Ministry of Finance launches public consultation on proposed corporate tax regime
The UAE Ministry of Finance announced a public consultation on 28 April 2022 on the proposed corporate tax (CT) regime in recognition of the importance of consultation with the business community and other interested stakeholders. Comments and suggestions on the regime may be submitted until 19 May 2022. The public consultation document sets the background and key principles around certain provisions of the proposed CT regime that was announced at the end of January. A 9% federal corporate tax is scheduled to be effective for financial years starting on or after 1 June 2023 (for prior coverage, see the article in the February 2022 issue of Corporate Tax News).
It should be noted that the consultation document does not reflect the final views of the government and is not intended to address all possible aspects of the proposed CT regime.
Some of the key points of the consultation document are as follows:
Taxability and Exemptions
- UAE real estate held through private or family trusts on behalf of beneficiaries of individuals would be outside the scope of UAE CT.
- Unincorporated joint ventures and associations would be taxed only in the hands of the partners or members. In the case of foreign partners, the UAE CT treatment would be aligned with the relevant foreign jurisdiction.
- Six categories of businesses would be exempt from CT, including the government, wholly owned government companies, charities, funds and businesses engaged in the extraction of natural resources. Similar to VAT, only activities carried out in their sovereign capacity by the government and government companies would fall outside the scope of CT. For nonresidents, there is an expected exemption for the operation and lease of ships or aircraft to be used for international transportation.
- The most awaited provision is the treatment of free zones. It has been indicated that free zone companies would not be eligible for tax benefits offered by the free zone if they earn any mainland-sourced income, except for “passive” income earned from mainland UAE.
- Dividends and capital gains on the disposal of shares received by a corporate shareholder from within or outside the UAE would be considered for exemption from CT (subject to the fulfillment of certain conditions), as would foreign branch profits.
- All legally incorporated persons in the UAE would be subject to CT. A foreign company would be deemed to be resident in the UAE if it is effectively managed and controlled in the UAE, with the determination of management and control driven by the presence of directors or other decision-makers of the company.
- The OECD definition of a permanent establishment (PE) would be adopted, i.e., the fixed place of business and dependent agent tests. In brief, a foreign company would be considered to have a PE in the UAE if it has a fixed place in the UAE through which the business of the foreign company is wholly or partly carried on or if the foreign company has business travellers or UAE-based persons who act on its behalf in the UAE and have authority to conclude contracts in the name of foreign company. An exemption to this rule may include investment management firms.
- UAE-source income would be subject to a 0% withholding tax, which would keep the window open for increasing the rate in the future. Withholding tax would also be applicable on income sourced by free zone companies from the UAE mainland.
- UAE resident groups would be permitted to form a tax group if they have 95% common shareholding with the parent company. The adjustment of losses between the members of tax groups would be limited to 75%. There may be a provision to allow the transfer of losses between group companies not forming a tax group subject to certain conditions.
- Transfer pricing provisions would follow the OECD guidelines. Businesses would be required to maintain a master and local file for group company transactions.
- The UAE participates in the OECD Inclusive Framework to implement the Pillar Two proposals and the provisions are expected to be announced in due course.
- It has been confirmed that the introduction of CT would not impact the existing country-by-country reporting requirements.
Calculation of CT and other administrative provisions
- The calculation of taxable income would be relatively simple, with the accounting profit/loss as per financial statements forming the base.
- Certain limitations would be placed on the deduction of expenses to arrive at taxable income for CT purposes. For example, the amount of corporate interest expense that could be deducted would be limited to 30% of a business’ earnings before interest, tax, depreciation and amortization (EBIDTA), as adjusted for CT purposes, subject to certain exceptions from the cap. Penalties would apply for noncompliance.
- A business would be permitted to offset losses incurred in one period against taxable income in future periods up to a maximum of 75% of taxable income, with no restriction on the time period for which the losses could be carried forward if the shareholders of the business do not change.
- The filing and payment of CT is expected to be nine months from the end of the financial year.
- There seems to be no mandatory requirement for the auditing of financial statements except for free zone entities that claim an exemption from CT.
The release of the public consultation document gives business some grounds to evaluate the impact of the new CT regime on their business. Businesses should consider the impact of CT on their activities and make representations through the public consultation forms.