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Navigating Your First UAE Corporate Tax Return: A Few Critical Considerations
Ravishanker, Ravishanker V, Director - Taxation, Kreston Menon

Unrealised Gains and Losses: The Realisation Basis Election

A critical one-time choice in the first CT return is whether to elect the “realisation basis” for unrealised gains and losses. Under normal accrual accounting, certain assets or liabilities can have unrealised gains or losses (for example, a rise in value of an investment property or securities portfolio) that are recorded in profit before any actual sale or settlement. By default, such unrealised gains would be included in accounting income and thus taxable. The realisation basis election allows a company to defer tax on unrealised gains and losses until they are actually realised.

This election is only available in the first tax period, and once made, it applies to all future periods unless exceptionally revoked with Federal Tax Authority (FTA) approval. The election can be applied in one of two ways: either to (a) all assets and liabilities that are measured at fair value through profit (or subject to impairment accounting), or (b) to all assets and liabilities held on capital account. For example, if an investment property’s fair value increased by AED 2 million during 2024, electing the realisation basis would mean this AED 2 million unrealised gain is not taxed in 2024 – instead, tax will only be due when the property is actually sold and that gain is realised.

Businesses with significant fair-value adjustments should strongly consider making this election in their first return, as it can defer the tax on such unrealised gains until a future sale, improving cash flow.
UAE Corporate Tax Pertinent Questions – All You Need To Know
Ravishanker, Ravishanker V, Director - Taxation, Kreston Menon

Background


According to the UAE Federal Decree-Law No. 47 of 2022 on taxation of corporations and businesses (UAE CT Law), businesses will become subject to Corporate Tax UAE (CT) from the beginning of their first financial year which starts on or after 1 June 2023. Executive Regulations of the Decree Law containing interpretations and implementation guidelines of the Articles are forthcoming from the Ministry in the form of various Cabinet Decisions.

A few key areas have been reproduced below.

Registration of Taxable Persons


Who is liable to register for UAE CT Law?

All Taxable Persons (Persons subject to CT), including Free Zone Persons and Taxable Persons eligible for Small Business Relief are liable to register for UAE CT Law. It has been clarified by way of various Decisions that the following Persons need not register under UAE CT Law:

• A Government Entity

• A Government Controlled Entity

• A Person engaged in Extractive Business

• A Person engaged in Non-Extractive Natural Resources Business

• A Non-Resident Person that derives only State Sourced Income and has no Permanent Establishment in the UAE

• A Natural Person deriving income less than AED 1 million from Business or Business Activities

When can one register for UAE CT?

The Federal Tax Authority (FTA) is adopting a staggered approach with respect to registration. In early January, the FTA launched an early bird registration drive for CT through the EmaraTax platform. Subsequently, The FTA vide a press release on 14 May 2023 has announced the launch of registration for CT for Public Joint Stock Companies and Private Companies from 15 May 2023.

It should be noted that the Frequently Asked Questions (FAQs) published on the website have clarified that taxpayers are required to register before the prescribed due date of the first CT return without any penalties.

Tax Period


What is my first Tax Period?

For the purposes of the UAE CT Law, the Tax Period is the Financial Year of a Person which shall be the calendar year or the 12-month period for which the Taxable Person prepares financial statements.

The Decree Law applies to all financial years commencing on or after 1 June 2023. For most businesses, the financial year commences either on 1 January or 1 April. Accordingly, a bulk of the first tax years would either be

1 January 2024 to 31 December 2024, or 1 April 2024 to 31 March 2025, respectively. Further, the due date of filing returns is within 9 months from the end of the tax period i.e., 30 September 2025 and 31 December 2025, respectively.

Can a Taxable Person change their Tax Period?

It has been clarified by a recent decision that the Taxable Persons are eligible to change their Tax Periods for extending the same to up to 18 months or shortening the same to 6 to 12 months subject to meeting specified conditions.

Qualifying Free Zone Persons (QFZPs)


What are the conditions under which a Free Zone Person qualifies to be a Qualifying Free Zone Person (QFZP)?

A Free Zone Person who meets the pre-conditions for availing of the incentive mentioned under the law is termed QFZPs.

The pre-conditions to be regarded as a QFZP include:

• maintaining adequate substance in the UAE.

• complying with the transfer pricing requirements

• electing not to be taxed under the normal UAE CT regime i.e., at 9%.

The QFZPs would incur 0% UAE CT on ‘Qualifying Income’ and 9% on ‘Non-Qualifying Income’.

What is Qualifying Income?

While the term ‘Qualifying Income’ is expected to be clarified in specific regulations, the overview of the Decree published in the UAE Government Portal indicates that all income earned by the Free Zone Person which is in compliance with the restrictions on business by the Free Zone Authority particularly on transactions with the Mainland could constitute ‘Qualifying Income’.

Are there special considerations that are likely to apply to QFZPs?

It may also be noted that since the QFZPs are eligible for a tax incentive, the FTA is likely to monitor the returns and documents of such taxpayers closely. Accordingly, despite payment of Nil tax, there would be a need to maintain adequate documentation. Further, it has also been clarified that all QFZPs, irrespective of turnover, must maintain audited financial statements.

Small Business Reliefs


Are there special measures that have been introduced for small businesses including startups?

Resident small businesses having an annual revenue of less than AED 3 million in the relevant tax period or any preceding tax periods can avail themselves of Small Business Relief (SBR). Under this relief, such Taxable Person can elect to be treated as not having any Taxable Income. It may be noted that this relief is available for financial years commencing from 1 June 2023 and continues for subsequent tax periods ending up to 31 December 2026. Further, it may be noted that such relief is not available for a QFZP or a component of a Multinational Enterprises Group i.e a group with a consolidated revenue of more than AED 3.15 billion.

Are there any disadvantages of claiming such relief?

The Taxable Person claiming SBR would not be eligible to carry forward unclaimed interest costs or taxable losses in such tax periods where SBR is availed. Accordingly, it is pertinent to evaluate the claiming of this relief holistically and not in isolation.

Are there reliefs provided for small businesses with respect to Transfer Pricing (TP)?

By way of a recent Ministerial Decision, the requirement for maintaining a Master file and a Local file has been restricted to the following category of Persons:

• Component of a Multinational Enterprises Group that has a total consolidated revenue of AED 3.15 billion or more in the relevant tax period; or

• A Taxable Person whose revenue in the relevant Tax Period is AED 200 million or more.

This provides significant relief to small businesses with regard to the maintenance of extensive TP documentation. However, it may be noted that the requirement for application of the Arm’s Length Principle would continue to be applicable to international as well as local controlled transactions for all Taxable Persons.

Are there reliefs provided to small businesses pertaining to Accounting Standards and methods of accounting?

In a recent decision, relaxations have been granted to small businesses with regard to the Accounting Standards and method of accounting wherein a taxable person whose revenue does not exceed AED 3 million is allowed to maintain accounts on a cash basis and a taxable person whose revenue does not exceed AED 50 million may apply IFRS for SMEs.

Tax Grouping

What is a Tax Group?

A UAE CT Tax Group, in short, can be constituted by two or more resident juridical persons (other than a QFZP or an Exempt Person) having a parent-subsidiary relationship with at least 95% shareholding and control among other criteria. The conditions for UAE CT Tax Grouping are very different from tax grouping provisions available under UAE VAT Law wherein entities under common ownership, even if the shareholders are natural persons, are eligible to be grouped.

Is a Tax Group the same as a Qualifying Group?

The CT Law introduced two distinct grouping structures – ‘Qualifying Group’ and ‘Tax Group’. A fine reading of the relevant provisions identifies the following differences:

• While a ‘Qualifying Group’ is a de-facto status i.e., requires no application or election, a ‘Tax Group’ can be formed only through an application to the FTA.

• A qualifying group may also be constituted even if the common shareholder is an individual. The Tax Group can only be constituted of Juridical Persons.

• The constituents of the qualifying group will continue to be different taxpayers and file separate returns which will be assessed separately. In the case of a tax group, the ‘Parent company’ files one return on behalf of the group i.e., the group is assessed as a single entity basis consolidated financial statements.

• The basic exemption of AED 375,000 will apply to the tax group as an entity and not to each of its components.

Key Business Considerations


What are the key areas of the UAE CT Law that businesses will have to consider in their day-to-day operations and for making long-term strategic decisions?

CT, unlike VAT, would have a direct effect on the profits of the businesses and requires due consideration. Further, being a new introduction, the Decree Law also would introduce new concepts which would mandate businesses to recalibrate their traditional business practices.

The businesses should take due cognizance of the following major aspects introduced by the Decree and closely monitor the developments in these areas:

• Conformity to OECD Transfer Pricing (TP) guidelines for transactions with related parties and connected parties, including capturing the same in the opening balance.

• Maintenance of records supporting the information provided in the returns.

• Evaluation of any arrangement or agreement in the light of the General Anti-Abuse Rules (GAAR) prescribed by the Decree.

• The provisions relating to Place of Effective Management, Permanent Establishment or State Sourced Income may result in a business falling within the purview of this Decree, even if registered outside the UAE.

• Careful evaluation of various elections or applications prescribed under various provisions.

Are further decisions awaited from the Ministry and/or the Authority?

While a large trench of clarifications has been received over the last few weeks, the impending Cabinet Decision and regulations can add new requirements and provisions leading to multiple new interpretations and discussions.

A few key clarifications that are expected from the Ministry include:

• Specific requirements and format of documentation for transfer pricing.

• Definitions and procedures associated with QFZPs.

• Penal provisions and quantum of such penalty.

• Formats for annual returns, applications, and other statements.

Conclusion


UAE has always been known for its ease of doing business and business friendly ecosystem. The introduction of CT is a radical change, albeit essential. Apart from the effect of the additional expenditure in the Income Statement, the businesses are also concerned about the burden of compliance that they would be expected to bear.

The inclusion of provisions facilitating seeking clarifications from the FTA indicates the commitment of the Ministry and the Authority in undertaking this radical change in partnership with all the stakeholders, including all the taxpayers. This is a source of massive reassurance to the taxpayers
Global Minimum Tax (GMT) and UAE Corporate Tax: Navigating Pillar Two
Ravishanker, Ravishanker V, Director - Taxation, Kreston Menon
Global Minimum Tax (GMT) or Global Anti-Base Erosion Model (Pillar Two)

Background

The Organisation for Economic Cooperation and Development (OECD) has explained Base Erosion and Profit Shifting (BEPS) as ‘tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax’. The phenomenon was discussed in detail in the OECD publication ‘Addressing Base Erosion and Profit Shifting’ in February 2013, identifying existing opportunities and practices and broad action areas to address the associated concerns. An action plan was published on 19 July 2013 – ‘Action Plan on Base Erosion and Profit Shifting’ – which laid down fifteen action plans and prescribed the methodology for the same.

Tax Challenges Arising from Digitalisation were rightly identified as a key action item – Action 1. Various forums questioned the relevance of global taxation principles, developed in a brick-and-mortar environment, in this changing technological landscape. The advent of technology and digitalisation has resulted in three phenomena in the world of business – ‘scale without mass, reliance on intangible assets and the centrality of data.’ Reforms to address concerns and meet the challenges posed by the changing business models were seen as the need of the hour.

With a series of reports, publications and public consultations starting as early as October 2015, the Action 1 has evolved to what we now know as the ‘Two-Pillar Approach to Address the Tax Challenges Arising from the Digitalisation of the Economy’. Pillar One focuses on nexus and profit allocation, while Pillar Two focuses on a global minimum tax.

In February 2016, the proposed architecture of the Inclusive Framework on BEPS (“the Inclusive Framework”) was endorsed by G20 Finance Ministers. Today, over 140 countries and jurisdictions work together in the Inclusive Framework to tackle Base Erosion, enhance transparency, and improve coherence of international tax rules.

Overview

The Global Minimum Tax (GMT), envisaged in Pillar Two of the Framework, strives to tax large Multinational Enterprises (MNEs), with annual consolidated revenue of above EUR 750 million and having presence in more than one jurisdiction, at a minimum tax of fifteen percentage (15%) on their global profits. Pursuant to the approval received from the Inclusive Framework, the GloBE Model Rules were published in December 2021. The Rules require the MNEs to calculate the incomes and taxes on a jurisdictional basis. A Top-up Tax is levied if the Effective Tax Rate (ETR) for a jurisdiction is less than the GMT Rate i.e 15% to bring the total amount of tax in that low-tax jurisdiction up to the 15% rate. The top-up tax is computed on the income after applying a Substance- Based Income Exclusion (SBIE) – a carve-out based on payroll and tangible assets.

Collection of Top-up Tax

The Top-up Tax is collected either by the low-tax jurisdiction itself by imposing a Qualified Domestic Minimum Top-up Tax (QDMTT), or by another jurisdiction through two inter- locking rules of Top-up tax charge – (i) Income Inclusion Rule (IIR) and (ii) Under Taxed Profits Rule (UTPR).

• Lower-tax jurisdiction can retain their right to tax by imposing a QDMTT which allows such jurisdiction to impose an additional tax on the Constituent Entities in order to bring the ETR of the jurisdiction to the Global Minimum Tax Rate ie. 15%.

• The IIR follows a ‘top-down’ approach wherein the Rule is applied by the Ultimate or Intermediary Parent Entity(ies) imposes a Top-Up Tax on the GloBE Income of Low Taxed Constituent Entities whose ETR is less than the Global Minimum Tax Rate i.e 15%. As the name suggests, such Income is included in the Income of the identified parent entity charging top-up tax under this Rule.

• The UTPR works as a backstop to the IIR where the residual Top-up Tax is charged by the jurisdictions of the Component Entities distributed in an appropriate weighted ratio of tangible assets and employees. The UTPR may be operated either by denying certain deductions (which otherwise would have been admissible) or by levying an additional charge.

UAE and Global Minimum Tax

Introduction of UAE Corporate Tax Law

While the UAE Corporate Tax Law was introduced and applies to all financial years beginning on or after 1 June 2023, the UAE Ministry of Finance (MoF) also provided the following information with respect to Pillar Two:

• Underscoring UAE’s commitment to ‘addressing the challenges faced by tax jurisdictions internationally’ and its membership to the Inclusive Framework, the introduction of Corporate Tax also paved way to provide the appropriate framework for the adoption of Pillar Two Rules.

• Clarification that the Pillar Two Rules would not apply in the UAE in 2024 and that a public consultation would be initiated in the first quarter of 2024 to seek relevant inputs from the stakeholders with regard to the timing and design of the Pillar Two Rules.

• Intention to facilitate submission of Global Information Return (GIR) via the UAE authorities.

Amendment to the UAE Corporate Tax Law

In October 2023, Federal Decree-Law No. 60 of 2023 was released amending certain provisions of the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (UAE Corporate Tax Law). The amendment contained the following aspects:

• Introduction and definition of the terms ‘Top-up Tax’ and ‘Multinational Enterprise’ to the UAE Corporate Tax Law.

• The charging provision of the UAE Corporate Tax Law, Article 3, was amended to include the charging authority to impose Top-up Tax, based on a separate decision to be issued by the Cabinet.

• Article 65 of the UAE Corporate Tax Law was amended to establish and state that such Top-up tax collected shall be shared between the Federal and Local Governments, based on the relevant separate legislation in this regard.

• The provisions of the Top-up Tax shall come into effect at a date to be specified in a separate decision to be issued by the Cabinet.

Public Consultation

In March 2024, the MoF released a Public Consultation document, consisting of a Consultation Questionnaire and a Guidance Paper, seeking to gather views from the stakeholders on the policy design options for implementation of Pillar Two Rules. The document contained certain critical elements providing valuable insights to the stakeholders from the perspective of the authorities, though the document does not represent the financial policy position of the UAE.

• The OECD statement issued on 8 October 2021 allows jurisdictions to extend the applicability of the Rules to smaller MNE groups headquartered in their jurisdiction. If the UAE were to adopt the GloBE rules, the UAE does not intend to extend the applicability of the Rules to smaller UAE headquartered MNE groups.

• While the GloBE Rules allow for the revenue thresholds to be established in local currency, UAE considers it beneficial to maintaining the thresholds in Euro to promote coordination among jurisdictions.

• While a Substance-Based Income Exclusion (SBIE) is not mandatory, the UAE MoF proposes for the SBIE to be consistent with the outcomes of the GloBE Rules.

Active comments were sought from the stakeholders on the following aspects:
• Inputs and views on the preferred charge mechanism i.e IIR, UTPR or QDMTT.

• A potential increase in the UAE Corporate Tax Rate from 9% to 15%, thereby increasing the ETR for MNEs.

• Methodology to be adopted if UTPR was to be the charge mechanism – denial of deduction or a separate charge.

• Exclusion of Joint Ventures (JVs) / JV subsidiaries / Minority Owned Constituent Entities (MOCEs) from a probable UAE QDMTT and interplay with Safe Harbour status.

• Considerations for Stateless Flowthrough Constituent Entities and Permanent Establishments in the design of UAE QDMTT.

• Semantics of QDMTT liability allocation.

• Adoption of International Financial Reporting Standards (IFRS) for the purpose of QDMTT.

• Potential Income-based or Expenditure-based tax incentives.

Way forward for UAE

The UAE’s proactive approach to implementing Pillar Two rules demonstrates its commitment to international tax standards and combating tax avoidance. By engaging stakeholders through public consultation, the UAE aims to ensure that its tax policies strike a balance between compliance requirements and the needs of businesses operating within its jurisdiction.

Key considerations for the UAE include selecting the appropriate charge mechanism under GloBE rules, potentially increasing the corporate tax rate to align with the GMT, and providing clarity on various aspects such as denial of deductions and treatment of joint ventures. This decision would also be critical, considering that the UAE has a relatively low Corporate Tax of 9% and a 0% tax rate for Qualifying Free Zone Persons, seemingly reducing the ETR for in-scope MNEs.

As the UAE progresses towards adopting the GMT framework, stakeholders anticipate a seamless transition that maintains the country’s attractiveness for businesses while upholding global tax integrity standards. By effectively implementing Pillar Two, the UAE can strengthen its position as a responsible global citizen and a preferred destination for multinational investment.
UAE Corporate Tax: Accounting Profits and Taxable Income
Ravishanker, Ravishanker V, Director - Taxation, Kreston Menon
While the fundamental aim of measuring profit aligns across commercial accounting practices and tax regulations, different countries apply distinct tax and accounting rules. Some nations closely link accounting income with taxable income, while others have self-contained tax laws. In the UAE, accounting net profit forms the basis for determining taxable income for corporate tax purposes. The UAE Corporate Tax Law (‘UAE CT Law’) provides that the Taxable Income of each Taxable Person shall be determined separately, on the basis of properly prepared, standalone Financial Statements for financial reporting purposes in accordance with the Accounting Standards accepted in the UAE for Corporate Tax purposes.

Accounting Standards and Accounting Profit

Accounting profit, also known as financial profit or bookkeeping profit, represents a Company’s net income derived from its operational and non-operational activities. It is calculated by subtracting total expenses from total revenue and serves as a key metric for assessing profitability and comparing financial health with industry peers.

Accounting Standards

According to Article 20(1) of the UAE CT Law, Taxable Persons are obligated to prepare financial statements in compliance with the applicable accounting standards within the country. As International Financial Reporting Standards (IFRS) are in effect in the UAE, taxable persons must adhere to IFRS guidelines for their financial reporting. Ministerial Decision No. 114 of 2023 specifies that the only Accounting Standards accepted in the UAE for Corporate Tax purposes are the International Financial Reporting Standards (“IFRS”) and the International Financial Reporting Standard for Small and Medium- sized Entities (“IFRS for SMEs”). Taxable Persons may use IFRS for SMEs if they derive Revenue not exceeding AED 50,000,000 in a Tax Period.

Basis of accounting

IFRS stipulates that financial statements should be prepared using the accrual basis of accounting. However, Article 20(5)(a) authorizes the Minister to establish circumstances and conditions under which financial statements may be prepared using the cash basis of accounting. Taxable Persons can apply to the Federal Tax Authority (FTA) for transitioning from accrual basis to cash basis accounting. Upon approval by the FTA, these changes will take effect from the commencement of the tax period in which the application is submitted or from a future tax period.

In accordance with Article (2) of Ministerial decision No. 114 of 2023, a Taxable Person may prepare Financial Statements using the Cash Basis of Accounting if:
• Their Revenue does not exceed AED 3 million within the relevant Tax Period; or

• In exceptional circumstances and pursuant to an application submitted by the Taxable Person to the FTA.

Audited financial statements

Ministerial Decision No. 82 of 2023 has been published specifying that a Taxable Person deriving Revenue exceeding AED 50,000,000 (Fifty Million United Arab Emirates Dirhams) during the relevant Tax Period as well as a Qualifying Free Zone Person shall prepare and maintain audited financial statements.

Relief for Small Businesses

Article 21 of the UAE CT Law offers tax relief for small businesses, allowing tax resident entities with Revenue not exceeding AED 3,000,000 in a relevant Tax Period and all previous Tax Periods that end on or before 31 December 2026 to elect for Small Business Relief thereby deeming that the entity has not derived any taxable income.

Adjustments to accounting profits

As per Article 20 of the UAE CT Law, the Taxable Income for the tax period is the net profit or loss reported in the financial statements, after making adjustments as necessary, for the following items:

Unrealized gains or losses

Taxable Persons who prepare their financial statements on an accrual basis will have an option to avail realisation basis treatment of unrealized accounting gains or losses for tax computation. If the Taxable Person decides to avail the benefit of taxing unrealised gains and losses on realisation basis, they are obliged to choose between the following options:
Option 1 – the taxpayer can elect to recognize gains and losses for all assets and liabilities only when they are realized.

Option 2 – the taxpayer can elect for the realization basis to apply only to assets and liabilities held on capital account. Gains and losses on other assets and liabilities would be included in taxable income on a current basis.

Exempt Income

Exempt income under Article 22 encompasses dividends, qualified participation relief dividends, select foreign permanent establishment income, and specific non- resident income related to operating ships and aircraft.

Qualifying Group Exemptions

No gain or loss needs to be considered in determining the Taxable Income in relation to the transfer of one or more assets or liabilities between two Taxable Persons that are members of the same Qualifying Group i.e two or more Taxable Persons who satisfy specified conditions including, but not limited to, common shareholding of 75%.

Business Restructuring Relief

No gain or loss needs to be taken into account in determining Taxable Income in relation to business restructuring transactions, subject to specified conditions.

General expenditure deduction

In accordance with Article 28, Expenditure incurred wholly and exclusively for the purposes of the Taxable Person’s Business that is not capital in nature shall be deductible in the Tax Period in which it is incurred, subject to the provisions of this Decree-Law. Accordingly, the Taxable Person needs to ensure that the expenditure is carefully evaluated to ensure the business purpose of such expenditure and the capital or revenue nature thereof. Further, if any expenditure serves multiple purposes, a deduction is allowed for the identified business purpose of such expenditure or a reasonable portion of such expenditure determined based on a fair and reasonable basis.

Interest expenditure

The general interest deduction limitation rule, according to Article 30, restricts interest expenditure deduction to 30% of Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA). This limitation doesn’t apply to banks,certainfinancialinstitutions,insurancebusinesses, and individuals. Ministerial Decision No. 126 of 2023 further extends the exemption from this rule to Taxable Persons whose Net Interest Expenditure does not exceed AED 12,000,000 (Twelve Million Dirhams)

Article 31 also prescribes specific non-deduction for interest expenditure on loan obtained from Related Parties, used for certain specific purposes laid down in the UAE CT Law.

Entertainment expenditure

Article 32 lays down special rules governing entertainment expenses, limiting deductions to 50% of the cost. These expenses encompass spending for entertaining customers, shareholders, suppliers, or business partners, including meals, accommodation, transportation, admission fees, facilities, equipment, and other expenses of similar nature.

Non-deductible expenditure

Article 33 specifies expenditure that are not deductible for the purposes of computation of Taxable Income. This includes:


Transactions with Related Parties and Connected Persons

Article 34 of the UAE CT Law stipulates that transactions and arrangements between Related Parties must meet the arm’s length standard. Further, Article 36 of the UAE CT Law specifies that a payment or benefit provided by a Taxable Person to its Connected Person shall be deductible only if and to the extent the payment or benefit corresponds with the Market Value of the service, benefit or otherwise provided by the Connected Person and is incurred wholly and exclusively for the purposes of the Taxable Person’s Business.

Accordingly, necessary adjustments may have to be made to the taxable income if the transactions with related partiesandconnectedpersonsarenotcarriedoutinline with the Arm’s Length Principle.

Loss relief

Chapter 11 of the UAE CT Law specifies that a Tax Loss can be offset against the Taxable Income of subsequent

Tax Periods to arrive at the Taxable Income for those subsequent Tax Periods. Specific rules have been made in relation to conditions to be satisfied for such set off and transfer of losses within the group.

Conclusion

In conclusion, adherence to accounting standards accepted in the UAE is crucial for businesses to accurately determine their taxable income. While there may be differences between commercial accounting practices and tax rules globally, the UAE aims for alignment to international standards, promoting efficiency and reducing compliance costs. Understanding the provisions outlined in the UAE CT Law ensures proper treatment of adjustments such as unrealized gains or losses, exemptions, reliefs, and deductions. Additionally, the flexibility provided for changes in accounting methods underscores the importance of compliance with the law over conflicting accounting standards.
Navigating the UAE’s New Corporate Tax Landscape for Free Zones
Ravishanker, Ravishanker V, Director - Taxation, Kreston Menon
Introduction

In a move that has significant implications for businesses operating within UAE’s free zones, the implementation of the Corporate Tax Law through Federal Decree-Law No. 47 of 2022 issued on 1st June 2023 has ushered in a new era of taxation. This landmark legislation follows the global commitments that UAE has made to ensure tax transparency and enhanced regulatory oversight. Adhering to global standards enhances UAE’s reputation as a responsible global financial hub.

Taxation Rates and Applicability

Under Article 3 of the Corporate Tax Law, Qualifying Free Zone Persons (QFZPs) enjoy favourable tax rates: 0% on Qualifying Income and 9% on Taxable Income that does not meet the criteria for Qualifying Income. A Qualifying Free Zone Person is defined as one that adheres to specific conditions outlined in Article 18 of the Law. These conditions include the following:

a) Maintaining adequate substance in the State.
b) Derives Qualifying Income as specified in a decision issued by the Cabinet at the suggestion of the Minister.
c) Has not elected to be subject to Corporate Tax under Article 19 of this Decree-Law.
d) Complies with Articles 34 and 55 of this Decree-Law.
e) Meets any other conditions as may be prescribed by the Minister.

Ministerial Decision No. 139 of 2023 has prescribed the following additional conditions to be met by a QFZP:

a) Its non-qualifying revenue does not exceed the

De-minimis requirements set out in Article (4) of the Decision.

b) It prepares audited financial statements.

Maintaining adequate substance in the State

The emphasis on substance serves as a cornerstone for promoting transparency, fairness and adherence to international standards in taxation. Businesses are encouraged to establish substantial operations, tangible assets and a genuine economic presence within the state. By adhering to the FTA’s directives and maintaining adequate substance, companies contribute to a sustainable economy while minimizing the risk of inappropriate tax practices.

Based on the guidance provided in Cabinet Decision No. 55 of 2023, a QFZP shall undertake its core income-generating activities in a Free Zone and have adequate assets, an adequate number of qualified employees, and incur an adequate amount of operating expenditures, in relation to the activities carried out.

Qualifying Income

The Cabinet has issued Decision No. 55 of 2023 on determining Qualifying Income for the QFZP and the Ministry of Finance (MOF) has issued Decision No. 139 of 2023 regarding Qualifying Activities and Excluded Activities for the purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses.

The following constitute Qualifying Income of a QFZP:

• Income derived from transactions with another Free Zone Person (FZP), other than the excluded activities, where such Free Zone Person is the ultimate beneficiary of the goods or services.
• Income derived from Non-Free Zone Persons (NFZP), in respect of Qualifying Activities, that are not excluded activities.
• Non-qualifying revenue within the De-minimis limits i.e., if non-qualifying revenue is within 5% of total Revenue or AED 5 million, whichever is lower.

Additionally, the following income shall not be Qualifying Income:

• Income attributable to a Domestic Permanent Establishment or a Foreign Permanent Establishment.
• Income attributable to ownership or exploitation of Immovable Property, as follows:
o Transactions with NFZP, in case of commercial property
o Transactions with any Person, in terms of non – commercial property

Qualifying Activities as specified in Ministerial Decision No. 139 of 2023.

(a) Manufacturing of goods or materials.
(b) Processing of goods or materials.
(c) Holding of shares and other securities.
(d) Ownership, management, and operation of ships.
(e) Reinsurance services that are subject to the regulatory oversight of the competent authority in the State.
(f) Fund management services that are subject to the regulatory oversight of the competent authority in the State.
(g) Wealth and investment management services that are subject to the regulatory oversight of the competent authority in the State.
(h) Headquarter services to Related Parties.
(i) Treasury and financing services to Related Parties.
(j) Financing and leasing of Aircraft, including engines and rotable components.
(k) Distribution of goods or materials in or from a Designated Zone to a customer that resells such goods or materials, or parts thereof or processes or alters such goods, materials, or parts thereof for the purposes of sale or resale.
(l) Logistics services.
(m) Any activities that are ancillary to the activities listed in paragraphs (a) to (l) of this Clause.

Excluded Activities as specified in Ministerial Decision No. 139 of 2023

(a) Any transactions with natural persons, except transactions in relation to the Qualifying Activities specified under paragraphs (d), (f), (g) and (j) of Clause (1) of Article (2) of this Decision.
(b) Banking activities
(c) Insurance activities
(d) Finance and leasing activities
(e) Ownership or exploitation of immovable property, other than Commercial Property located in a Free Zone where the transaction in respect of such Commercial Property is conducted with other Free Zone Persons.
(f) Ownership or exploitation of intellectual property assets.
(g) Any activities that are ancillary to the activities listed in paragraphs (a) to (f) of this Clause.

De Minimis Requirements as specified in Cabinet Decision No.55 of 2023

The De minimis requirements shall be considered satisfied where the non-qualifying Revenue derived by the QFZP in a Tax Period does not exceed 5% (five percent) of the total Revenue of the Qualifying Free Zone Person in that Tax Period or AED 5,000,000 (five million dirhams), whichever is lower.

Articles 34 and 55 of the Decree-Law

As per Article 34, in determining taxable income, transactions and arrangements between related parties must meet the Arm’s Length standard. Arms’ Length standard is a principle used in business and tax contexts, where transactions between related parties should be conducted as if they were unrelated and independent entities, ensuring fairness and market value without any special influence or bias. The Arms’ Length Price must be determined by applying one or a combination of the following transfer pricing methods: (a) The comparable uncontrolled price method (b) The resale price method (c) The cost-plus method (d) The transactional net margin method (e) The transactional profit split method.

As per Article 55, a taxable person is required to file together with their tax return a Disclosure Form containing information regarding the taxable person’s transactions and arrangements with its Related Parties and Connected Persons in the form prescribed by the authority. One must note that the definition of Related Parties and Connected Persons as per the Decree Law covers a wide range of relationships and is wider than the definition of Related Parties under IAS 24 – Related Party Disclosures. While Ministerial Decision No.97 of 2023 provides relief in maintaining Master File and Local File to certain Tax Payers (Tax Payers who are not constituents of a Multinational Enterprises Group and has Revenue less than AED 200 million), all Tax Payers are expected to maintain documentation required to prove that relevant transactions meet the Arm’s Length standard.

Digital Public Consultation

Further to the issuance of the Decree Law and implementing decisions relating to the application of Corporate Tax in the Free Zones, the MoF has indicated in the published FAQs that more details and guidance regarding the scope and meaning of each qualifying activity will be provided as required, by FTA in due course. In this regard, the MoF has issued the consultation paper seeking views on certain elements of the proposed framework for the classification of the qualifying activities and excluded activities set out under Ministerial Decision 139 of 2023. With a goal of obtaining valuable perspectives of all the stakeholders and accommodating the diverse business practices that are prevalent in the economy, the consultation was active from 19 July 2023 to 9 August 2023. On the basis of inputs and feedback received through this initiative, it is expected that additional guidance and clarity would be rendered with respect to the Free Zone tax regime.

Conclusion

In conclusion, the UAE’s Free Zone tax regime stands as a testament to the country’s commitment to fostering economic growth and attracting foreign investment. The incentivized tax rates offered to eligible Free Zone entities serve as a powerful incentive for businesses seeking to establish a presence in these strategic zones. However, moving forward, Free Zone companies must approach this opportunity with a clear understanding of the prescribed conditions outlined in the Decree Law.

A comprehensive evaluation of eligibility criteria before embarking on operations within a Free Zone is paramount. It is incumbent upon each Free Zone entity to ensure they meet these conditions to avoid any unforeseen implications. The repercussions of non-compliance, leading to the loss of QFZP Privilege for up to four subsequent Tax Periods, underscore the importance of adhering to the regulatory framework.

Furthermore, the guidance provided in the frequently asked questions (FAQs), specifically advising Free Zone companies to engage with their respective Free Zone authorities for confirmation of eligibility for the 0% corporate tax rate, offers a practical and proactive approach to compliance. Such collaboration between businesses and regulatory bodies will not only streamline the process but also enhance transparency and clarity.

As Free Zone entities set their sights on the future, it is imperative to recognize the symbiotic relationship between regulatory adherence and sustained success. By meticulously evaluating eligibility, maintaining open communication with Free Zone authorities, and embracing the advantages of the UAE’s Free Zone tax regime, businesses can position themselves for continued growth and prosperity within this dynamic economic landscape.
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