Since the UAE Corporate Tax (CT) regime was announced in January 2022, there has been a great deal of uncertainty and ambiguity for businesses across the region. In this article, our Sanctoras UAE Tax Specialist, Charlie Kelleher, will go through the basics of the new framework to help businesses understand their obligations, as well as leverage potential benefits.

‍When did UAE Corporate Tax take effect?

While the UAE Corporate Tax Law took effect on June 1, 2023, businesses with a financial year running from January to December didn’t see their first tax period start until January 1, 2024. This staggered introduction meant that businesses had time to prepare. However, the additional complexity highlights the need for business owners - and their advisors - to stay on their toes to ensure timely registration, avoid penalties and achieve compliance from the start.

‍Corporate Tax registration: timing is crucial

Ensuring your business is registered for Corporate tax in the UAE is essential. It is vital to note that a company’s UAE tax registration deadline depends on when its trade licence was issued, not necessarily the year of issuance. Here’s a breakdown of the registration deadlines:

Any juridical person that is a Resident Person, including those based in Free Zones, and is incorporated, established, or recognised under UAE laws on or after March 1, 2024, must apply to register for Corporate Tax within three months from the date of its incorporation, establishment, or recognition.

‍Competitive Corporate Tax rates

The UAE offers a globally competitive tax regime. The Corporate Tax rate is 0% for taxable income up to AED 375,000 and 9% for income exceeding this threshold. However, businesses must be aware of adjustments to taxable income due to various rules, including interest deductibility limits, restrictions on charitable contributions, and caps on entertainment expenses. Understanding these nuances is key to effective tax planning.

‍Understanding UAE Free Zones and their impact on tax planning

- What is a Free Zone in the UAE?

The UAE offers investors over 40 Free Zones, including 26 in Dubai, where expatriates and foreign investors can fully own their businesses. These zones are known for their advanced infrastructure and tailored services, aimed at streamlining operations and minimising the time and effort required to run a business.

- What is a Qualifying Free Zone Person (QFZP)?

A QFZP is essentially a company or business entity established within a UAE Free Zone and operating within a UAE Free Zone. However, merely being a business in a Free Zone doesn’t automatically give you access to the tax concessions. In order to qualify as a QZFP, and access the beneficial 0% Corporate Tax rate, the entity must meet certain criteria.

- What criteria must entities meet to be a QZFP?

To qualify as a QFZP, entities must meet the following conditions:

1. Maintain adequate substance in the Free Zone
2. Not have elected to be subject to Corporate Tax
3. Ensure non-qualifying revenues do not exceed the de-minimis requirements 
4. Comply with the 'arm's length principle' and transfer pricing documentation 
5. Preparing Audited Financial Statements in accordance with the law
6. Meet any other conditions as may be prescribed by the Minister
7. Derive qualifying income*

*Qualifying income includes the following:

• Manufacturing, processing, and distribution of goods or materials
• Holding and managing shares, securities, and ships
• Reinsurance, fund management, and wealth/investment management services, subject to regulatory oversight
• Headquarters, treasury, financing, and leasing services to related parties, including aircraft leasing
• Logistics and ancillary services related to the above activities

- What if an entity's non-qualifying income exceeds the de minimis threshold?

If you are a QFZP and generate non-qualifying income, and this income exceeds the de minimis threshold, you will lose the QFZP regime. The de minimis requirement stipulates that non-qualifying revenue must not exceed the lower of 5% of total revenue or AED 5 million. If this threshold is exceeded, the entity will not be eligible for the QFZP regime, and all income, including both qualifying and non-qualifying, will be subject to the standard 9% Corporate Tax rate.'

‍Who is subject to UAE Corporate Tax?

• UAE-incorporated entities, including free zone entities.
• Foreign entities that are effectively managed and controlled from the UAE.
• Individuals engaged in business activities within the UAE.
• Other persons specified by a Cabinet decision.
• Non-resident entities may also be subject to UAE corporate tax if they have a Permanent Establishment (PE) in the UAE, derive UAE-sourced income, or have a nexus in the UAE, such as deriving income from UAE immovable property.

‍What exemptions and reliefs are available?

Certain types of income are exempt from corporate tax, these include:

• Dividends and profit distributions from UAE and foreign entities can be exempt if they meet the participation exemption criteria: at least 5% ownership, a 12-month holding period (or intent to hold), and the subsidiary being subject to tax at a rate of at least 9% in its home country.
• Income from foreign permanent establishments (PEs) under certain conditions.
• Income earned by non-residents from operating aircraft or ships in international transportation, subject to specific conditions.
• Moreover, small businesses with revenue under AED 3 million can elect to be treated as not deriving taxable income, benefiting from small business relief and reducing their compliance burden.

Are Capital Gains included in taxable income?

Yes, Capital Gains are included in taxable income. Capital Gains and Capital Losses on ownership interests ('Participating Interest' as mentioned above) in an entity ('Participation') are tax-exempt if they meet all of these criteria:

1. the ownership stake is at least 5%,
2. it’s held for 12 months or intended to be,
3. the Participation is taxed at a minimum rate of 9% in its country or territory.

Can tax losses be carried forward and offset?  

Businesses in the UAE can carry forward tax losses indefinitely and offset them against up to 75% of taxable income in future periods, provided they meet specific conditions. However, losses incurred before the implementation of the UAE CT regime, before becoming a taxable person, or from exempt income cannot be offset.

Corporate Tax grouping 

Companies in the UAE may form a tax group, which allows them to be treated as a single taxable entity, provided they meet certain criteria such as 95% ownership, a common financial year, and uniform accounting standards. This option can simplify tax filing and reduce administrative costs by consolidating financial statements.

Financial statement requirements and compliance

All taxable persons in the UAE must maintain financial statements in accordance with International Financial Reporting Standards (IFRS). Certain entities, depending on their Free Zone status and if they are deemed a Qualifying Free Zone Person’ may also be required to prepare audited financial statements. All mainland entities are required to prepare audited statements. Records must be maintained for a minimum of seven years.

Tax filing and transfer pricing

Corporate tax returns and payments are due nine months after the end of the tax period, with no requirements for preliminary or advance filings. Additionally, transactions with related parties and connected persons must meet the ‘arm’s length’ standard to ensure fair market value, a requirement that also extends to Free Zone entities to maintain their QFZP status.

Navigating the new Corporate Tax Landscape

Navigating the UAE's Corporate Tax landscape requires careful planning and a deep understanding of the regulatory framework. To avoid penalties, businesses must stay informed and compliant.

For expert guidance tailored to your business needs, contact Charlie Kelleher at Sanctoras: charlie.kelleher@sanctoras.com