The UAE government announced on January 31, 2022, that it would enact legislation to allow for implementation of Corporate Tax on business profits. The corporate tax in UAE will come into effect from June 1, 2023.
The United Arab Emirates (UAE) has a long history of having a tax-free system; however, the UAE recently announced that it would start taxing corporate profits at a rate of 9% to comply with the recommendations of the OECD Pillar Two of the Base Erosion and Profit Shifting (BEPS) Project to implement a global minimum effective tax rate.
The Federal Tax Authority (FTA), under the Ministry of Finance of the Government of the United Arab Emirates, will be the nodal institution in charge of managing and carrying out Corporate Tax.
On April 28, 2022, the Government of the United Arab Emirates (UAE) released a Public Consultation Document that detailed the proposed Corporate Tax regime in the UAE. The Corporate Tax implementation process included the taking of this action.
The proposed Federal Corporate Tax would incorporate best practices from all around the world and include well-known and recognized global principles, according to the Rationale given in the Consultation Document. As a result, the Corporates wouldn’t need to assess any new ideas moving ahead because they would be sure to be well aware of such principles.
Impact on a Company’s Departments or Functions
Any corporation would almost certainly need to change its tax and finance departments’ mindsets to comply with the new tax law when it initially goes into effect. It will be crucial moving forward to examine every transaction and every book entry from the perspective of Corporate Tax in UAE.
Value-added tax (VAT) and excise regimes were implemented, and as a result, enterprises in the United Arab Emirates (UAE) usually and generally geared up pretty strongly. Both the VAT and the excise regimes were like this. In exchange, the government aided businesses by understanding issues with non-compliance, drastically lowering penalties, and extending the deadlines for paying those penalties.
These efforts were supported by extending the deadlines for paying those fines. In a previous piece, the authors gave their opinions on this subject.
The Corporate Tax regime will impact tax, supply chain operations, information technology, and legal activities. It will be essential for the tax functions to influence business decisions made by the organization in an ever-increasingly significant way. Businesses must also maintain a sound record-keeping data architecture that complies with industry best practices for managing tax risk and data.
This is crucial for businesses since it is likely that the UAE government will make sure that some of the best practices in tax technology from other nations are implemented from the start of the tax regime (for example, e-audits, e-compliance, e-assessments, and e-invoices). This is likely to be the case.
Therefore, businesses would need to ensure that their employees have the necessary training and that their processes are well established to be prepared for a tax function that is allowed by technology.
It is crucial for businesses to ensure that their data management systems are strong enough to enable simple data sharing with the FTA following any regulatory change. The alternative of trying to catch up with the new regulations is preferable.
It is impossible to predict how much the FTA will prioritize these technological chores when putting the Corporate Tax into place until further information is available. This is due to the FTA not having yet made this information public. However, having digital capabilities from the start of the regime itself is vitally essential.
Tax professionals must change their focus from a process-centric attitude (compliance, back-office tasks, etc.) to a data-centric mentality for businesses to achieve their goals (risk management, data management). For businesses to be successful, this is essential.
For the proposed UAE Corporate Tax, Taxable Persons are split into eight categories, each followed by a description of the treatment that will be given. The same can be summed up as follows:
Natural Person:
People who are not involved in business or commercial activities in the UAE as a sole proprietor or as a partner in an unincorporated partnership with premises in the UAE are classed as natural people and are not subject to UAE C T.
Employment income, interest income, rental income, and other investment income are all exempt from the UAE Corporate Tax, which only applies to revenue earned from enterprises. Only corporate income is intended to be subject to the UAE Corporate Tax.
A Legal Person:
All corporations and other legal persons established in the UAE will be liable to taxation under the proposed UAE Central Tax. Foreign businesses with permanent establishments in the UAE or income produced from the UAE will also be taxed under the proposed UAE Corporate Tax. Furthermore; it will be assumed that international firms with their effective administration in the UAE are subject to taxation in the UAE.
The Limited Responsibility Partnership will be treated as a company and be subject to UAE corporate taxation, along with other partner organizations that follow the same model and limit rather than eliminate the liability of the partners. On the other hand, other partnerships or unincorporated partnerships will be classified as “flow-through” partnerships. Only the partners will be responsible for the UAE corporation tax on their share of the partnership’s profits.
Individuals Exempt From UAE Capital Tax:
It is advised that the following people receive automatic exemptions from the UAE Capital Tax or exemptions through application:
- The Federal and Emirate Governments, as well as their authorities, departments, and other public institutions;
- Fully-owned UAE companies that carry out a mandated or sovereign activity;
- Companies that extract and exploit natural resources in the UAE and are subject to Emirate-level taxation;
- Charities and other public benefit organizations;
- Public and regulated private social security and retirement pension funds;
- Investment funds, such as mutual funds and exchange-traded funds.
- Extraction and Exploration of Natural Resources: According to the UAE Constitutional Draft, any revenue the government receives from the extraction and exploration of natural resources should be exempt from its purview. Additionally, earnings made by private enterprises under the conditions of a government-issued concession agreement are exempt from the UAE Corporate Tax, albeit they are still subject to emirate-level taxation.
- The government and its corporate affiliates: Although it is recognized that the government frequently engages in sovereign activities exempt from the UAE Commercial Transactions Law, any commercial activity carried out by the government by the requirements of a Trade License is required to adhere to the law. The same rules apply to any activities conducted through subsidiaries of government-owned companies or other companies owned by those companies.
- Investment Funds: According to the UAE CT system, international and UAE funds that are arranged as unincorporated partnerships are considered to have fiscal transparency. This implies that the fund investor is treated as though they had made a direct investment in the underlying assets. As a result, such an unincorporated partnership won’t be subject to stand-alone taxation. The UAE CT system also plans to treat international money with unincorporated partnership structures as having fiscal transparency. Additionally, regulated investment funds and Real Estate Investment Trusts may apply to the Federal Tax Authority (FTA) if they meet the requirements to be excluded from UAE corporation tax.
- Charities and Public Benefit Organizations: The proposed UAE Corporate Tax, charities and public benefit organizations are only excluded if the finance ministry has granted their application. Religious groups are only exempt from the planned UAE Corporate Tax if the Ministry of Finance has permitted them to do so.
- Free Zones: It is suggested that “Free Zone Persons,” or companies and branches established in free zones, be subject to UAE corporate tax and must file C T Returns annually. Free Zone Persons (FZP) will, however, be taxable at zero percent, keeping in mind the tax-free regime provided by the free zones, provided that they maintain sufficient substance and adhere to all regulatory criteria. The Free Zone Persons must comply with all legal criteria before this can happen. Despite this, FZP retains the right to arbitrarily decide to be subject to the normal C T rate at any time.
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