Tax Updates

Limited and general partnerships

Limited and general partnerships and other unincorporated joint ventures and association of persons will be treated as “transparent” for UAE CT purposes.

A flow-through entity – also known as a “pass-through entity” or “fiscally transparent entity” – is a legal business entity where its profits flow directly to the investors/owners, and only the investors or owners are taxed on the income. The structure helps avoid double taxation, which is when an income from the same source is taxed both at a corporate and personal level.

Partners in an unincorporated partnership

As a general rule, an unincorporated partnership will not be treated as a taxable person, i.e. the partnership is looked through and each partner is treated as a taxable person on their distributive share. This would mean each partner would be responsible for complying with UAE CT administration and compliance burdens and for paying UAE CT on their taxable income as if each carrying on independent business subject to UAE CT. Assets, liabilities, income, and expenditure of the partnership should be allocated to each partner in accordance with their distributive share.

Partners in an unincorporated partnership can make an irrevocable (save exceptional circumstances) application to the FTA for the unincorporated partnership to be treated as a taxable person, i.e. to be recognised as its own entity subject to UAE CT. Where this application is made, partners remain jointly and severally liable for the partnership’s CT liability. One partner will be appointed as the responsible partner for any UAE CT obligations and proceedings for the partnership.

Foreign partnerships

Foreign partnerships will be treated as unincorporated partnerships where the partnership is not subject to tax under the laws of the foreign jurisdiction and each partner is individually subject to tax on their distributive share of the partnership’s income when the partnership receives or accrues it. Partnerships are flexible vehicles that are typically complex from a tax perspective. The approach adopted in the UAE CT law attempts to simplify the tax treatment and is in line with international best practice.

Family foundations

The CT Law identifies family foundations, trusts, and similar entities as independent juridical persons that are used to protect and manage the assets of an individual or a family with a separate legal personality. A family foundation can apply to be treated as a transparent ’unincorporated partnership‘ for UAE CT purposes under certain conditions. This would generally prevent the income of the foundation or trust from attracting UAE CT and could be a useful vehicle for families to ensure a tax efficient holding structure, proper governance, as well as succession planning.

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Under the UAE CT Law, the accounting net profit (or loss) as stated in the standalone financial statements of a business is taken as the starting point for determining its taxable income. The law prescribes a number of key adjustments to the accounting net profit (or loss) in order to compute the taxable income.

The following table sets out the aspects to consider when determining the nature of a taxable person (i.e. resident vs. non-resident) as well as the applicable tax base:

Capital gains

There are no separate capital gains provisions under the UAE CT law. Any gains / (loss) on disposal of capital assets would form part of the taxable income, which would be subject to 0% or 9% tax rate as the case may be.

Unrealised gains or losses

Based on the CT Law and the FAQs, a taxable person that prepares financial statements on an accrual basis of accounting can opt for the following:

• Elect to recognise gains and losses on a ‘realisation basis’ for CT Law purposes (i.e. any and all unrealised gains would not be taxable [and conversely, any and all unrealised losses would not be deductible] until they are realised).
• Elect to recognise gains and losses on a ‘realisation basis’ for CT Law purposes for assets and liabilities held on capital account only (i.e. only unrealised gains and losses in respect of assets and liabilities held on capital account would not be taxable or deductible, respectively, until they are realised). Unrealised gains and losses arising from assets and liabilities held on revenue account, on the other hand, would continue to be included in taxable income on a current basis.

Exempt Income

To avoid instances of double taxation, and recognising the United Arab Emirates’ position as an international business hub and leading holding company location, the UAE CT regime exempts dividends and other profit distributions received by a taxable person from a UAE tax resident entity (i.e. local dividends) or received from non-UAE tax resident persons, as well as other types of income as detailed below.

Participation exemption

Dividends and other profit distributions relating to ownership interest (referred to as a ‘participating interest’) in a foreign juridical person (referred to as ‘participation’) will be exempt from tax if:

• the ownership interest is at least 5%
• a 12-month uninterrupted holding period (or the intention to hold for 12 months) is in place

• the participation is subject to tax in its country or territory of residence at a rate that is not lower than 9%, and
• not more than 50% of the assets directly or indirectly owned by the participation consist of an ownership interest or entitlements that would not qualify for the participation exemption if these assets were held directly by the taxable person.

The ‘subject to tax’ test would be satisfied if:

• A 9% effective tax rate (ETR) is applied on income or profits of the participation.
• In the event such a 9% ETR is not applicable based on the relevant jurisdiction’s tax regime, a 9% ETR is reached if re-calculated based on the provisions of the UAE CT Law.

Further, an entity could be treated as satisfying the condition that it must be subject to tax at a rate that is not lower than the UAE CT rate (i.e. at least 9%) if its principal business objective and activity is to acquire and hold shares or equitable interests that are considered as participating interests and the income of the participation during the relevant tax period substantially consists of income from participating interests. The tax rate requirement will also be treated as met where the juridical person is a QFZP or exempt person.

A participating interest of less than 5% could also qualify for the exemption where the acquisition cost of the ownership interest exceeds AED 4 million.

Foreign permanent establishment exemption

A resident person could create a PE in another jurisdiction based on the domestic tax laws of this jurisdiction, subject to any tax treaty. Generally, the income attributed to such a foreign PE will be taxed in that jurisdiction. In such a scenario, the UAE CT Law provides an option to the resident person to elect for an exemption of this income in the United Arab Emirates. The exemption will be available if the foreign PE is subject to CT or similar taxes at a rate not less than 9% in the foreign jurisdiction. If the resident person opts for this exemption, it will not be eligible to take into account losses, income, expenditure, and foreign tax credits in relation to the foreign PE in the United Arab Emirates.

International transportation exemption

Income earned by a non-resident from operating aircraft or ships in international transportation will not be subject to CT in the United Arab Emirates if the income earned by a UAE resident person that carries on these activities is exempt from CT in the jurisdiction of the non-resident.

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Corporate Tax is imposed on Taxable Income earned by a Taxable Person in a Tax Period.
Corporate Tax would generally be imposed annually, with the Corporate Tax liability calculated by the Taxable Person on a self-assessment basis. This means that the calculation and payment of Corporate Tax is done through the filing of a Corporate Tax Return with the Federal Tax Authority by the Taxable Person. The starting point for calculating Taxable Income is the Taxable Person’s accounting income (i.e. net profit or loss before tax) as per their financial statements. The Taxable Person will then need to make certain adjustments to determine their Taxable Income for the relevant Tax Period. For example, adjustments to accounting income may need to be made for income that is exempt from Corporate Tax and for expenditure that is wholly or partially non-deductible for Corporate Tax purposes.

What is taxable income as per Corporate Tax?

Article 1 of UAE CT Law define the term ‘Taxable Income’ stated below:

” The income that is subject to Corporate Tax under this Decree-Law.”

Chapter Six of this Decree-Law deals with the Calculating Taxable Income, hereunder Article 20 defines the general rules on determining the taxable income on which Corporate Tax to be calculated and paid.

In simpler terms, article 20 states that, the Taxable Income of each Taxable Person shall be determined separately on the basis of adequate, standalone financial statements prepared in accordance with accounting standards accepted in the State, after making adjustment for certain specified items namely Unrealised Gain or Loss, Exempt Income, Reliefs, Incentives Deduction, Tax losses, Transactions with Related Parties and Connected Person and Unrecorded Income or Expenditure.

What are the Corporate Tax rates in GCC?

What is the Corporate Tax Rate in UAE?

• Corporate Tax will be levied at a headline rate of 9% on Taxable Income exceeding AED 375,000.
• Taxable Income below this threshold will be subject to a 0% rate of Corporate Tax.
  Corporate Tax will be charged on Taxable Income as follows:

Resident Taxable Persons

Qualifying Freezone Persons

*this amount confirmed in a Cabinet Decision 116 of 2022 on the Applicable Taxable Income Threshold for Corporate Tax.

Illustration:

If a business has earned taxable income of AED 500,000 in a given financial year, what will be the UAE CT amount payable?

The CT liability will be calculated as follows:

• Taxable income of AED 0 ‐ AED 375,000 at 0% = AED 0
• Portion of taxable income exceeding AED 375,000 (i.e. AED 500,000 ‐ AED 375,000 = AED 125,000) at 9% = AED 11,250

The UAE CT liability for the year will be AED 0 + AED 11,250 = AED 11,250

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According to the UAE Federal Decree-Law No. 47 of 2022 on taxation of corporations and businesses (the “Corporate Tax Law”), businesses will become subject to UAE Corporate Tax from the beginning of their first financial year that starts on or after 1 June 2023.

What is Corporate tax (CT)?

Corporate tax is a form of direct tax levied on the net income or profit of corporations and other entities from their business. The government imposes a corporate tax on businesses, and the amount of tax a business pays depends on a number of factors, including the size of the business, its profits, and the type of business.

Objectives of CT

By introducing the CT, the UAE aims to:

• cement its position as a leading global hub for business and investment

• accelerate its development and transformation to achieve its strategic objectives

• reaffirm its commitment to meeting international standards for tax transparency and preventing harmful tax practices.

Who is subject to Corporate Tax?

Broadly, Corporate Tax applies to the following “Taxable Persons”:

• UAE companies and other juridical persons that are incorporated or effectively managed and controlled in the UAE;
• Natural persons (individuals) who conduct a Business or Business Activity in the UAE as specified in a Cabinet Decision to be issued in due course; and
• Non-resident juridical persons (foreign legal entities) that have a Permanent Establishment in the UAE (which is explained under Section 8).

Who should pay corporate tax in the UAE?

All businesses with a taxable profit (net) of more than 375,000 AED are subject to corporate tax and must pay a set proportion of their net profit as corporate tax. UAE companies that are incorporated or managed and controlled in the UAE, as well as some entities in a free zone, fall under this category. To help small firms and start-ups, the corporate tax rate will be 0% if the net profit is less than 3,75,000 AED.

What income is exempt?

The Corporate Tax Law also exempts certain types of income from Corporate Tax. This means that a Taxable Persons will not be subject to Corporate Tax on such income and cannot claim a deduction for any related expenditure. Taxable Persons who earn exempt income will remain subject to Corporate Tax on their Taxable Income.
The main purpose of certain income being exempt from Corporate Tax is to prevent double taxation on certain types of income. Specifically, dividends and capital gains earned from domestic and foreign shareholdings will generally be exempt from Corporate Tax. Furthermore, a Resident Person can elect, subject to certain conditions, to not take into account income from a foreign Permanent Establishment for UAE Corporate Tax purposes.

How can businesses file for corporate taxes in the UAE?

Businesses in UAE are first required to get registered under the CT regime in UAE if they are eligible for it, and after getting registered, they may receive a corporation tax registration number from the said authority. The registered business may be required to file the return within the due date, which will be 9 months after the fiscal year end, as per the law.

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