income for income that is exempt from corporate tax or for expenses that are not fully or partially deductible for corporate tax purposes.
7. What is exempt income?
The main purpose of exempting certain income from corporate tax is to prevent double taxation of certain types of income. Specifically, dividends or capital gains realized from domestic and foreign stocks will generally be exempt from corporate tax. Furthermore, a resident person can choose, subject to certain conditions, not to account for the income of his foreign permanent establishment for corporate tax purposes in the country.
8. What is the corporate tax rate?
Corporate tax is levied at a standard rate of 9% on taxable income above AED 375,000. Taxable income below this amount will be subject to corporate tax at the rate of zero percent.
9. Tax regisration, filing of tax returns and payment of corporate tax:
All taxable persons (including persons based in the free zone) must register for corporate tax with the Federal Tax Authority and obtain a corporate tax registration number. The FTA may also require certain exempt persons to register for corporate tax. Taxable persons must submit a tax return for corporate tax for each tax period within 9 months from the end of the relevant tax period. In general, the same time period for payment of any corporate tax due will apply in relation to the tax period for which a tax return is submitted.