The Ministry of Finance in the UAE has officially published Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, also known as the Corporate Tax Law (CT Law). 

This new legislation marks a significant development following the Ministry’s announcement earlier this year about the introduction of federal corporate tax in the UAE.

The Corporate Tax Law was applicable to financial years beginning on or after June 1, 2023.

But what do you really need to know? 

Key Features of the Corporate Tax Law:

1. Scope: The Corporate Tax Law applies to:
   • All legal entities within the UAE, including those operating in free zones.
   • Legal entities incorporated abroad but managed and controlled from the UAE.
   • Individuals conducting business within the UAE.
   • Foreign businesses with a permanent establishment in the UAE, those deriving UAE-sourced income, or those with a nexus as defined in forthcoming Cabinet Decisions. 
2. Exemptions: Under the Corporate Tax Law, certain entities are exempt from corporate tax. These include:
   • Government entities and government-controlled entities.
   • Businesses engaged in natural resource extraction.
   • Non-extractive natural resource businesses.
   • Qualifying public benefit entities and public pension or social security funds.
   • Qualifying investment funds, subject to meeting specific conditions outlined in the CT Law. 
3. Tax Rates:
   • 0% on taxable income up to AED 375,000.
   • 9% on taxable income exceeding AED 375,000.
   • It is anticipated that a different rate will apply to large multinational corporations covered under Pillar Two of the OECD’s BEPS Project, specifically those with consolidated global revenues exceeding EUR 750 million (approximately AED 3.15 billion). 
4. Free Zones: Entities in qualifying free zones will benefit from a 0% corporate tax rate on qualifying income and a 9% rate on non-qualifying income. The CT Law specifies conditions that must be met for free zone entities to qualify for these rates. 
5. Exempt Income: The Corporate Tax Law allows for the exemption of certain types of income, provided specific conditions are met. This includes:
   • Dividends and profit distributions from UAE legal entities.
   • Dividends and profit distributions from participating interests in foreign legal entities (more than 5% ownership).
   • Income from foreign permanent establishments and income derived from operating aircraft or ships in international transport. 
6. Deductions:
   • Expenses incurred wholly and exclusively for business purposes are deductible in the period they are incurred.
   • Non-deductible expenses include non-business expenditures, costs related to exempt income, non-business losses, donations to non-qualifying entities, fines, bribes, dividends paid to shareholders, and recoverable input VAT. The Corporate Tax Law also includes specific rules for interest deductions and limits on entertainment expenditures. 
7. Restructuring Relief: The CT Law provides tax relief for business transfers within a qualifying group and business restructuring, subject to certain conditions. 
8. Withholding Tax: Domestic and cross-border payments will be subject to a prevailing withholding tax rate of 0% in the UAE. 
9. Foreign Tax Credits: UAE businesses will be able to claim foreign tax credits for taxes paid on income earned outside the UAE. 
10. Transfer Pricing (TP): The Corporate Tax Law establishes guidelines for the arm’s length standard and defines terms such as “related parties,” “control,” and “connected persons.” 
11. Tax Grouping: The CT Law details conditions for forming tax groups, calculating group taxable income, and handling tax losses. 
12. Tax Registration: All taxable entities must register for corporate tax in the manner and timeline specified by the Minister. 
13. Tax Return Filing and Payment: Taxable entities are required to file their corporate tax returns and settle the tax payable within nine months from the end of the financial period. Certain exempted entities may still need to file returns. 
14. Record-Keeping: Records related to corporate tax must be maintained for seven years from the end of the relevant tax period.

How Does This Affect You?

The enactment of the Corporate Tax Law represents a substantial shift in the UAE’s tax landscape, impacting all businesses within the UAE, including free zone entities, family businesses, and individuals conducting business in the UAE. Foreign businesses with a presence in the UAE will also be affected. It is essential for all businesses to understand the implications of the Corporate Tax Law to ensure compliance and optimize tax efficiency.

How Can We Assist?

We, at Khairallah legal advocates and consultants, are well-positioned to assess how the Corporate Tax Law will impact your organization and to assist with your corporate tax requirements in the UAE. 

We are offering now a 30-min free consultation! Contact us today and let us protect your legal rights!