The UAE Ministry of Finance opened a consultation on 27 April for the proposed introduction of a federal corporate tax regime. It follows the announcement on 31 January that the UAE is to introduce federal corporate tax on business profits for financial years starting on or after 1 June 2023.
The introduction of a corporate tax regime is intended to help the UAE achieve its strategic objectives and accelerate its development and transformation. The Ministry said work continues on the design and implementation of a corporate tax regime to ensure that it incorporates best practices globally and minimises the compliance burden for businesses.
All UAE established businesses are within the scope of the UAE corporate tax framework, with potential exemptions for government entities listed in a Cabinet Decision, natural-resource extraction and exploration subject to Emirate-level decrees, charities and other public benefit organisations, public and regulated private social security and retirement pension funds and investment funds.
Limited liability partnerships are to be subject to the corporate tax framework, but limited partnerships, general partnerships and other unincorporated vehicles are to be treated as transparent for corporate tax purposes.
Free zone entities are expected to be treated as subject to 0% corporate tax provided they maintain adequate substance and comply with the regulatory requirements. This applies to income generated from outside the UAE and from other entities in any other free zone.
The income of a mainland branch of a free zone entity will be subject to UAE corporate tax, but passive income generated by a free zone entity from mainland entities will be exempt. Other payments made by a mainland entity to a free zone entity are expected to be treated as non-deductible in the mainland entity and income from such payments would also disqualify the free zone entity from eligibility to the 0% corporate tax rate.
In line with OECD guidelines, fixed place of business and dependent agent permanent establishment provisions are to be included in the corporate tax framework, along with transfer pricing regulations according to arm’s length principle.
Dividend income and/or capital gains will be exempt if more than a 5% shareholding is held, and the foreign subsidiary has been subject to at least 9% corporate tax or its equivalent. Foreign branch exemption may be available, while interest expense is expected to be limited to 30% of EBITDA (earnings before interest, taxes, depreciation and amortisation).
Tax losses incurred after the introduction of UAE corporate tax can be used to offset 75% of taxable income within a tax year. Excess tax losses can be carried forward indefinitely, although could be subject to a change in ownership provision. Tax losses can be shared between entities that have at least 75% common ownership. Tax losses of free zone entities that enjoy the 0% CT rate cannot be shared.
The deadline for the filing of the tax returns and payment of the tax is expected to be nine months after the end of the financial year.