The UAE implemented a corporate tax starting from June 1, 2023. This tax is levied on the adjusted accounting net profits of businesses exceeding 375,000 AED. A single corporate tax return will suffice per fiscal year, eliminating the need for advance tax payments or provisional tax returns.
The Ministry of Finance outlined the corporate tax rates as follows:
- 0% for taxable income up to AED 375,000
- 9% for taxable income surpassing AED 375,000
Now let’s understand some of the terms used in corporate tax in UAE
1. Who qualifies as a Resident Person?
For Corporate Tax purposes, entities such as companies and other juridical persons incorporated or recognized under the laws of the UAE are automatically deemed Resident Persons. This encompasses juridical persons formed in the UAE under mainland legislation or applicable Free Zone regulations and those established by specific statutes (e.g., special decrees). Additionally, foreign companies and juridical persons may be treated as Resident Persons if they are effectively managed and controlled in the UAE. This determination is based on the entity’s specific circumstances, with a key consideration being the location where substantive key management and commercial decisions are made. Natural persons are subject to Corporate Tax as Resident Persons on income from both domestic and foreign sources, but only if such income is derived from a Business or Business Activity conducted within the UAE. Other income earned by natural persons falls outside the scope of Corporate Tax.
2. Who is considered a Non-Resident Person?
- A non-resident person may be liable for Corporate Tax in specific scenarios, including two applicable to natural persons. The first scenario is when a natural person possesses a Permanent Establishment in the UAE, with a turnover exceeding AED 1,000,000 in a calendar year. The second case involves deriving State-Sourced Income according to the Corporate Tax Law.
- For juridical persons incorporated outside the UAE and not effectively managed within, Corporate Tax applies in three instances. This includes having a Permanent Establishment, deriving State-Sourced Income, or having a nexus in the UAE, earning income from Immovable Property. Non-resident juridical persons meeting these criteria must register for Corporate Tax to avoid compliance delays and penalties.
- Corporate Tax registration is unnecessary for non-resident juridical persons deriving only State-Sourced Income without a Permanent Establishment or nexus in the UAE.
- Additionally, a non-resident natural person must register for Corporate Tax and obtain a TRN if their turnover attributable to a Permanent Establishment in the UAE exceeds AED 1,000,000 within a calendar year.
3. What constitutes a Permanent Establishment?
The concept of Permanent Establishment is a crucial principle in international tax law employed in corporate tax regimes worldwide. In the UAE Corporate Tax Law, Permanent Establishment determines whether and when a foreign entity has established a sufficient presence in the UAE, making its business profits subject to Corporate Tax. The definition aligns with Article 5 of the OECD Model Tax Convention on Income and Capital and the UAE’s position under the Multilateral Instrument to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting. Foreign entities can refer to the relevant Commentary of Article 5 of the OECD Model Tax Convention and consider any provisions in bilateral tax agreements between the country of residence of the Non-Resident Person and the UAE when assessing the presence of a Permanent Establishment.
4. What are Tax Groups, and under what conditions can they be established?
Two or more Taxable Persons, meeting specific criteria (outlined below), can seek to establish a “Tax Group,” treating them collectively as a single Taxable Person for Corporate Tax purposes.
To create a Tax Group, both the main company and its subsidiaries must be legal entities, share the same Financial Year, and prepare financial statements using identical accounting standards.
Moreover, the parent company, to establish a Tax Group, must:
- Possess a minimum of 95% of the share capital of the subsidiary.
- Control at least 95% of the voting rights in the subsidiary.
- Be entitled to a minimum of 95% of the subsidiary’s profits and net assets.
- Ownership, rights, and entitlement can be held either directly or indirectly through subsidiaries. Still, it’s crucial to note that a Tax Group cannot incorporate an Exempt Person or Qualifying Free Zone Person.
How is the Taxable Income of a Tax Group computed?
To ascertain the Taxable Income of a Tax Group, the parent company needs to prepare consolidated financial accounts covering each subsidiary within the Tax Group for the relevant Tax Period. For the purpose of calculating the Taxable Income of the Tax Group, transactions between the parent company and each group member, as well as transactions among the group members, would be eliminated.
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