UAE Corporate Tax 2023: 50 Million+ Income Rules
The Ministry has made a decision regarding the requirement for companies earning more than Dh50 million to pay corporate tax in the UAE.
UAE Corporate Tax: MoF Clarifies Rules for Audited Financial Statements and Permanent Establishments
The UAE’s Ministry of Finance (MoF) has recently issued two decisions that will bring transparency and clarity to the country’s corporate tax regime. These decisions aim to establish a fair and well-regulated tax environment, prevent tax avoidance and double non-taxation, and ensure compliance with global best practices.
The MoF has clarified the rules related to audited financial statements for taxable entities and the situations where the presence of natural persons in the UAE could/could not give rise to a permanent establishment for non-resident persons. This article will discuss the key points of both decisions.
You can read Complete Guide about UAE Corporate Tax 2023 to get yourself familiarized.
Audited Financial Statements
Ministerial Decision No. 82 of 2023 specifies that taxable entities, including qualifying free zone companies, that derive revenues of over Dh50 million are required to prepare and maintain audited financial statements. These statements should be audited by a registered auditor or audit firm in the UAE. The audited financial statements should be submitted to the MoF within six months from the end of the entity’s financial year.
The decision defines “taxable entities” as those that are subject to corporate tax under the UAE’s Federal Decree-Law No. 7 of 2017 on Tax Procedures. Few Entities have been made it into the Exemptions List for UAE Corporate Tax.
These entities are required to prepare and maintain audited financial statements that provide a true and fair view of their financial position and performance. The audited financial statements should include a balance sheet, income statement, statement of changes in equity, cash flow statement, and notes to the financial statements.
The decision applies to all taxable entities, including those that have not previously been required to prepare and maintain audited financial statements. These entities should take the necessary steps to comply with the decision and ensure the accuracy of their financial statements.
Download Complete Guide Below with Federal Laws on UAE Corporate TAX 2023.
Permanent Establishments
Ministerial Decision No. 83 of 2023 clarifies the situations where the presence of natural persons in the UAE could/could not give rise to a permanent establishment for non-resident persons. A permanent establishment is a fixed place of business where the non-resident person carries out its business activities, either wholly or partially.
The decision defines “natural person” as an individual who is not a UAE national or a person who is not subject to tax in the UAE. The presence of natural persons in the UAE does not necessarily give rise to a permanent establishment for the non-resident person. However, if the natural person carries out activities in the UAE on behalf of the non-resident person, and these activities continue for a specific period, this could give rise to a permanent establishment.
The decision specifies what constitutes a temporary and exceptional presence in the UAE. A presence will be considered temporary and exceptional if it arises due to unforeseen circumstances, such as the natural disasters, civil unrest, or the COVID-19 pandemic. In such cases, the presence should not give rise to a permanent establishment. However, if the presence continues for more than six months, it could give rise to a permanent establishment.
The decision also clarifies that a non-resident person’s presence in the UAE for the purpose of attending meetings, conducting negotiations, or providing advice or assistance to its UAE affiliates, or other similar activities, does not give rise to a permanent establishment.
Conclusion
The MoF’s recent decisions on audited financial statements and permanent establishments bring transparency and clarity to the UAE’s corporate tax regime. These decisions provide taxable entities and non-resident persons with clear guidance on their tax obligations and help prevent tax avoidance and double non-taxation. Taxable entities that derive revenues of over Dh50 million are now required to prepare and maintain audited financial statements, while non-resident persons have clear guidelines on the situations where the presence of natural persons in the UAE could/could not file.
What is Corporate Tax?
Corporate Tax is a type of direct tax that is imposed on the overall earnings of corporations and other entities. In some other countries, Corporate Tax is also known as "Corporate Income Tax" or "Business Profits Tax".
Who is subject to Corporate Tax?
The Corporate Tax in UAE applies to companies and juridical persons incorporated or managed and controlled in the UAE, as well as individuals conducting business activities in the country. Non-resident juridical persons with a Permanent Establishment in the UAE are also subject to Corporate Tax.
Free Zone persons are also subject to Corporate Tax, but those who meet the conditions for Qualifying Free Zone Persons can benefit from a Corporate Tax rate of 0% on their Qualifying Income.
Non-resident persons without a Permanent Establishment in the UAE may be subject to Withholding Tax at a rate of 0%. Withholding Tax is collected at source by the payer on behalf of the recipient of the income.
Who is exempt from Corporate Tax?
- Automatically exempt:
- Government Entities
- Government Controlled Entities that are specified in a Cabinet Decision
- Exempt if notified to the Ministry of Finance (and subject to meeting certain conditions):
- Extractive Businesses
- Non-Extractive Natural Resource Businesses
- Exempt if listed in a Cabinet Decision:
- Qualifying Public Benefit Entities
- Exempt if applied to and approved by the Federal Tax Authority (and subject to meeting certain conditions):
- Public or private pension and social security funds
- Qualifying Investment Funds
- Wholly-owned and controlled UAE subsidiaries of a Government Entity, a Government Controlled Entity, a Qualifying Investment Fund, or a public or private pension or social security fund
How is a Taxable Person subject to Corporate Tax?
To determine the applicable basis of taxation under the Corporate Tax Law, the classification of the Taxable Person as a Resident or Non-Resident is crucial.
A Resident Person is taxed on both domestic and foreign income, whereas a Non-Resident Person is only taxed on income earned within the UAE.
The determination of residence for Corporate Tax purposes is based on specific factors outlined in the law, rather than where a person resides or is domiciled. If a person does not meet the conditions for either classification, they are not considered a Taxable Person and are exempt from Corporate Tax.
Who is a Resident Person?
Companies and other legal entities established in the UAE are automatically considered as Resident Persons for Corporate Tax purposes. However, foreign companies and entities may also be considered Resident Persons if they are effectively managed and controlled within the UAE. For natural persons, Corporate Tax only applies to income earned from Business or Business Activity conducted in the UAE, but not on any other income earned.
Who is a Non-Resident Person?
To be considered a Non-Resident Person for Corporate Tax purposes, a juridical person must either have a Permanent Establishment in the UAE or earn income from the UAE government. Non-Resident Persons are required to pay Corporate Tax on their taxable income that is linked to their Permanent Establishment in the UAE. In addition, Non-Resident Persons are subject to Withholding Tax at a rate of 0% on certain types of UAE-sourced income that are not related to their Permanent Establishment.
What is a Permanent Establishment?
The Permanent Establishment concept in the UAE Corporate Tax Law is used to determine if a foreign person has established sufficient presence in the UAE to be subject to Corporate Tax.
The definition of Permanent Establishment in the law is based on the definition in Article 5 of the OECD Model Tax Convention on Income and Capital. Foreign persons can use the relevant Commentary of Article 5 of the OECD Model Tax Convention to assess if they have a Permanent Establishment in the UAE, taking into account any bilateral tax agreement between their country of residence and the UAE.
What is Corporate Tax imposed on?
Corporate Tax is charged on the Taxable Income of a Taxable Person during a Tax Period. Corporate Tax is usually assessed yearly and the Taxable Person is responsible for calculating their own Corporate Tax liability using self-assessment. The calculation and payment of Corporate Tax are done through the filing of a Corporate Tax Return with the Federal Tax Authority. The starting point for calculating Taxable Income is the Taxable Person's accounting income, which includes net profit or loss before tax. However, adjustments must be made to determine the Taxable Income for the relevant Tax Period. These adjustments include accounting for income that is exempt from Corporate Tax and for expenses that are wholly or partially non-deductible for Corporate Tax purposes.
What income is exempt?
The Corporate Tax Law has provisions for certain types of income that are exempt from Corporate Tax, which means that no Corporate Tax will be levied on such income and the related expenditure cannot be deducted.
However, Taxable Persons who earn such income will still be subject to Corporate Tax on their Taxable Income. The primary purpose of exempting certain income from Corporate Tax is to avoid double taxation on particular types of income. Dividends and capital gains from domestic and foreign shareholdings are typically exempt from Corporate Tax.
In addition, a Resident Person can opt not to consider income from a foreign Permanent Establishment for UAE Corporate Tax purposes, subject to certain conditions.
What expenses are deductible?
- Legitimate business expenses that are incurred solely for the purpose of deriving taxable income are generally deductible. However, the timing of the deduction may vary depending on the type of expense and accounting method applied.
- For capital assets, expenditure is typically recognized through depreciation or amortization deductions over the economic life of the asset or benefit.
- Expenditure that has a dual purpose, such as expenses incurred for both personal and business purposes, should be apportioned, with the relevant portion being treated as deductible if it's incurred solely for the purpose of the taxable person's business.
- Certain expenses, which are deductible under general accounting rules, may not be fully deductible for Corporate Tax purposes. These expenses must be added back to the accounting income for determining the taxable income.
- Examples of expenditures that may not be deductible include bribes, fines and penalties, donations to non-qualifying public benefit entities, dividends and other profit distributions, corporate tax, and expenditure not incurred solely for the purpose of the taxable person's business.
- Client entertainment expenditure may be partially deductible, with only 50% of the amount of expenditure being deductible.
- Deduction of net interest expenditure is allowed, which exceeds a certain de minimis threshold of up to 30% of the amount of earnings before the deduction of interest, tax, depreciation and amortisation, except for certain activities.
What is the Withholding Tax rate?
Certain types of income sourced in the UAE and paid to non-residents may be subject to a 0% withholding tax rate, which means that there is no requirement for either UAE businesses or foreign recipients of such income to register or file for withholding tax. However, it is important to note that withholding tax does not apply to transactions that occur between two UAE resident persons.
When can a Free Zone Person be a Qualifying Free Zone Person?
Here are the conditions that a Free Zone Person must meet to be considered a Qualifying Free Zone Person and benefit from a preferential Corporate Tax rate of 0% on their "Qualifying Income":
- Maintain adequate substance in the UAE.
- Derive "Qualifying Income."
- Not have made an election to be subject to Corporate Tax at the standard rates.
- Comply with the transfer pricing requirements under the Corporate Tax Law.
- The Minister may prescribe additional conditions that a Qualifying Free Zone Person must meet.
What are Tax Groups, and when can they be formed?
Multiple Taxable Persons can apply to form a single "Tax Group" for Corporate Tax purposes if they meet certain conditions. These conditions include having the same Financial Year, using the same accounting standards, and being resident juridical persons.
To form a Tax Group, the parent company must own at least 95% of the share capital and voting rights of the subsidiary, as well as be entitled to at least 95% of the subsidiary's profits and net assets. However, the Tax Group cannot include an Exempt Person or Qualifying Free Zone Person.
How to calculate the Taxable Income of a Tax Group?
The parent company of a Tax Group must prepare consolidated financial accounts covering each subsidiary that is a member of the group to determine its Taxable Income. Transactions between the parent company and group members, as well as transactions between group members, are eliminated for the purpose of calculating the group's Taxable Income.
How to prepare for Corporate Tax?
- Read the Corporate Tax Law and supporting information: The first step is to read the law and any supporting information available on the websites of the Ministry of Finance and the Federal Tax Authority.
- Determine if your business is subject to Corporate Tax: Use the information available to determine whether your business is subject to Corporate Tax and, if so, from what date.
- Understand the requirements for your business: It is important to understand the requirements for your business under the Corporate Tax Law, including when to register, what the accounting period is, when to file a return, what elections or applications your business may need to make, and what financial information and records your business will need to keep.
- Regularly check for updates and guidance: The Ministry of Finance and the Federal Tax Authority regularly provide updates and guidance on the Corporate Tax regime, so it is important to regularly check their websites for further information.
What are the rules applied for Freezone?
A Free Zone Person can receive a 0% Corporate Tax rate on their "Qualifying Income" only if they meet certain conditions and are classified as a Qualifying Free Zone Person. These conditions include maintaining sufficient presence in the UAE, earning Qualifying Income, not electing to be subject to regular Corporate Tax rates, and complying with transfer pricing requirements.
The Minister may also impose additional conditions. Failure to meet the conditions or electing to be subject to regular Corporate Tax rates will result in the standard Corporate Tax rate being applied from the start of the relevant Tax Period.
