United Arab Emirates - MOF issues guidance on new corporate tax law

This article has been updated. It was originally published on 17 April 2023

The UAE Ministry of Finance (MOF) recently issued several ministerial decisions on various aspects of the new Corporate Tax Law (CTL) that will become effective on 1 June (for prior coverage, see the article in the February 2022 issue of Corporate Tax News):

Corporate tax exemption

Article 9 of the CTL sets out the conditions that must be fulfilled by a public benefit entity to be eligible for a corporate tax exemption:

  • The entity must be established and operated exclusively for religious, charitable, scientific, artistic, cultural, athletic, educational, healthcare, environmental, humanitarian or animal protection purposes or as a professional entity, chamber of commerce or similar entity operated exclusively for the promotion of social welfare or the public benefit.
  • The entity may not undertake any business activities other than those that directly relate to or are designed to fulfil the purpose for which the entity is established.
  • The entity’s income or assets are used exclusively in the furtherance of the purpose for which it was established.
  • The entity’s income or assets are not payable or made available for the personal benefit of a shareholder, member, trustee, founder or settlor (which are not itself a QPBE, government entity or government-controlled entity).

Ministerial Decision No. 37 lists entities (Federal and for each Emirate) that will be considered exempt QPBEs if the relevant conditions are fulfilled. The list covers religious institutions, government-sourced funds, sports club charities, trust clubs, and school and college welfare funds. A government entity can suggest additions and deletions to the list of QPBEs as supported by data, information and documentation.

A government entity must notify the MOF of any changes in listed QPBEs that affect its eligibility to qualify for the exemption. The notification must be submitted within 20 working days of the occurrence of the changes; and the ministry will prescribe how the notification will have to be made.

A QPBE and a government entity must provide all relevant documents to the MOF evidencing compliance with conditions in article 9.

Registration requirement

Article 4 of the CTL sets out the persons that are exempt from corporate tax in the UAE. Article 51 requires taxable persons to register with the Federal Tax Authority (FTA) and authorises the ministry to require registration in specific cases. Decision No. 43 provides that the following persons are not required to re-register with the FTA for corporate income tax purposes:

  1. Government entities;
  2. Government controlled entities;
  3. Persons engaged in an extractive business that fulfils the conditions for an exemption;
  4. Persons engaged in a non-extractive natural resource business that fulfils the conditions to qualify for an exemption; and
  5. Nonresidents that derive only UAE-source income and do not have a permanent establishment in the UAE.

The registration exception does not apply to entities covered under bullet 1-4 that undertake a business activity that is not exempt because the prescribed conditions were not fulfilled. Such entities will have to register with the FTA.

The MOF already has commenced corporate tax registration for certain businesses and has highlighted in information sessions that penalties will not be levied for late registration if the registration is effected before the first filing deadline under the CTL.

Business activities conducted by a government entity as a single taxable person

Decision No. 68, which applies only to federal and local government entities, effectively allows these entities to form a tax group, allowing them to file a single corporate tax return and reduce their compliance burden. The key points of the decision are as follows:

  • Federal and local government entities are defined as the government itself, its ministries, agencies, departments, authorities and public institutions.
  • A representative entity of the federal or local government must submit an application for the government to be treated as a single taxable person. The application must include all businesses and business activities conducted under a license issued by a licensing authority. The procedural requirements to file the application electronically will be clarified in due course.
  • The start date for treatment as a single taxable entity will be the beginning of the tax period specified in the application or from any other tax period as determined by the FTA.
  • The representative entity will be responsible for complying with all obligations set out in the CTL.
  • A representative entity of the federal or local government must submit an application for the government to be treated as a single taxable person. The application must include all businesses and business activities conducted under a license issued by a licensing authority. The procedural requirements to file the application electronically will be clarified in due course.
  • In computing taxable income, the representative entity will have to consolidate financial results, assets and liabilities of all businesses or business activities and eliminate intragroup transactions of the single taxable person.

Small business relief

Decision No. 73 grants relief to small businesses under the CTL with a view to supporting start-ups and other small or micro businesses by reducing their corporate tax burden and compliance costs.

Under the small business relief (SBR) scheme, qualifying businesses (UAE resident juridical persons and individuals) will be treated as not having any taxable income during the relevant period, i.e., no corporate tax will be payable regardless of the actual profits earned by the business. The highlights of the SBR provision are:

  • To qualify, resident taxable persons must have revenue less than AED 3 million in the current and previous tax periods (based on accounting standards accepted in the UAE); the relief is not available if the taxpayer’s revenue exceeds that threshold in any tax period.
  • The revenue threshold will apply to tax periods starting on or after 1 June 2023 and will apply to subsequent tax periods that end before or on 31 December 2026.
  • The relief will not be available to qualifying free zone persons or members of multinational enterprise groups.
  • An election will have to be made to the FTA to claim the SBR.
  • Taxable persons will be able to carry forward and set off business losses in financial years where the business does not elect to apply for the SBR.
  • If persons with total revenue exceeding AED 3 million artificially separate their business to claim benefits under the SBR scheme, it will be considered an arrangement to obtain a corporate tax advantage under the general anti-abuse rules in the CTL. 
     

Ashish Athavale
Brian Conn
Mufaddal Safdari
BDO in United Arab Emirates

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