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The UAE Federal Decree Law No. 47 of 2022 on Taxation of Corporations and Businesses (the CT Law) was released on December 9. Thus, taxable income of financial year beginning on or after June 1, 2023 will be subject to CT.

The UAE CT headline rate of 9 per cent on mainland entities would be the lowest among GCC countries. The UAE will continue to remain an attractive destination within the GCC and internationally for doing business.

The CT Law, while in line with the Public Consultation Document (PCD) has also taken into account suggestions made by various stakeholders. As proposed in the PCD, accounting results continue to be the starting point for computing tax liability.

The PCD provided for the disallowance of interest cost exceeding 30 per cent of the EBITDA. However, there was no mention of carry forward of the disallowed interest.

The CT law while continuing to restrict the interest deduction to 30 per cent of EBITDA has allowed the carry forward and set off of the disallowed interest up to 10 tax periods. This is a welcome development and has come as a relief to capital-intensive sectors, which are heavily leveraged.

Tax on assets

Further, the PCD stated that revaluation gains/losses on assets and liabilities would be subject to Corporate Tax. This provision severely impacted many holding companies having exposure to investments in assets not meeting the participation regime conditions.

The CT Law now gives an option to the taxpayers to elect as to whether the gains should be taxed on realised basis or unrealised basis. The taxpayer can exercise the option either for gains/losses arising on capital assets/liabilities or for gains/losses arising on both revenue and capital assets/liabilities.

Another point for consideration was the taxability of gains which accrued before the CT law becomes effective. The CT Law provides for a transitional provision based on which the value of assets and liabilities as per the closing balance-sheet (i.e., the last balance-sheet before tax law becomes effective) will be considered as the value of such assets and liabilities for tax purposes.

Free zone bases

In the free zone, transactions between free zone persons and related mainland entities may be permissible subject to compliance with the ‘arm’s length’ principle. Rules and conditions for free zone entities to be eligible for a zero per cent CT rate are awaited.

Besides the above, provisions relating to anti-abuse, advance pricing agreements, permanent establishments, and transfer pricing have been introduced.

To UAE, CT Law is a comprehensive tax legislation with a competitive tax providing for ease of compliance.