Taxation of corporations and businesses UAE federal
Decree Law NO. 47 of 2022
An Executive Summary of UAE Federal Decree-Law No. 47 of 2022 covering..
- Who is taxed and what is taxed?
- Computing taxable income, allowances, and disallowances
- Taxation of free zone persons
- Tax grouping
- Transfer pricing, transactions with related parties, and connected persons
- Compliances under the law
- Tax losses, foreign tax credits
Who is taxed and what is taxed?
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Resident taxable person
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Non resident taxable person
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Definition
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What is tax- able?
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The Law exempts Government entities, Government controlled entities, persons engaged in extractive and non-extractive natural resource businesses, public benefit entities, investment funds, pension and social security funds from the levy.
Computing taxable income
Tax compliance begins with accounting
- Taxable Income to be determined on the basis of a standalone financial statement prepared following accounting standards accepted in the UAE.
- Adjustments to the accounting profits shall be made against unrealised gains or losses, exempt incomes, ineligible deductions, adjustments to meet Arm’s Length Pricing for transactions with Related Parties and Connected Persons, etc.
- Transactions measured in the Financial Statements using Fair Value methods, and impairment adjustments can be reported after realization.
- Cash basis of accounting may be permitted by the Minister.
- Change in accounting methods will be permitted from the beginning of a tax year.
- Interest on loans, where the loan amount has been utilized to pay related parties as capital contributions or repayments or as distribution of profits is specifically disallowed. However, it shall be allowed if the person can demonstrate the business requirement for availing of the loan.
- Entertainment expenditure has been capped at 50% of the spent.
- Donations, grants, or gifts made to an entity that is not a Qualifying Public Benefit Entity
- Bribes, Fines, and penalties, other than amounts awarded as compensation for damages or breach of contract
Interest expenses
- Interest deductible up to 30% of EBITDA every year including adjustments for interest carried forward from the previous year. Carry forward is permitted for 10 subsequent years
- Banks, insurance providers, and natural persons are specifically exempt from this interest capping.
Free Zone Persons
Tax compliance begins with accounting
- 0% tax incentives available to Qualifying Free Zone persons. Conditions to claim the tax incentive includes maintaining adequate substance in the UAE and income meeting the definition of specified qualifying Income.
- Free Zone persons can elect to be subject to Corporate Tax.
- Free Zone persons shall deal with related and connected persons complying with Arm’s Length Principle and Transfer Pricing requirements.
- If a free zone person fails to meet any condition at any time during the tax period, will be subject to tax at standard slab rates.
- Tax groups cannot be formed between Qualifying Free Zone Persons and other Taxable persons.
Related Parties and Connected Persons
Transactions with Related Parties and Connected Persons shall be at Arm’s Length
- Related parties and connected persons have been given a broad definition covering 4th degree of kinship or affiliation, direct or indirect ownership, control, or common control.
- Taxable persons shall be able to prove transactions with connected persons have been conducted at market price.
Arm’s Length Principle and Transfer Pricing
Mechanism for determining ALP prescribed.
- The Law prescribes that transactions with related parties must be at Arm’s length Price. Taxable persons shall substantiate that such transactions are at Arm’s Length with unrelated persons using one or more methods prescribed failing which adjustments to the taxable income shall be made.
- Authority may require a taxable person to file a disclosure containing information regarding transactions and arrangements with related parties and connected persons in the form and manner prescribed
- The taxable person shall maintain both a master file and a local file in the form prescribed by the authority. Further, the documents and information to support Arm’s Length Pricing shall be submitted within 30 days when called by the authority.
Dividends
- Dividends from resident persons and dividends out of foreign participating interest has been specifically exempt from Taxable Income.
- Participation conditions include holding at least 5% ownership and uninterrupted holding for at least 12 months.
International Agreements
- In case of inconsistencies between the Law and an international agreement, the terms of the international agreement shall prevail
Unincorporated Partnerships and Family Foundations
Mechanism for taxing unincorporated partnerships prescribed
- Income from unincorporated partnerships will be taxed in the hands of individual partners in the ratio of their profit share.
- While taxing income from the partnership in the hands of individual partners, any expenses incurred by the partner and interest on his share of capital will be allowed. However, any interest paid by the partnership to individual partners shall not be allowed as expenses in the partnership and will be treated as a distribution from the partnership.
- Any foreign tax credit allowable to the firm will be shared in the ratio of profit share.
- Partners in the unincorporated partnership can make an application to the Tax Authority to tax the partnership as one taxable person and in such instances all partners will be jointly and severally liable for tax compliance.
- Family foundations shall be treated as unincorporated partnerships subject to conditions.
Compliances
Tax Law provides for annual compliance
- Tax registration and de-registration shall be necessary.
- The tax period shall be the financial year of the taxable person. Change of taxable period shall be permitted.
- Tax returns shall be filed and taxes shall be paid to the Authority within 9 months from the end of the relevant tax period.
- Financial statements shall be called by the authorities in a specified format. A category of persons may be required to file audited financial statements.
- Resident Taxable Persons can elect to be treated as not having taxable income based on not exceeding thresholds to be specified by the Authority and subject to conditions. However, the information shall be requested by the Authority.
Tax Losses
- Tax loss of a period shall be allowed to set off against taxable income of unlimited subsequent periods to the extent of 75% of the profits of a period.
- Transfer of losses between incorporated resident persons shall be permitted based on common ownership of at least 75%. However, none of the persons shall be a Qualifying Free Zone Person or an exempt person. The financial year and accounting standards adopted by such persons should be aligned.
Foreign Tax Credit
- Foreign Tax Credit for the relevant Tax Period shall be allowed as a credit to the extent tax due on the relevant income.
- Unutilised Foreign Tax Credits cannot be carried forward or carried back.
Withholding Tax
- The law specifies the income of Non-Residents having no PE will be subject to withholding tax. The withholding tax rate shall be 0% or any other rate specified by the Minister.
Corporate Tax Services Portfolio
Corporate Tax Services Portfolio
Advisory Services
- Tax diagnostic review
- Corporate tax advisory
- Group structuring
- Process and transaction review
- Country by Country reporting
Transfer Pricing Services
- Domestic and global TP review
- TP policy development
- Master file and local file development and review
- Transaction advisory
