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UAE issues explanatory guide including exemptions, clarifications for corporate tax

Clause-by-clause guide is meant to assist readers with gathering the government’s intention and aid in interpreting the law

The UAE’s Ministry of Finance has issued an Explanatory Guide for Federal Decree-Law No 47 of 2022 on Taxation of Corporations and Businesses, which provides the legislative basis for imposing a federal tax on corporations' and business profits effective for financial years starting on or after June 1, 2023.

The guide provides an article-by-article explanation of the meaning and intended effect of the provisions of the Corporate Tax Law and its implementing decisions. The Guide may be used in interpreting the Corporate Tax Law and how particular provisions may need to be applied.

Younis Haji Al Khouri, undersecretary of the Ministry of Finance, said: “The Ministry is working to provide clarity and guidance to those who are or may be subject to UAE's Corporate Tax, so they can understand the provisions of the law and why it is enacted. The Explanatory Guide reflects our continued commitment to ensuring taxable persons are supported and provided with information ahead of the law's entry into effect."

Minimise burden

It includes explanations of the various features of the UAE's Corporate Tax regime which would encourage business activity and minimise the compliance burden for taxable persons.

Foremost, the application of a zero per cent Corporate Tax rate for taxable income up to Dh375,000, and a zero per cent Corporate Tax rate for qualifying Free Zone persons, in recognition of the importance of Free Zones to the development of the UAE historically.

In addition, the Corporate Tax regime provides financial and administrative relief to support start-ups and small businesses. Businesses qualifying for such relief will not pay any tax and avail simplified filing requirements where their turnover is up to Dh3 million.

The guide describes other features, including a zero per cent withholding tax on cross-border and domestic payments; exemptions from Corporate Tax for foreign branch profits, dividends and capital gains earned from domestic and foreign shareholdings where the relevant conditions are met; and foreign tax credits for foreign sourced income that is not exempt to avoid double taxation.

Clause-by-clause clarifications

Nirav Rajput, senior counsel, Aurifer Middle East Tax, said this clause-by-clause guide was not issued previously for Value Added Tax (VAT), Economic Substance Regulations (ESR) or Excise Tax, which is meant to assist readers with gathering the government’s intention and aid in interpreting the law.

“Broadly, the guide narrates along the lines of the Federal Decree-Law itself issued in October 2022, and the various decisions that were issued thereafter. The scope of the ‘Qualifying Income’ is still anticipated in the coming weeks. Meanwhile the Guide confirms that certain qualifying activities conducted by Free Zone persons are eligible for the zero per cent corporate tax benefit,” he said.

Amongst several nuances, he added the guide clarifies that a ‘resident‘ for CT purposes is not dependent on the ‘legal residency’ concept.

“For example, having an Emirates ID alone does not by itself determine the residency for Corporate Tax. Also, the Guide clarifies that a foreign company is ‘effectively managed or controlled’ in the UAE if the ‘strategic decisions and powers regarding the management of the entity’ are exercised (and not the day-to-day functions) in the UAE. It is also clarified that the 50 per cent restriction for entertainment does not include staff expenditure,” it said.

In addition, it highlights targeted exemptions for certain entities which are subject to Emirate level corporate taxation or considered important to the social fabric of the UAE.

These include government entities, investment funds, pension and social security funds, public benefit organisations and natural resource businesses.

The guide also includes detailed explanation of internationally benchmarked Transfer Pricing documentation requirements and thresholds to ensure a minimal compliance burden on small and medium enterprises. It clarifies the ability to utilise tax losses in future tax periods without a time limitation, as well as the ability to transfer tax losses between tax group companies, where the relevant conditions are met.

This means UAE groups can file and pay their Corporate Tax on a consolidated basis as a single taxable entity to ensure administrative efficiencies and simplicity.

The UAE’s Ministry of Finance also issued the Ministerial Decision No (97) of 2023 on the requirements for maintaining transfer pricing documentation for transparency and fairness in the UAE's tax system.

Under the law, taxpayers must maintain transfer pricing documentation, specifically a master file and a local file, including if they have revenues in a relevant tax period of at least Dh200 million, or they are part of a multinational enterprise group with a total consolidated group revenue of at least Dh3.15 billion in the relevant tax period.

reporters@khaleejtimes.com

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