Public Consultation Paper Summary Corporate Tax UAE

Tax Agent May 18, 2022

Introduction:

Since the United Arab Emirates (UAE) Ministry of Finance announced on January 31, 2022 on the application of the Corporate Tax federal (CT) for corporate profits for financial years beginning on or after June 1, 2023, great efforts have been made to ensure that global best practices are combined with Reducing compliance with the UAE CT regime and a public consultation document on income tax companies in the UAE has been published, acknowledging the importance of consulting businesses and stakeholders for with feedback to make informed decisions. This will help the Ministry of Finance develop the final design and implementation of the corporate tax structure in the UAE so that its impact on business can be understood.

Interested parties and companies can submit their comments via the online submission form. The last date to submit these details will be May 19, 2022. Interested parties can submit their proposals on managing the CT regime, reducing compliance costs and complexity or any other issues. any other subject.

Policy principles and directions:

In order for the UAE to achieve its strategic goals as well as its development and transformation intentions, a corporate tax regime has been proposed with international principles and practices in mind. global best. These principles ensure compliance with modern business practices, certainty, simplicity, neutrality, flexibility, fairness and transparency.

Taxable persons

Natural persons:

When engaging in business or commerce in UAE
Includes sole proprietorships, sole proprietorships and associates most of the non-incorporated partnerships carrying out Activities in UAE
When establishing a business license or license.

Legal entity:

Including foreign legal entities with permanent establishment in UAE
Having income from UAE

Exempt persons

Government, government agencies (federal and state) kingdoms), governmental or related bodies and public organisations;
UAE companies engaged in sovereign or authorized activity listed in Cabinet decision and 100% government owned;
Natural resource extraction and extraction in the United Arab Emirates is taxed at the Uniform level;
Charitable organizations or other public interest organizations listed in the decision of the Cabinet;
Public and private social security (regulatory);
Pension funds;
The investment fund meets the prescribed conditions.

Government and government-owned entities

While conducting business activities on its own or in association with third parties, including those conducted under license business.

Natural resources

Production and exploitation of primary natural resources are oil, water, natural gas andsand and rock deposits.

Charity and public interest organizations

Conduct commercial activities not directly related to the stated purpose;
When revenues and contributions are used for the benefit of those involved in the organization.

Investment funds

Those who do not meet the regulatory requirements.

Free zones

When dealing with mainland UAE

Tax base:

Residents:

COUNTRIES. A legal entity incorporated in the UAE is automatically considered a “resident” for UAE CT purposes. Similarly, any natural person conducting business or trade in the UAE, either on their own behalf or through a non-incorporated partnership, shall also be considered a resident individual for purposes of destination of the UAE’s CT regime. An offshore company can be considered a resident if it is effectively managed and controlled in the UAE. It is practical to determine if an organization is effectively managed and controlled in the United Arab Emirates, but in general one needs to consider where the company’s directors or people are out. Other decisions make important business and management decisions.

UAE residents will be subject to UAE tax on their worldwide income, which for an individual will be limited to income derived from their business conducted in the UAE. However, certain income earned abroad will be exempt from the CT, including income from foreign affiliates and eligible foreigners. More details on these exemptions are provided in Section 5 of this document. Where income earned from abroad is not exempt, income taxes paid in the foreign jurisdiction can be taken as a credit against the CT payable in the UAE on the relevant income to prevent double taxation.

Nonresidents

Nonresidents will be subject to UAE CT on:

Taxable income from their Permanent Establishment in the UAE; and
Income which is sourced in the UAE.

Permanent Establishment (PE)

The concept of PE is an important principle of international tax law used in CT regimes across the world. The primary goal of the PE concept is to determine whether a company has established an adequate presence in a foreign country to justify direct taxation on the company’s business profits in that country. In general, a country has the right to tax the business profits of a foreign company only if that company has a PE in that country. The concept of PE under the CT regime proposed by the UAE has been designed based on the OECD model tax treaty. Article 5 of the OECD Model Tax Convention sets forth internationally accepted principles for determining what constitutes a PE, which will be the basis for determining PE under the UAE PE regime.

This approach allows foreign companies to use the detailed OECD Article 5 commentary when assessing whether they have PE in the UAE, and the results of this assessment should often be relevant to the situation. there is a double taxation treaty between the foreign company’s country and the UAE (since UAE double taxation treaties are often based on the OECD model tax treaty). The operating threshold that will trigger ES for an offshore company in the UAE will be determined by the following two key tests:

Criterion for fixed place of business – A foreign company will have a PE in the UAE if it has a “fixed place” in the UAE through which the foreign company’s operations are carried out in whole or in part. A permanent place of business shall include a management location, a branch, an office (including a temporary field office or an employee’s home office), factory, production facility, real estate and construction site where activities are carried out for more than 6 (six) months. Equipment and structures used in the exploration of natural resources, as well as mines, oil or gas wells, quarries and other places of extraction of natural resources will also be considered PE. No PE may arise if activities conducted through a “fixed site” in the UAE are of a preparatory or ancillary nature. In general, preparatory or ancillary activities are those performed to prepare or support the foreign company’s more substantial business activities. Examples of preparatory and ancillary activities include limited promotional and marketing activities, conducting market research, and attending seminars or conferences. A permanent or permanent place in the UAE may also not be considered a PE if it is used solely for the storage, display or delivery of goods by a foreign company or to hold a warehouse of goods for the sole purpose of especially giving to others.
Dependent agent check In the absence of a “fixed base” in the UAE – The operations of a “dependent agent” in the UAE can still generate PE for a foreign company in the UAE. The “Dependent agent test” can be met when a business traveler or person based in the UAE is representing a foreign company in the UAE and has and regularly exercises authority to enter into contracts on behalf of a foreign company. for foreign companies. The company. This includes situations where the person negotiates or enters into a contract on behalf of a foreign company in the UAE without substantial interference from the non-resident company. Manufacturing expertise will not arise when a person conducts a foreign company’s business in the UAE in the ordinary course of his or her own business. This so-called independent agent exclusion will only apply when the person is not working exclusively for the foreign company and is truly economically and legally independent of the foreign company. The same PE rules and principles will apply to determine if a Free Area Person has a PE in mainland UAE.
Investment Management Exemption – Given the UAE’s position as a leading investment and wealth management hub, the UAE CT Mode will enable UAE managed investment managers to provide services discretionary investment management for overseas clients without activating UAE ES for foreign investors or foreigners. investment funds. This waiver will be subject to the same conditions as similar schemes in major financial centres.

UAE-sourced income:

UAE-sourced income earned by a foreigner without PE in the UAE will be subject to withholding tax at 0% (zero percent).
The UAE CT scheme will have specific regulations and guidelines for determining whether income is sourced in the UAE. However, income will generally be deemed to be from the UAE if the income is earned from a resident of the UAE, if the payment is distributed to the UAE Manufacturing Specialist by a foreign company, or if the income is from activities or contracts performed. in the UAE. , property located in the UAE or rights used for economic purposes in the UAE.
The same principles will apply to determine whether a Free Area Person has income from a source within the UAE mainland.

Calculating Taxable Income:

To reduce complexity and compliance costs, the UAE CT regime recommends using an accounting net profit (or loss) as shown in a business’ financial statements as the starting point for determining its taxable income. Using accounting standards provides a common definition of income, helps reduce compliance costs, and provides a basis for compliance with international standards. Aligning the calculation of taxable income with accounting profit (where possible and appropriate) will limit tax differences and save businesses from having to maintain two sets of records: one for financial reporting purposes main and the other for CT purposes. Financial statements must be prepared in accordance with the accounting standards and principles accepted in the UAE and companies will use their own accounting period as the fiscal (annual) period. When a company does not have a financial accounting period, its default financial period will be the calendar year. While International Financial Reporting Standards are commonly used in the UAE, enabling other financial reporting standards and mechanisms to determine taxable income to be taken into account and reducing compliance costs for certain taxpayers (e.g. startups and small businesses).

Treatment of unrealized gains and losses Unrealized gains or losses arise when an asset or liability held by an enterprise has changed in value but no transaction giving rise to an unrealized profit or loss has taken place. For example, when a commercial property appreciates in value, but the property is not sold, no profit will be realized. These gains or losses may be recognized for accounting purposes even if they have not been realized. The UAE CT will have specific rules for determining whether unrealized gains or losses should be taken into account when calculating taxable income. These relate to profit or loss related to capital items or income items. Capital items are items that have a lasting effect on the business. These include assets, such as machinery, and long-term liabilities, such as loans to purchase property. Unrealized capital gains or losses of capital items are not included in taxable income. Revenue items are items that have a short-term effect on the business. Production assets are items that are not capital items and can include items such as goods sold by a business.

Unrealized capital gains or losses on income items will need to be taken into account when calculating taxable income.

Exempt income:

UAE resident companies will be subject to UAE corporation tax on their worldwide income, including capital gains. However, in order to avoid double taxation cases and to recognize the UAE’s position as a leading international business center and the position it holds, the UAE’s CT scheme will waive some forms of tax collection. tax import. The main exemptions from UAE CT relate to income that UAE companies derive from investments in other companies and from activities carried out outside of the UAE through subsidiaries or affiliates foreign. In addition, all national dividends, including those from the UAE Free Zone. In addition, there is an exemption for capital gains from the transfer of one’s shares in the free zone. For foreign branches, the exemption or reduction of profits can only be made when the foreign jurisdiction has sufficient tax rates.

Non-resident income earned through international transport by means of operation/lease of ships or aircraft may only be exempt if there is reciprocal tax treatment in a foreign jurisdiction that has relate to.

Expense deduction limit:

Net interest expenses before EBITDA Related party payments made to a person in the free zone are exempt

Interest related party if there is a valid business reason to receive a loan 50% entertainment incurred expenses received from customers, shareholders, suppliers and other business partners

Interest paid to the corporation Most administrative sanctions, VAT can be recovered, donated to the competent authority.

Loss:

Companies will be able to set aside a loss incurred in a period up to a maximum of 75% of the taxable income of future periods of each of these future periods. In the absence of a change in ownership greater than 50%, these losses can be carried forward indefinitely to be offset. However, this does not happen when companies are listed on an accredited stock exchange.

However, losses incurred before the corporate tax regime came into force or losses incurred before a person became a taxpayer under the UAE corporate tax regime, losses arising from exempt income-generating activities or assets or losses incurred unrelated to activities carried out on land by a person in a free zone are not eligible for the exemption.

Group:

Where the parent company of a group of companies residing in the UAE owns at least 95% of the share capital as well as the voting rights of its subsidiaries, the group companies may form a tax group to be considered a single individual for corporate tax purposes for the same fiscal year. All that is required is for companies forming a tax corporation to sign a notice payable to AFC, after which the parent company will be responsible for managing and paying corporate taxes for the whole group. In addition, in the event of an intra-group restructuring or transfer, the assets and liabilities must be transferred at net book value of taxes and must be kept in the same group for a maximum period of time. at least three years. However, in the event of a breach of this condition, the gain/loss incurred on the initial assignment must be added/deducted on the assignor’s tax return for the relevant tax period.

Transfer Valuation:

Related Parties – For purposes of the UAE’s CT regime, a related party means two or more persons who are related or related to the degree private, or by birth, adoption, marriage or guardianship and a legal entity holds, directly or indirectly, and alone or together, 50% or more of the shares or control of the entity. It will also be referred to as a related party transaction in which two or more legal entities directly or indirectly and alone or jointly own or control 50% of the shares of each party.
Connected persons – In addition to related parties, related persons are natural persons who directly or indirectly hold shares or control the subject of tax. This also includes a director, officer or partner of a taxable person.
Arm’s length principle – All transactions within the transfer pricing jurisdiction must adhere to the transfer pricing rules and arm length guidelines detailed in the Transfer Pricing Guidelines of OECD and also sends transfer pricing information in the event the arm’s length price exceeds a certain threshold in the relevant tax period.

Corporate tax rate and calculation:

The minimum tax rate is zero and the maximum tax rate is determined based on whether the total taxable income is less than or above 375,000 AED respectively. However, multinationals that are subject to the OECD’s profit sharing and base erosion law, Pillar 2 of the BEPS 2.0 framework, will enjoy variable rates. Taxable income is calculated after making specific adjustments or exceptions to net accounting profit and tax losses, which can be carried forward to subsequent tax years and deducted from income. taxable for the relevant year.

Developments in international taxation:

UAE proposes to incorporate the second pillar proposals into the corporate tax regime, as work is underway with other members of the inclusive framework level.

The Federal Revenue Agency (FTA) will be the responsible and regulatory body for the enforcement, collection and administration of corporate taxes in the UAE. All businesses will be required to file their annual tax returns electronically. The payment and declaration of corporate tax must be made within nine months of the tax period and according to the principle of self-assessment.

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