Decoding the New Corporate Tax Landscape in the UAE

Decoding the New Corporate Tax Landscape in the UAE

by Varun Kalsi, Director, Global Head of Legal and Business & Family Solutions, and Nikita Sayam, Assistant Vice President, Legal and Business & Family Solutions, Lighthouse Canton‍

The United Arab Emirates’ (UAE) Corporate Tax (CT) on business income has come into effect, marking a significant shift in its tax policy. The introduction of the CT is propelled by the UAE’s part in the Organisation for Economic Cooperation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) project. Over 140 countries and jurisdictions, including the UAE, are working together on the OECD/G20 Inclusive Framework on BEPS. The UAE’s introduction of the CT law further strengthens its position as a premier global center for business and investment and ensures a more transparent tax environment.

Considerations for Family Businesses

With the CT law in effect, family-owned businesses and enterprises should familiarise themselves with the features of the law to ensure the readiness of their dealings in the UAE. This is particularly important as the UAE CT will be applicable across all Emirates on the income or profit of corporations and other businesses. There will continue to be an exception for certain activities and persons as mentioned in the key features.‍

Demystifying the UAE Corporate Tax

The CT is a form of direct tax levied on the taxable income of corporations, individuals, and other entities from their business activities. The UAE enacted Federal Decree-Law No. (47) of 2022 concerning the Taxation of Corporations and Businesses on December 9, 2022 (Law). CT would apply from financial years that begin on or after June 1, 2023. For instance, a business operating on a financial year from January 1, 2023, to December 31, 2023, will be subject to CT from January 1, 2024, i.e., the commencement of its first financial year after June 1, 2023.

UAE Corporate Tax- Key Features

The following are the key features of the UAE corporate tax. Please note that some concepts under the CT regime should be necessarily read with the relevant Cabinet or Ministerial Decisions.‍

II.Who will be taxed?

Both UAE residents and non-resident entities and persons, subject to specific conditions and exemptions will be required to pay the CT on income exceeding AED 375,000. This will include the following: ‍

UAE Residents:

Juridical Person/entity which is

• Separate legal entity in the UAE (examples: UAE LLC, foundation, public/ private company);

• Separate legal entity in a foreign jurisdiction effectively managed and controlled from UAE (by key decision makers such as directors resident in UAE); and

• Qualifying free zone person with respect to portion of its income that is not qualifying income as specified under the Law.

Individuals who conduct any business or business activity in the UAE, where:

• Turnover from business/ business activity exceeds AED 1,000,000

• AND

• Taxable income therefrom exceeds AED 375,000

Any income attributable to wages, personal investment income, and real estate investment income of resident individuals will not be considered as business*/ business activity** and therefore, not subject to CT.

*Business: Any activity conducted:

• Regularly,

• On an ongoing and independent basis

• By any person (juridical or natural)

• In any location (industrial, commercial, agricultural, vocational, professional, service or excavation activities)

• Or any other activity related to the use of tangible or intangible properties.

**Business Activity: Any transaction, activity, or series thereof conducted by a person in the course of their Business.

‍Non Resident Persons

• Having a permanent establishment in the UAE (as specified under the Law); or

• Deriving income sourced from the UAE; or

• Being a juridical person, who has a nexus in UAE, i.e., earns income from an immovable property in the UAE.

Typically, a permanent establishment is created when a foreign entity is seen to be having operations or business in another country, the other country being UAE in this instance, through natural persons (or an entity) in the UAE and income is generated in the UAE through such operations or business activity. Alternatively, a permanent establishment can also be deemed to be in the UAE where the effective control and management of a foreign entity is from the UAE, i.e., through UAE residents.

III.Certain exemptions to levy of UAE CT

Exempt Income

• Dividends and other profit distributions received from a UAE resident juridical person

• If one is engaged in the business of extracting natural resources in UAE, and income is generated therefrom

• Dividends, other profit distributions, capital gains, and any other income from a participating interest^

^Participating Interest:

• At least 5% interest in the shares or capital of a juridical person;

• At least 12 uninterrupted months of ownership (or the intention to hold) of the same;

• Participation is subject to CT in home jurisdiction at a rate of not less than 9% (the UAE CT rate);

• Taxable person entitled to receive at least 5% of profits available and at least 5% of liquidation proceeds on cessation of the juridical person;

• Maximum 50% of the direct and indirect assets of the juridical person consist of ownership interests that would not be exempted from CT if they were held directly by the taxable person.

Exempt Persons

• Government entity

• Government-controlled entity

• Persons engaged in extracting natural resources in the UAE

• Entity incorporated in the UAE, wholly owned and controlled by any exempt persons and:

  • Undertakes all or part of the exempt person’s activity; or

  • Is engaged exclusively in holding assets or investing funds for the benefit of the exempt person; or

  • Only carries out activities that are ancillary to those carried out by the exempt person.

• A qualified investment fund, where:

  • The fund or its manager is regulated by a UAE-based or foreign competent authority;

  • Interests in the fund are traded on a recognised stock exchange, or are marketed and made available sufficiently widely to investors;

  • Main purpose of the fund is not to avoid CT.

IV. Some other key concepts under the Law

1. Small Business Relief:

The sunset clause provides that if a taxable person's revenue does not exceed AED 3 Million for a tax period then such person will be deemed not to have derived any taxable income and thus, will not be subject to CT. This tax relief is only valid for tax periods w.e.f. June 1, 2023 to December 31, 2026.‍

2. Unincorporated partnerships:

Unless an application is made to the contrary, an unincorporated partnership will not be considered a taxable person in its own right, and the persons conducting a business through such unincorporated partnership will be treated as individual taxable persons and taxed accordingly. The assets, liabilities, income, and expenditure of the unincorporated partnership will be allocated to each partner in proportion to their distributive share.‍

3. Family Foundations:

A family foundation is an independent legal entity under civil law jurisdictions such as the UAE. The founder contributes his/her assets into the foundation. These assets would belong to the foundation and the founder would be able to ringfence the benefits of the assets with respect to specific beneficiaries (including himself, if required). The foundation’s council manages the assets in accordance with the foundation’s charter and by-laws in support of a charitable, or private cause and for the benefit of beneficiaries, which could be certain individuals or the general public, as the case may be. Thus, a family foundation is often considered to be an appropriate succession planning vehicle so long as it is commensurate with the needs and objectives of a founder.

A family foundation can make an application to be treated as an unincorporated partnership where all the following conditions are met:

• It was established for the benefit of identifiable natural persons, or for the benefit of a public benefit entity, or both.

• Its principal activity is to receive, hold, invest, disburse, or otherwise manage assets or funds associated with savings or investment; and

• the activity conducted by the foundation will not constitute a business or business activity if such activity had been undertaken by the founder or beneficiaries directly, rather than through the foundation. Also, the assets in the foundation had been held directly by the founder but were not used for business/business activity.

Upon approval of the application, the family foundation will not be taxed and the beneficiaries would be seen as directly owning or benefiting from the activities and assets of the family foundation. This is key, as any personal investment income of the beneficiaries arising from the family foundation will not be considered as business/ business activity and therefore, not be subject to CT.

V. Are there any anti-avoidance rules under the Law?

1. The Law provides for general anti-abuse rules (GAAR) which apply where it can be reasonably concluded by the federal tax authority (“Authority”) (having regard to all relevant circumstances) that:

• The entering into or carrying out of a transaction or arrangement (or part thereof) is not for a valid commercial or other non-fiscal reason which reflects economic reality; and

• The main purpose or one of the main purposes of a transaction or arrangement (or part thereof) is to obtain a CT advantage, that is not consistent with the intention or purpose of the Law.

2. CT advantage includes (but is not limited to):

1. A refund or increased refund of CT;

2. Avoidance or reduction of CT payable;

3. Deferral of payment of CT or advancement of a refund of CT; or

4. Aoidance of an obligation to deduct or account for CT.

3. Where the GAAR apply, the Authority may decide that one or more specified CT advantages obtained as a result of the transaction or arrangement are to be counteracted or adjusted. An assessment must be issued by the Authority giving effect to its decision, and the authority would need to demonstrate that its decision is just and reasonable.

‍4. The authority’s assessment may include:

1. Allowing/ disallowing any exemption, deduction or relief in calculating the taxable income or CT payable;

2. Allocating any such exemption, deduction or relief, to any other persons;

3. Re-characterising the nature of any payment under the Law; or

4. Disregarding the effect that would otherwise result from the application of other provisions of the Law, and make compensating adjustments to the CT liability of any other person affected by the decision.

Adapting to the New Norm:

This landmark tax reform in the UAE will impact numerous businesses across various sectors, potentially influencing the profit margins of many medium-sized enterprises. They will need to implement systems and procedures for monitoring taxable operations, keep precise records, and submit accurate tax filings. This effort might necessitate extra manpower and knowledge, leading to increased compliance costs.

There could be some solutions to reduce the impact of the new tax regime on businesses.‍

The obvious way forward would be not meeting the specified applicability threshold, or qualifying for legal exemptions. For example, there are certain exemptions that offer relief to specific sectors and entities. Those involved in the extraction of natural resources in the UAE and ancillary businesses as well as qualified investment funds meeting the pre-defined criteria may qualify for exemption.‍

Management and directorship structures should also be examined and revisited. A foreign entity, such as a private investment company (PIC), may also consider reviewing its management structure to ensure that it is not predominantly led, managed, controlled, or influenced by directors residing in a particular location to avoid the perception of being exclusively managed or controlled from such jurisdiction.‍

Disclaimer: This blog is intended for general awareness and does not constitute legal or tax advice. The specific impact of the CT on your business depends on various factors and should be assessed accordingly. Kindly consult a qualified professional for personalized guidance tailored to your unique situation.