Since the end of April, the Ministry of Finance (“MOF”) and the Federal Tax Authorities (“FTA”) have decided to publish every week the most expected decisions to clarify some points of the UAE CorporateTax (CT) law.
These decisions reveal a desire for fiscal and accounting transparency. Some decisions raise questions about the attractiveness of some specific regimes in the UAE, such as free-zone entities.
Below is a summary of the most important decisions and their potential impact on business in the UAE.
Small business relief
On 3 April 2023, the Ministry of Finance issued Ministerial Decision No. 73 of 2023 detailing the Small Business Tax Relief, as mentioned in Article 21 of the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses.
This tax relief is good news for small and start-up companies and for future investors. This will keep the UAE an attractive place for investments.
However, this regime does not apply to Multinational Enterprise Groups, that have consolidated group revenues of more than 3.15 billion AED [1] or qualifying Free Zone persons considering that these entities have specificities such as the Globe rules and 0% tax regime.
To be eligible, some conditions must be met:
i. The revenue for the relevant tax period, and each previous tax period, do not exceed 3 million AED
The revenues must be calculated based on the accepted accounting standards applicable in the UAE, i.e. Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). In practice, the IFRS are commonly used by UAE companies as local UAE GAAP has not been implemented.
The threshold will have to be assessed each year to opt for or not for the business small relief.
The applicability of this threshold will start on or after 1st June 2023.
ii. Business rationale
The MOF has introduced an anti-abuse rule to avoid restructuring to benefit from tax relief. Indeed, where a taxable person intentionally separates its business for the sole purpose of meeting the 3 million AED threshold, the Federal Tax Authority will consider it as an artificial separation to obtain a tax advantage. In that case, the Authority can make compensating adjustments to the tax liability of the relevant taxable person.
iii. A formal election
The benefit of this tax relief requires a formal option with the Federal Tax Authority.
If all conditions are met, a tax-resident person may elect to be treated as not having derived any Taxable Income within a tax period. The Small Business Relief also allows a Taxable Person to benefit from reduced compliance requirements, including transfer pricing.
This mechanism only applies to subsequent tax periods that end before or on 31 December 2026.
In return for this tax relief, carry forward tax losses and any disallowed net interest expenditure will not be allowed for the tax periods where the small business relief is not elected.
The need for such a requirement obliges small companies to maintain accounting documentation to justify compliance with the threshold and the implementation of an internal process for compliance.
Small companies with a revenue of less than AED 375,000 will surely opt for 0% tax rate with very simplified documents.
Determining if an entity is exempt from registration or not?
On 10 April 2023, Ministerial Decision No. 43 of 2023 on Exception from Tax Registration for the purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (the “Corporate Tax Law”), in accordance with Article 51 of the Corporate Tax Law was issued which lists the persons who shall not be required to register for Corporate Tax.
In this decision, MOF has listed all exempt persons that are not subject to CT registration:
- A Government Entity.
- A Government Controlled Entity.
- A Person engaged in an Extractive Business that meets the conditions of Article 7 of the CT Law.
- A Person engaged in a Non-Extractive Natural Resource Business that meets the conditions of Article 8 of the CT Law.
- A Non-Resident Person that derives only UAE Sourced Income under Article 13 of corporate tax Law and that does not have a Permanent Establishment in the UAE according to the provisions of the CT Law.
This decision’s exemption aligns with international best practices, where individuals exempted from Corporate Tax, such as the federal government, UAE government departments and authorities, other public institutions, and other categories mentioned above, are exempted from tax registration since they are not subject to tax. As long as these entities continue to meet the exemption conditions outlined in the relevant articles of the Decree-Law, there is no need for them to register with the Federal Tax Authority.
At the same time, the Federal Tax Authoritiy has issued the decision no 7 of 2023 to confirm that other exempt persons such as investment funds and Qualifying Public Benefit Entities are subject to CT registration and must apply for exemption to the tax Authorities. They have also an additional formal obligation to submit each year to confirm that the exemption conditions are still met.
This difference between 100% exempt companies and those that are subject to CT Registration leads to a distinction between companies that are presumed to be exempt based on their business in the UAE and those that must justify their exemption.
In any case, neither the MOF nor the FTA decisions refers to qualifying free zones, which will undoubtedly be subject to all tax formalities and classified as taxable persons at the 0% rate.
Accounting obligations – Tax Transparency
The Ministry of Finance issued a Ministerial Decision No. 82 of 2023 on the Determination of Categories of Taxable Persons Required to Prepare and Maintain Audited Financial Statements
The article discusses the categories of taxable persons who are required to prepare and maintain audited financial statements. Clause 2 of Article 54 of the Corporate Tax Law outlines two categories of taxable persons who fall under this requirement.
The first category includes any taxable person who has earned revenue exceeding AED 50,000,000 during the relevant tax period. This threshold applies to all types of taxable persons, including companies, partnerships, and branches of foreign entities.
The second category includes “Qualifying Free Zone Persons.” These are persons licensed by a free zone authority who meet specific criteria, such as holding a valid tax residency certificate issued by the free zone authority, having a physical presence in the free zone, and not being a branch or subsidiary of a company outside the free zone.
By meeting these requirements, these individuals are required to prepare and maintain audited financial statements in compliance with the Corporate Tax Law.
Transfer pricing requirements
Domestic transactions
The Ministry of Finance is yet to implement specific transfer pricing regulations for domestic transactions. However, the UAE has been taking steps to align its tax framework with international standards, such as joining the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) in 2018.
While there are no explicit transfer pricing rules for domestic transactions, the Ministry of Finance has referred to the Arm’s length principle for all transactions with related parties or connected parties. In practice, the Federal Tax Authorities could still ask about the domestic article even if it is low risk from a CT tax perspective.
Therefore, it is essential to monitor any updates or changes in the UAE’s tax regulations, as the impact of transfer pricing rules for domestic transactions may occur in the future. In the meantime, businesses operating in the UAE should ensure compliance with existing tax regulations and maintain proper documentation to support their intra-group transactions.
The new rules
The Ministry of Finance in the United Arab Emirates has recently announced the release of Ministerial Decision No. 97 of 2023. This decision outlines the regulations that must be followed when it comes to maintaining transfer pricing records. Noteworthy elements of the new legislation include:
- The decision establishes the obligation for certain taxpayers to prepare and maintain transfer pricing documentation, including a Local File and a Master File, to demonstrate compliance with the arm’s length principle in their related-party transactions.
- Taxpayers with an annual consolidated group revenue of AED 3,15 billion (approx. USD 900 Million) for a Multinational Enterprises Group (as defined in Cabinet Decision No. 44 of 2020) and those with a Taxable Person’s Revenue of AED 200 Million (USD 54.4 Million) or more during the relevant Tax Period, along with those involved in complex or high-risk transactions, must comply with the documentation requirements.
- The Local File should provide detailed information on the taxpayer’s related-party transactions, including non-resident, exempt persons,and A Resident Person that has made an election under Article (21) of the CT Law and meets the conditions of such election. The nature, terms, and conditions of the transactions, as well as the transfer pricing methods applied and the rationale for their selection.
- The Master File should contain an overview of the multinational group’s global business operations, including its organizational structure, intangible assets, and overall transfer pricing policies.
Taxpayers are required to submit the transfer pricing documentation to the Federal Tax Authority upon request, within a specified time frame.
Penalties may be imposed for non-compliance with the transfer pricing documentation requirements, including failure to prepare, maintain, or submit the required documentation.
The decision also provides guidance on the use of transfer pricing methods, comparability analysis, and the application of the arm’s length principle in determining the appropriate pricing for related-party transactions.
This long-awaited decision increases the transparency of intra-group transactions of large groups operating in the UAE and also brings them into line with international tax standards.
Compared to other countries in the region, the UAE is still generous compared to neighbouring countries where the threshold for the application of TP rules is lower (Qatar: USD 13.7 Million).
TP disclosure form
Article 55 of the UAE CT Law refers to a TP disclosure form. However, there is not any reference to this requirement in the recent Ministerial Decision No. 97 of 2023.
Many other countries require taxpayers to submit such a document to their respective tax authorities. This form provides an overview of related-party transactions and transfer pricing policies and is usually a part of the annual tax return filing process. By using this form, tax authorities can detect possible transfer pricing risks and choose which cases to audit.
The threshold of application of this TP obligation is generally very low because the formality is annexed to the tax return. Thus, the majority of taxable person should be subject to this TP obligation at least and should be prepared to identify and analysed any transaction with a related or connected company. Let the MOF or FTA issue a decision on this matter.
FTA decisions
Surprisingly, the FTA also issues corporate tax decisions on 7 April 2023.
These decisions cover certain practical aspects in the context of the implementation of the CT.
Conditions for change in the Tax period
To be eligible for a change in tax period, the entity must:
- Have a valid legal, commercial, or economic reason (e.g.: align financial years with other entities for tax group purposes),
- Not have filed a tax return for the relevant period,
- Have opted for a maximum extension of 18 months; or for shortening of the next Tax Period between 6 and 12 months.
The application must be submitted within six months of the end of the original tax period, and all specific time frames set out in the decision must be met.
Failure to comply with these conditions can result in legal and financial consequences, including penalties and fines.
Tax deregistration timeline
Article 52 (1) of the CT Law indicates that a Taxable Person shall apply with the FTA for a deregistration for CT purposes in the event the Taxable Person no longer carries out business activities[1] by means of liquidation, dissolution etc.
The FTA decision no (6) of 2023 clarifies the mechanism and timelines to deregister for CT purposes.
A Taxable UAE resident Person[2] may apply for a Tax Deregistration within 3 months from the date of cessation of Business or Business activity, dissolution, liquidation or otherwise.
The publication of these decisions highlights the functions of the FTA, which will be the main interlocutor of taxpayers and will also be the tax inspection body.
Through all these decisions, the UAE Tax Authorities have clarified some points of the CT law before its entry into force. On May 14, 2023, a CT guide was published to provide an explanation of each article of the CT law.
With 15 days to go before the CT comes into effect, the Ministry of Finance is under pressure to issue all the necessary clarifications to people doing business in the UAE.
The decision on frees-zone entities remains without doubt the most awaited as it will impact many foreign and Emirati investors who have used this legal vehicle for business purposes.