The UAE Ministry of Finance (MoF) has recently released additional Frequently Asked Questions (FAQs) and a general guide (CTGGCT1) on Corporate Tax. Below are the some of the key highlights-
1. Tax Period: If the Taxable Person does not prepare Financial Statements, Gregorian calendar year (i.e., 1 January – 31 December) shall be considered as their Financial Year. Natural person who are liable to corporate tax shall always have Gregorian calendar year (i.e., 1 January – 31 December) as their corporate tax period.
2. Unrealised gains and losses- Taxable Persons are required to include any realised or unrealised gains and losses reported in the Financial Statements in the calculation of their Taxable Income unless they make the election to use the realisation basis.
- When the election has been made, the Taxable Person must exclude any unrealised gains and losses while computing their Taxable Income. Upon realisation of the asset or liability, the Taxable Person will include such amounts that were not previously taken into account for Corporate Tax purposes. Realisation includes selling or disposing of the asset or liability, transferring it, settling it, or writing it off in accordance with the accounting standards applied by the Taxable Person.
- The decision to elect for the realisation basis must be made by the Taxable Person during their first Tax Period, and will be irrevocable except under exceptional circumstances.
- If the Taxable Person does not make the election to apply the realisation basis in their first Tax Period, then this will be considered an irrevocable election.
3. Expenditure incurred for Taxable and Exempt income- If expenditure is incurred for deriving both Taxable Income and Exempt Income then such expenditure must be apportioned, so that only the proportion of expenditure incurred wholly and exclusively for deriving Taxable Income will be deductible. If the proportion is not identifiable, then an appropriate proportion can be deducted which is determined on a ‘fair and reasonable’ basis.
4. Record keeping: – Taxable Persons are required to maintain records and documentation to support the information provided in a Tax Return or in any other document submitted to the Federal Tax Authority (FTA). Examples of specific documents which might be kept include but are not limited to: –
- Bank statements;
- Loan or financing documentation;
- Sale and purchase ledgers;
- Invoices or other records of daily earnings, such as till rolls;
- Order records and delivery notes; and
- Other relevant business correspondence.
There is no requirement that these documents are maintained in their original format and it may be possible to keep them in an electronically.
– Tax Returns and payments: -Delay in submission of Tax Return or a delay in making a payment of Corporate Tax Payable will result in a penalty of:
- AED 500 for each month of delay, or part thereof, for the first twelve months.
- AED 1,000 for each month of delay, or part thereof, from the thirteenth month onwards.
– Required records and other information: – Failure of a Taxable Person to keep the required records and other information will result in following penalties:
- AED 10,000 for each violation.
- ii. AED 20,000 in each case of repeated violation within 24 months from the date of the last violation.
6. Wholesale Distribution of goods or material shall be considered as Qualifying activity- Qualifying Free Zone Persons can benefit from the 0% Corporate Tax rate on income derived from the wholesale distribution of goods or materials (i.e., not to the end consumer) from a Designated Zone to domestic and foreign businesses.
7. Free Zone Corporate Tax regime: – Free Zone Corporate Tax regime for availing benefit of 0% will apply automatically. There is no need to make an election or submit an application to the FTA for electing the same. However, a Free Zone Person that does not want to benefit from the Free Zone Corporate Tax regime can elect to apply the standard UAE Corporate Tax regime (9%).
8. Determination of Adequate substance for Free Zone Entities: – Adequate substance varies depending on the particular circumstances of the Qualifying Free Zone Person and will be assessed on a case-by-case basis. This assessment should take into account the nature and level of activities performed by the Qualifying Free Zone Person, the Qualifying Income it earns and any other relevant facts and circumstances.
9. Mixed-use properties located in a Free Zone: – Where a mixed-use property such as a residential building with retail space generates both Qualifying and non-Qualifying Income, the Qualifying Free Zone Person must attribute and apportion income and expenditure between both types of income, and maintain relevant transfer pricing documentation and other records to support such allocations. Certain income and expenditure may be directly attributable, whereas other income and expenditure may need to be apportioned on a fair and reasonable basis in accordance with the arm’s length principle.
10. CT Registration of Branches:
- Domestic or foreign permanent establishment of a Qualifying Free Zone Person, or
- Free Zone branch of a mainland or foreign juridical person.
There is no requirement for the above branches to separately register and file a UAE Corporate Tax return with the FTA. Branches are required to be registered along with their head office.
11. Access to Double Tax treaties and foreign tax credit in case of Free Zone Persons: – Relief from taxation under a double tax treaty depends on factors like residency and legal/economic connections. Free Zone Persons are considered ‘Resident Persons’ in the UAE for CT, making them potentially eligible for treaty benefits, subject to specific treaty conditions. Each case should be assessed individually. Qualifying Free zone persons can avail exemption or reduction of withholding tax available under the applicable Double Tax Treaty between the UAE and that Foreign country. No Foreign tax credit can be claimed for any remaining foreign withholding tax suffered on its Qualifying Income.
12. CT Registration of each partner (Natural Person) in an Unincorporated Partnership: Natural persons that are engaged in a Business or Business Activity through an Unincorporated Partnership are individually subject to UAE Corporate Tax on their share of the income from the Unincorporated Partnership. Accordingly, where the natural person is a partner in the Unincorporated Partnership, they would be required to register for UAE Corporate Tax purposes and comply with the requirements of the Corporate Tax Law.
13. Release of Provision that was created prior to the effective Corporate Tax Date: – There are no specific adjustments to be made in relation to the release of a provision that was created prior to the effective Corporate Tax date. Therefore, the relevant credit to the Profit &Loss will be subject to Corporate Tax.
14. General Interest Deduction Limitation Rule: – Under the General Interest Deduction Limitation Rule, a Taxable Person may deduct their Net Interest Expenditure up to the greater of the de minimis (AED 12 million) or 30% of their adjusted EBITDA. On this basis, a Taxable Person that has Net Interest Expenditure greater than the de minimis of AED 12 million and has negative adjusted EBITDA for a Tax Period would be able to deduct AED 12 million of Net Interest Expenditure.
15. Exchange rate to be used for UAE Corporate Tax purpose: – For UAE Corporate Tax purposes, all amounts must be converted to UAE Dirhams based on the applicable exchange rate set by the Central Bank of the UAE at the time the foreign currency transaction is to be translated into the national currency. FTA will prescribe the method of conversion in due course
16. Natural person conducting Multiple Businesses: – A natural person who conducts multiple taxable Businesses will be considered as one single Taxable Person for UAE Corporate Tax purpose irrespective of how many taxable Businesses or Business Activities he/she undertakes. This means that each natural person should register for Corporate Tax once and prepare a single Corporate Tax Return, which includes the income and expenses from all of their taxable businesses.
17. Registered persons are required to file UAE Corporate Tax Return: – As long as a Taxable Person is registered, they are required to file a Corporate Tax Return, irrespective of the level of income or the status of the company. However, Deregistered Persons are not required to file a Corporate Tax Return.
18. Filing CT return in cases of Losses: – Taxable Persons are required to file a Corporate Tax Return, irrespective of whether they have made a profit or loss. Taxable Persons with Tax Losses are required to file Corporate Tax Return in order to ensure that these losses can be carried forward and used to reduce Taxable Income of future years.
19. Individual investing in multiple Real Estate and generating rental income above AED 1 million: –Individual investing in multiple Real Estate and generating rental income above AED 1 million will qualify for exclusion for Corporate Tax purposes, provided it is not conducted, or required to be conducted through a Licence.
20. Free Zone CT regime conditions apply to all Free Zone and QFZPs: The conditions of the Free Zone Corporate Tax regime are set under the Corporate Tax Law and apply uniformly across all Free Zones in the UAE. This means that the conditions for being a Qualifying Free Zone Person and benefiting from the Free Zone Corporate Tax regime are the same, irrespective of the Free Zone in which the Free Zone Person is established or registered.
21. Free Zone entities be subject to the global minimum tax (OECD, BEPS Pillar 2) rules- Qualifying Free Zone entities that are part of a large multinational group are expected to be subject to the Pillar Two global minimum tax rules once these rules have been implemented.
22. Election to be made for specific provisions of CT law: – A taxpayer may need to make elections or applications to implement specific provisions of the UAE CT Law. Elections has to be made for the following: –
- Small Business Relief
- ii. Exemption of Foreign Permanent Establishment income
- iii. Qualifying Free Zone Person being subject to General Corporate Tax rate (9%)
- iv. Business restructuring relief
23. Applications which require FTA’s approval: – Unlike elections, applications which require FTA’s approval are given below:
- Exemption from CT
- ii. Treating an Unincorporated Partnership as a single Taxable Person
- iii. Requesting refunds from the FTA,
- iv. Forming tax groups