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.
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.
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?
Who is subject to Corporate Tax?
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?
Who is a Resident Person?
Who is a Non-Resident Person?
What is a Permanent Establishment?
What is Corporate Tax imposed on?
What income is exempt?
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?
When can a Free Zone Person be a Qualifying Free Zone Person?
- 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?
How to calculate the Taxable Income of a Tax Group?
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.