Calculation of Taxable Income and Exemption under UAE Corporate Tax Law Consultation Document

𝐔𝐀𝐄  𝐂𝐎𝐑𝐏𝐎𝐑𝐀𝐓𝐄 𝐓𝐀𝐗 𝐋𝐀𝐖 𝐂𝐎𝐍𝐒𝐔𝐋𝐓𝐀𝐓𝐈𝐎𝐍 𝐃𝐎𝐂𝐔𝐌𝐄𝐍𝐓 𝐊𝐄𝐘 𝐅𝐄𝐀𝐓𝐔𝐑𝐄𝐒

Calculation of Taxable Income Exemptions

On 31 January 2022, the UAE Ministry of Finance announced the introduction of Federal Corporate Tax (CT) in UAE w.e.f. 1 June 2023. While the UAE Federal Tax Authority (FTA) is finalizing the UAE CT regime, on 28 April 2022, it issued a public consultation document covering various aspects of the proposed law. The business community and other interested stakeholders are expected to provide their comments online at the prescribed link by 19 May 2022.

Taxable Persons

• UAE CT will apply to UAE companies and other legal persons incorporated in the UAE as well as to a foreign legal entity having a Permanent Establishment (PE) in UAE.
• UAE CT will not apply to individuals unless he is engaged in business or commercial activity in the UAE, which requires him to obtain a commercial license or equivalent permit from the relevant competent Authority in the UAE.

However, there are certain exceptions that will exempt entities from CT and are as follows:

– The federal and emirate governments and their departments, authorities, and other public institutions.
– Wholly government-owned UAE companies that carry out a sovereign or mandated activity, and that are listed in a cabinet decision.
– Businesses engaged in the extraction and exploitation of UAE natural resources that are subject to Emirate-level taxation.
– Charities and other public benefit organizations that are listed in a cabinet decision.
– Public and regulated private social security and retirement pension funds; and
– Investment funds, subject to meeting the relevant conditions.

Basis of Taxation

• UAE CT would be based on the residential status of the person in UAE.
• The following persons shall be considered as Residents of UAE for UAE CT:

– A legal person that is incorporated in UAE;
– Any natural person who is engaged in a business or commercial activity in the UAE, either in their own name or through an unincorporated partnership;
– A foreign company, if it’s effectively managed and controlled from    the UAE.

• Tax residents would be liable for UAE CT on its worldwide income. Any income earned from a foreign jurisdiction on which taxes is paid in such jurisdiction will be allowed as a credit against UAE CT.
• Non-residents will be subject to UAE CT on taxable income from their PE in UAE and income which is sourced in the UAE.

Calculation Of Taxable Income

• Accounting net profit (or loss) as stated in financial statements would be considered as a starting point for determining taxable income.
• Commonly, the International Financial Reporting Standard (IFRS) is used in UAE for preparing financial statements. However, consideration is given to allowing alternate financial reporting standards for drawing the financial statement.
• Capital unrealized gains and losses will not be required to be included while computing taxable income, but Revenue item unrealized gains and losses will have to be considered while computing taxable income.

Exemptions from Taxation

The following income shall be exempt from taxation:

• Capital gain and dividend income received by UAE company from a foreign company, subject to certain conditions like UAE shareholder company must own at least 5% of the shares, and the foreign company is subject to CT (or an equivalent tax) at a rate of at least 9% in home country – Participation Exemption;
• All domestic dividend income earned by UAE company (including dividend paid by Free Zone person);
• UAE Company will have two options for taxing the income of foreign branches
  1. claim a foreign tax credit for taxes paid in the foreign branch country, or
  2. elect to claim an exemption for their foreign branch profits. Income from Foreign Branches. An exemption for foreign branch profits shall not be available where the foreign branch is not subject to a sufficient level of tax in the foreign jurisdiction in which it is located.
• Income earned by a Non-resident from operating or leasing aircrafts or ships (and associated equipment) used in international transportation, provided similar treatment is provided to a UAE business in the relevant foreign jurisdiction

Interest Caping Rule

• It is proposed to cap the amount of interest expense to group companies to 30% of earnings before interest, tax, depreciation, and amortization (EBITDA). Irrespective of the 30% cap, some fixed amount would be allowed as a deduction. Specific exemption from these provisions to banks, insurance, and certain regulated financial services entities and businesses carried out by natural persons.
• Different interest capping thresholds may be allowed for the consolidated groups. In addition to meeting arm’s length test, interest payment between group companies would also be required to provide commercial justification for availing the loan.

Treatment of Expenses

• Only 50% of the expenditure incurred to entertain customers, shareholders, suppliers, and other business partners shall be tax-deductible, as such expenses often include non-business and personal elements.
• No deduction will be allowed for certain specific expenses such as administrative, penalties, recoverable VAT, or donations paid to an organization that is not an approved charity or public benefit organization.

Treatment Of Tax Losses

• There is an indefinite loss carry forward period proposed but taxable profits will only be allowed to be offset at a maximum of 75% of prior year loss(es).
• The consultation paper notes that if there is a change in ownership of more than 50%, tax losses may still be carried forward provided the same or similar business is carried on by the new owners.
• It is important to note that any losses incurred before the effective date will not be available to be carried forward in the following situations:

– If a person was not liable to UAE tax.
– the losses relate to activities which generate income that is exempt from UAE CT.
– the losses were generated by a Free Zone Person that are not attributable to a PE in the mainland.