There is a wind of change in the tax system in the United Arab Emirates. The esteemed Ministry of Finance of the United Arab Emirates has seized the spotlight by announcing ground-breaking decisions regarding corporate taxation, as part of their unwavering commitment to fostering economic growth.
A federal decree mandating a nine percent corporate tax on taxable business profits exceeding AED 375,000,000 was issued. The revised regulation was announced in December 2022 and entered into force on June 1, 2023, for fiscal years beginning on that date.
The Ministry of Finance issued this decision, known as UAE Cabinet Decision No. (49) of 2023, to clarify how the Corporate Tax Law applies to resident and non-resident individuals engaged in business or business-related activities. The rules were made public on May 17, 2023.
The new tax does not apply to salaries or other personal income from employment, nor to interest and other personal income derived from bank deposits or savings programs, nor to real estate investments made by individuals in their personal capacity. There will be no change to the 5% value-added tax that was implemented in 2018.
These ministerial decrees are poised to transform the landscape by deconstructing the complexities surrounding the exemption of private regulated pensions and social security funds, elucidating the foundation of financial statement preparation and consolidation mechanisms within tax groups, and establishing unambiguous criteria for claiming the cherished participation exemption.
Three major decisions
- Privately-Administered Pension and Social Security Funds
The UAE Ministry of Finance has added provisions pertaining to the exemption of corporate tax from private pension and social security funds. This decision ensures conformance with international tax practices, ensuring that the exempt status of the UAE private pension or social security funds is recognized globally, thereby allowing access to double tax treaty advantages when engaging in international investments.
In addition, the decision specifies the utmost contributions permitted per beneficiary as well as the need for an annual confirmation of compliance conducted by a statutory auditor.
- Financial Reporting Methods and Standards
To facilitate the calculation of taxable income for corporate tax purposes, comprehensive guidelines have been established for the preparation of financial statements by enterprises in the UAE. This decision affirms unequivocally that the International Financial Reporting Standards (IFRS) are the applicable accounting standards in the UAE. Larger businesses with revenues exceeding Dh50 million are required to disclose their finances using IFRS.
Small and medium-sized enterprises (SMEs) with annual revenues of less than Dh50 million have the option of applying IFRS. Additionally, to alleviate the compliance burden, cash accounting is permitted for enterprises with revenues below 3 million AED.
- Participation Exemption
Under this provision, dividends, profit distributions, and capital gains derived from a participating interest are exempt from corporate taxation.
A participating interest is defined as a stake of at least 5 percent in the shares or capital of another entity held for at least 12 months.
When the subsidiary is located in a jurisdiction with a corporate tax rate of at least 9 percent or can demonstrate an effective tax rate of at least 9 percent on profits, income, or equity, the exemption applies. Also excluded are “free zones” in the United Arab Emirates, where companies are able to conduct business with less restrictions.
In addition, the decision clarifies that the relief applies to a variety of ownership interests, including preferential, ordinary, and redeemable shares, as well as membership and partner interests. To qualify, the total cost of acquiring these ownership interests must exceed or be equal Dh4 million. This assures that the UAE-based companies with certain investments in foreign entities that satisfy the specified conditions are exempt from paying corporate tax on such investments.
The Corporate tax exemptions apply to:
- Government entities.
- Government-owned corporations.
- Individual involved in the extraction industry.
- Individuals involved in the non-extraction of natural resources.
- Entity with public benefit status.
- Fund of qualified investments.
- A pension or social security fund administered by the state and subject to its regulatory supervision.
- A private pension or social security fund subject to regulatory supervision by the state’s competent authority.
- A legal entity incorporated in the State wholly owned and controlled by an Exempt Person and engaged in any of the following activities:
- Performs a portion or the entirety of the activity of the Exempt Person.
- Exclusively holds assets or invests funds for the benefit of the exempt individual.
- Performs only activities that are supplementary to those of the Exempt Person.
- Any other individual as determined by a Cabinet decision issued at the Minister’s suggestion.
Since expatriates make up around 80% of the UAE’s population, this shift might dampen the country’s allure. It might also benefit Saudi Arabia, which is racing to catch up to its smaller neighbor by creating its own free-wheeling international economic zones.
Still lower than regional contemporaries and the majority of global financial hubs, the 9% tax on firm earnings is still very modest.
These measures were meticulously crafted with a visionary fervor to strengthen the UAE’s corporate tax framework, fostering an environment that embraces adaptability and supports businesses across all industries. The pursuit of a business-friendly environment is central to these transformative directives.
In a world fraught with ambiguity and complexity, the Ministry of Finance of the United Arab Emirates is a beacon of clarity and progress. By implementing these decisions, the nation charts a course toward unrestricted prosperity, signaling to the world its unwavering commitment to nurturing a business-friendly environment.
