Presentation of the public consultation document on corporation tax – News
The consultation document contains 10 sections starting with the introduction and ending with the administration
If the individual conducts a business activity in the United Arab Emirates, which requires a business license, that individual’s income from the business will be subject to corporation tax. — File photo
On January 31, 2022, the Ministry of Finance (MoF) announced that the United Arab Emirates would introduce corporation tax on taxable profits of businesses with effect from the financial year beginning on or after June 01, 2023. of the finalization of the UAE Corporate Tax (CT) Regime, on April 28, 2022, the Ministry of Finance released the public consultation document to solicit stakeholders’ views on the key features and implementation corporate tax balance, which would be useful for the Ministry of Finance to receive input from interested parties and make informed decisions.
The consultation document contains 10 sections starting with the introduction and ending with the administration. In the first and second sections of the consultation document, the Ministry of Finance outlined the purpose of issuing the consultation document and the rationale for issuing the TC regime in the UAE respectively.
In the third section, the scope of application of corporation tax has been defined in detail, which covers the application of corporation tax to natural and legal persons. Companies exempt from corporate tax and the taxation of companies located in free zones were discussed in detail. If the individual conducts a business activity in the United Arab Emirates, which requires a business license, that individual’s income from the business will be subject to corporation tax. A legal person incorporated in the UAE will be subject to corporate tax and if the companies are incorporated outside the UAE, their income will nevertheless be subject to corporate tax if such companies:
• are controlled and managed in the UAE.
• have a permanent establishment in the UAE (UAE source income will be subject to CT)
• earn any UAE source income (UAE source income will be subject to CT)
Tax on general partnerships, joint ventures and associations of persons depends on their presence and the liability of their partners.
The fourth section deals with the definition of residents and non-residents. Legal persons incorporated in the UAE will automatically be considered residents. Foreign companies will be residents of the UAE if they are effectively managed and controlled in the UAE. The natural person who conducts business or trade in the UAE will be a resident of the UAE. Anyone who is not a resident will be considered a non-resident. Residents are taxable in the UAE on their worldwide income and non-residents will be subject to UAE tax on their PE’s taxable income in the UAE and on income derived from the UAE.
The fifth section contains the approach to calculating taxable income which states that financial statement earnings calculated under IFRS will be adjusted to arrive at taxable income.
In the sixth section, it was indicated that the group of companies resident in the UAE can form a tax group and be treated as a single taxable person. In addition, it covers the conditions for entering the tax group. Rules relating to loss transfer, group relief and restructuring relief have been detailed.
The seventh section emphasizes that there would be transfer pricing rules and that transactions between related parties would be at arm’s length. The arm’s length principles and documentation requirements have also been indicated in this section.
In the eighth section, it was stated that zero percent tax would be applicable on taxable income up to Dh375,000, and any taxable income above Dh375,000 would be subject to tax at the rate of 9%. The zero percent withholding tax would apply to the following domestic and cross-border payments made by UAE companies:
• Income from the UAE earned by a foreign company that is not attributable to a PE in the UAE of that foreign company.
• Mainland UAE income earned by a free zone person who benefits from the zero% CT scheme
• Dividends and other distributions of profits made by a free zone person who benefits from zero percent
The United Arab Emirates and more than 130 other countries have reached an agreement on BEPS 2.0. The ninth section will cover the approach proposed by the United Arab Emirates to respond to BEPS 2.0, and will establish the basis for the reallocation of profits from which the sales originate and the requirement for the overall minimum tax of fifteen percent.
A company subject to CT will need to register with the AFC and obtain a tax registration number. Each registered business will be required to file an annual tax return and make payment within nine months of the end of the relevant financial year, and this was stated in the last section of the public consultation document.
Mahar Afzal is Managing Partner at Kress Cooper Management Consultants. The above is not an official but personal opinion of the author. For any questions/clarifications, please write to him at [email protected]