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UAE law: Are you exempt from paying corporate tax?

The Emirates will introduce corporate tax at nine per cent from June 1, 2023

The persons can be categorised into taxable, exempt and out-of-scope persons, which can be further be classified into juridical or natural persons.

A juridical person is an entity established or otherwise recognized under the laws and regulations of the UAE or under the laws of a foreign jurisdiction that has a legal personality separate from its founders, owners and directors. Examples of UAE domestic juridical persons include a limited liability company, a foundation, an ‘onshore’ trust, a public or private joint stock company, and other entities that have separate legal personalities under the applicable UAE ‘mainland’ legislation or Free Zone regulations. The UAE branches of a domestic or a foreign juridical person are regarded as an extension of their “parent” or “head office” and, therefore, are not considered separate juridical persons.

The term natural person in corporate tax law means an individual. Natural persons can form a sole proprietorship or civil company for certain business activities. For CT purposes, these entities are treated as the natural person or persons owning them.

Any person who is not taxable or exempt is considered out of the scope of the law. Like, a non-resident person who is not managed and controlled from the UAE, or has not any permanent establishment in the UAE, or does not earn any UAE-sourced income or does not have any nexus in the UAE to drive UAE-sourced income is out of the scope of the UAE CT law.

Article 4 of the law covers exempt persons, which says that government entities, government-controlled entities, persons engaged in an extractive business, persons engaged in a non-extractive natural resource business, qualifying public benefit entities, qualifying investment funds, pension funds and social security funds are exempt from the law subject to fulfilling the conditions as given in the respective articles of the law. Any juridical person fully owned by the government entity, government-controlled entity, qualifying investment fund, pension fund or social security fund is exempt from CT upon fulfilment of the conditions.

The law requires that corporate tax (CT) shall be imposed on the taxable person, and the taxable person shall be either a resident person or a non-resident person.

The resident taxable persons include (i) the juridical person incorporated in the UAE, including free zones businesses, (ii) the juridical person established out of the UAE but controlled and managed from the UAE, (iii) any natural person who conducts a business or business activity in the UAE and (iv) any other person determined in a decision issued by the Cabinet. The non-resident taxable persons comprise (i) the permanent establishment (PE) of the non-resident person in the UAE, (ii) UAE-sourced income of the non-resident person, and (iii) nexus in the UAE of the non-resident person to drive UAE-sourced income. Based on this definition, all limited liabilities companies, public shareholding companies, public joint stock companies, sole establishments, civil companies etc., fall under the definition of taxable persons, and they are subject to tax accordingly.

The juridical taxable persons, established in the UAE or established out of the UAE but controlled and managed from UAE, are subject to CT on their worldwide taxable income, while a natural resident who is doing business in the UAE is liable to pay CT on their taxable income related to the UAE business, even the business earns income out of UAE. The non-resident taxable person is liable to pay tax on the taxable income attributable to the PE, UAE-sourced taxable income not attributable to the PE and taxable income that is attributable to the nexus of the non-resident person in the UAE.

Based on the above scope of the law, the persons are required to asses their position and plan the implementation of CT accordingly.

Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above is not an official but a personal opinion of the writer based on the UAE corporate tax law. For any queries/clarifications, please write to him at compliance@kresscooper.com