KEY POINTS The Corporate Tax Law will be effective from 1 June 2023 with a headline rate of 9%. The regime includes features that represent best practices in international taxation. Several exemptions are available for businesses operating across strategic sectors. Free zone persons can continue to maintain their 0% tax position subject to meeting certain conditions. General anti-avoidance and transitional rules apply from the date the law is published in the Official Gazette. Background On 9 December 2022, the UAE MoF published the Corporate Tax Law, which will be effective from financial years starting on or after 1 June 2023. This follows the public consultation document released on 28 April 2022, which describes the main features of the planned CT regime, as well as the principles applied in the design of such regime. Taxable person Generally, CT will apply to both resident and nonresident persons. A resident person will include: A juridical person incorporated otherwise established or recognized in the UAE (including free zones) A juridical person incorporated otherwise established or recognized outside of the UAE, that is effectively managed and controlled in the UAE A natural person that conducts business activity in the UAE A nonresident person can be subject to CT if it has a permanent establishment (PE) in the UAE, derives UAE-sourced income or has a nexus in the UAE (nexus rules are still to be specified through a Ministerial Decision). Applicable CT rates Generally, UAE businesses will be subject to a 9% CT rate. A rate of 0% will apply to taxable income not exceeding a particular threshold to be prescribed by a Ministerial Decision (expected to be AED375,000 based on the FAQs). While the MoF had previously indicated that a higher rate may apply to large multinationals subject to Pillar Two, the Corporate Tax Law is silent in this respect. Nevertheless, the FAQs reiterate the UAE’s commitment to introduce these rules in due course and further developments are expected. Exemptions Under certain conditions, the following persons will be exempt from CT: A person engaged in the exploitation of UAE natural resources (both extractive and non-extractive) Government and Government-controlled entities Qualifying public benefit entities Charities and public benefit organizations Pension or social security funds Qualifying investment funds Tax base UAE businesses will be subject to CT on their worldwide income. However, dividend income and capital gains will be exempt, subject to meeting the conditions of the participation exemption. The Law also provides for a foreign branch profits exemption where those profits have been subject to tax overseas at a rate of at least 9%. Foreign tax credit will be available for taxes paid overseas on forms of income that are not exempt from UAE CT. Natural persons that are UAE residents and subject to CT will be taxable only on the income earned from business activities undertaken in the UAE. Nonresidents will be subject to CT on any taxable income attributable to a PE or nexus in the UAE or any income that is considered UAE-sourced income. Permanent Establishment Nonresidents will be considered to have a PE in the UAE if they have a fixed place of business or a dependent agent in the country. The language used in the Law to describe these tests seem broadly aligned with Organisation for Economic Co-operation and Development (OECD) standards. The Corporate Tax Law states that other forms of nexus in the UAE that could create a PE will be determined through a Ministerial Decision. UAE-sourced income The Corporate Tax Law provides several examples of income that will be considered as UAE-sourced income. Generally, income earned by a UAE resident person will qualify as UAE-sourced income. Similarly, UAE-sourced income will also include any income derived from activities performed, assets located, or rights used for economic purposes in the UAE. Free zones The Corporate Tax Law introduces the concept of a “Qualifying Free Zone Person” (QFZP), which is broadly defined as a company or branch registered in a free zone that: Maintains adequate substance in the UAE Derives qualifying income (to be specified through a Ministerial Decision) Satisfies transfer pricing requirements Meets any other conditions to be prescribed through a Ministerial Decision A QFZP will still be subject to CT but may benefit from a 0% rate on its qualifying income. A QFZP can elect to forego this preferential regime and be subject to the standard CT rate. Taxable income The accounting income as reported in the standalone financial statements will be the basis to determine the taxable income. This will be subject to adjustments, which include: Unrealized gains or losses which arise in connection to capital items Income and associated expenses derived by an exempt person with respect to its exempt activity Dividend income and other profit distributions from a resident person Dividend income and capital gains under the participation exemption Income from a PE not located in the UAE that has been subject to CT at a rate of at least 9% Income derived by a nonresident from the operation or leasing of aircrafts and ships in international transportation Gains or losses from reorganizations or intragroup transfer of assets and/or liabilities subject to certain conditions Net interest expenditure will be capped at 30% of the EBITDA (earnings before interest, taxes, depreciation, and amortization) Entertainment-related expenses will be deductible up to 50% of the amount incurred With respect to the interest deduction limitation, the Corporate Tax Law indicates that the amount of disallowed expenditure can be carried forward for a period of 10 years. Additional restrictions can apply to related-party debt. The Corporate Tax Law also provides an additional list of non-deductible expenses which includes donations, administrative penalties, recoverable value-added tax (VAT), dividends or similar benefits paid to an owner of a taxable person, among others. Tax loss relief Businesses will be able to carry forward tax losses indefinitely, subject to certain conditions. These losses can be used to offset up to 75% of the taxable income of future tax periods. Losses incurred before the effective date of CT
