Various Ministerial Decisions issued by Ministry of Finance during week ending 27th May 23. Here are the key highlights of these Ministerial Decisions:
(1) Ministerial Decision No. 114 of 2023 on Accounting Standards and Method for the purposes of Financial Decree Law No. 47 of 2022 on the Taxation of Corporations and Businesses.
The said Decision is on Applicability of Accounting Methods and on Accounting Standards which states as follows:-
- Cash Basis of Accounting can be followed if the Revenue during the relevant Tax Period does not exceed AED 3 Mn or under exceptional circumstances
- In case of Taxable income of entities forming Tax group, consolidated financial statement should be prepared by eliminating the inter-group transactions.
- Taxable person has to prepare financial statement by applying IFRS.
- Further, the said decision gives relief to small and medium enterprises having Revenue of less than AED 50 Mn during the relevant tax period to apply “IFRS for SMEs”.
(2) Ministerial Decision No. 115 of 2023 on Private Pension Funds and Private Social Security Funds for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses
This Decision highlights certain conditions that are to be complied with by Private pension funds and Private social security funds, to be eligible for corporate tax exemption.
- The decision states the sources of income that would be eligible for Corporate Tax exemption and the threshold (15%) for the value of contributions to the pension plan that are deductible for Corporate Tax purposes.
- Both types of funds must have an auditor to ensure compliance with the decision and the said auditor must annually confirm the compliance with the decision and report any violation of law to the Authority.
(3) Ministerial Decision No. 116 of 2023 on the Participation Exemption for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Business
This decision deals with Participation Exemption conditions under UAE CT Law. It’s a very exhaustive decision and lays down clarifications on each of 3 conditions of being participating interest.
- Ownership Interest to include Ordinary Equity Shares, Preference Shares, Redeemable Shares, Member / Partner interests, etc. However, these interests should be classified as equity interest as per Accounting Standard followed.
- All types of ownership interests to be aggregated for computing the 5% threshold – this would even include interests held by members of Qualifying Group.
- Even income from a debt instrument, if classified as equity interest as per Accounting Standard followed would be treated as income from Participating interest.
- The entity in which ownership interest is held should be subject to a minimum tax rate of 9% in its home country. There are conditions provided to satisfy subject to tax conditions and in some cases, there is a provision to compute effective tax rate and even payments like Zakat could qualify provided effective tax rates is reaching to 9% level. These elaborations are bit detailed, and one would need to apply with caution.
- If the acquisition cost of ownership interest is equal to or more than AED 4 Mn, the minimum ownership requirement will be considered satisfied for claiming Participation Exemption. Thus, then only period of holding and subject to tax conditions needs to be met.
(4) Ministerial Decision No. 120 of 2023 on Transitional Rules for Corporate Tax, providing guidelines for adjusting a Taxable Person’s opening balance sheet under the Corporate Tax Law.
The said decision aims to ensure a fair and transparent approach for assets and liabilities held prior to the implementation of the new Corporate Tax regime.
- This ensures a fair tax calculation that considers the ownership or value history of certain assets and liabilities and only taxes such gains on such assets and liabilities that are attributed to periods after the Corporate Tax Law is effective. The decision applies to certain assets and liabilities, such as immovable property, intangible assets, financial assets and financial liabilities, held by businesses before the Corporate Tax Law comes into effect.
- While filing the First Tax Return, businesses can elect to make such adjustment to the taxable income on disposal of such assets and liabilities based on specific rules. Once the selection is done it will be considered as permanent and cannot be changed unless there are extraordinary circumstances, and the Authority approves the changes.
- There is further flexibility for the real estate sector where companies with immovable property recorded on a historical cost basis have an option to select the basis of the relief, using either a time apportionment method or valuation method, thereby allowing groups to determine the most favourable outcome for them on immovable property on an asset-by-asset basis.
Thus, this actually neutralizes the tax treatment for the specified assets, whether one prefers to readjust the valuation or continue with the existing accounting practices. This is very welcome approach and provides desired relief to tax payers.
So, we continue our journey of awaiting for details to be released week after week, while the close of the month is only few days away, the main decisions on “Qualifying income” and guidance on Transfer pricing along with some safe harbour thresholds are still awaited amongst other details.