The UAE Ministry of Finance (MoF) has released a public consultation document inviting comments from stakeholders on the proposed legislation. A progressive step by the Ministry, which provides an opportunity for businesses to play a key role in formulating the UAE Corporate Tax law.
While there is no tax on individual income, income from activities carried out by individuals through a commercial license would attract the tax. Further, federal and emirate governments, their departments, and companies carrying out sovereign activities, companies engaged in the extraction of natural resources, charities, pension funds, investment funds (subject to conditions) would be exempt.
Since the January announcement, a widely discussed topic has been the taxability of free zone entities. The consultation document lays down the following broad contours:
* The UAE Corporate Tax regime will honour the tax incentives currently being offered;
* Zero per cent CT rate will be applicable if the free zones entity earns income from outside UAE or within free zones;
* Audited financial statements are a must;
* Mainland branches of free zone entities will be taxed at the regular tax rate on mainland income;
* Free zone entities with passive income such as dividend, royalty and interest from the mainland will attract a 0 per cent corporate tax rate. Similarly, such entities in designated zones for VAT purposes supplying goods to the mainland will also be eligible for the 0 per cent rate;
* Free zone entities can be a regional sourcing hub; however payments made by mainland entities will not be a deductible expenditure;
* Any other mainland sourced income to the free zone will disqualify it from the 0 per cent rate; and
* Free zone entities can make an irrevocable decision to be subject to the regular corporate tax rate.
For computing taxable income, accounting profit/loss would be the starting point. The default tax year would be the Gregorian calendar year. Dividends and capital gains would be exempt subject to certain conditions. Expenses on account of interest payments have been limited to 30 per cent of EBITDA and only 50 per cent of entertainment expenses would be allowed as deduction.
Businesses can offset prior period losses against future taxable income up to 75 per cent of the taxable income. Tax losses can be carried forward indefinitely provided the same shareholders hold at least 50 per cent of the share capital. In case of new owners, only 50 per cent of the losses can be carried forward for the same business.
Corporate tax groups can be formed for companies having a common shareholding of at least 95 per cent. Furthermore, transfer of losses between group companies is permissible where there is 75 per cent or more common ownership.
‘Transfer Pricing’ provisions in line with OECD guidelines have been introduced. Taxpayers transacting with related parties and connected persons would need to submit a disclosure form, maintain a master file and a local file. The Country-by-Country Report (CbCR) compliance requirements would continue.
Currently, a 0 per cent withholding tax has been prescribed on domestic and cross-border payments with no obligation to file withholding tax returns.
Register with FTA
The first step towards Corporate Tax compliance would be that businesses will have to register with the Federal Tax Authority (FTA) to obtain a Tax Registration Number. Taxpayers would be required to file the tax return on the FTA portal and settle tax liabilities within nine months of the end of the tax period.
Further, it has also been provided that taxpayers would have an option to seek clarifications in respect of uncertain tax positions from the FTA. With respect to Global Minimum Tax (BEPS and Pillar 2), the Ministry of Finance would announce the principles for integration with UAE’s Corporate Tax.
The document is well thought through and covers key legislative aspects for a robust corporate tax regime. Certain aspects like carry forward of disallowed interest expenditure, depreciation allowances, and free zone interaction with the mainland require more clarity. The document is open for public comments until May 19.