Key Highlights:
- The Corporate Tax Law is set to come into effect from 1 June 2023, introducing a headline tax rate of 9%.
- The regime integrates internationally recognized best practices in taxation.
- Businesses operating within strategic sectors can avail numerous exemptions.
- Entities within free zones can maintain their 0% tax status, given they meet certain prerequisites.
- General anti-avoidance and transitional rules will come into play once the law is published in the Official Gazette.
Executive Summary
On 9 December 2022, the United Arab Emirates (UAE) Ministry of Finance (MoF) unveiled the Federal Decree-Law No. 47 of 2022 concerning the Taxation of Corporations and Businesses (Corporate Tax Law). This marks the commencement of a fresh corporate tax (CT) landscape in the UAE. Complementing the law’s release, 158 Frequently Asked Questions were also made public.
This new CT framework will be operative for financial periods starting on or subsequent to 1 June 2023. For conglomerates that conclude their financial year in December, this facilitates a 12-month preparatory window prior to the effective date. Nonetheless, the general anti-avoidance and transitional rules are valid from the law’s publication date in the Official Gazette.
Detailed Examination
Background
The UAE MoF publicized the Corporate Tax Law on 9 December 2022, scheduled to be operational from 1 June 2023. This is consequent to the preliminary public consultation document unveiled on 28 April 2022, elucidating the chief characteristics of the proposed CT system and its foundational principles.
Highlighted below are the principal components of the Corporate Tax Law:
Taxpayers may also be mandated to maintain audited or certified financial records.
Transfer Pricing (TP)
Interactions with associated entities and linked individuals must align with the arm’s-length principle. The phraseology within the Corporate Tax Law relating to this principle and other TP-associated facets aligns with Organisation for Economic Co-operation and Development (OECD) norms. Nonetheless, the categorizations of related entities and connected individuals appear expansive in comparison to global benchmarks. For instance, certain conditions can trigger a related or connected association based on kinship up to the fourth degree.
The Corporate Tax Law mandates UAE businesses to preserve TP documentation (master file and local file), subject to specifications set out in an impending Ministerial Decision. This documentation should be furnished to the FTA within a month of a request.
Additionally, it’s anticipated that businesses might need to submit a TP disclosure form coupled with the CT return. Further information on this will likely be detailed in a subsequent Ministerial Decision.
Companies will also be eligible to apply for advanced pricing agreements, with more insights expected soon.
An expanded alert focusing on the features of the UAE TP regime will be released shortly.
General Anti-abuse and Transitional Provisions
The Corporate Tax Law incorporates general anti-abuse rules (GAAR) meant to dismiss transactions or configurations primarily intended to gain a CT advantage. These regulations will be activated once the law is cataloged in the Official Gazette.
Concerning transitional provisions, the Corporate Tax Law indicates that the inaugural balance sheet for CT objectives will echo the final accounting balance sheet of the year immediately preceding the first tax year.
Implications
The ramifications of the novel CT system are profound for all entities active in the UAE, including individuals involved in business ventures. Businesses and individuals should initiate evaluations of the new regulations’ implications. This encompasses rule application assessment, cash flow implications modeling, exemption regime contemplation, and formulating processes to manage compliance. As more information becomes available in the forthcoming months via a series of Ministerial Decisions, entities should remain vigilant about these advancements and gear up for adherence prior to the commencement date.
