UAE: Ministry of Finance announces public consultation on corporate tax framework
The UAE Ministry of Finance (“Ministry of Finance“) announced on April 28, 2022 a public consultation on the proposed federal corporate tax (“CT“) framework. The consultation will continue until May 19, 2022 and companies are encouraged to make their submissions online. The submission link can be found here: https://www.mof.gov.ae/en/resourcesAndBudget/Pages/Corporate-Tax-Submission-Public-Consultation.aspx
It should be noted that the content of the public consultation document is not intended to reflect the final opinion of the Government of the United Arab Emirates. Therefore, the positions outlined in the Consultation Paper and this Client Alert should not be relied upon to make firm decisions at this stage.
One of the key takeaways from the consultation paper, which is relevant for MNEs likely to be subject to the Pillar 2 framework, is that the consultation paper does not offer any further insight into the interaction of the TRQ regime of WATER with standard Pillar 2 rules. This work is still in progress.
We have outlined some of the main points raised in the consultation document below.
Immediate consideration for businesses
The consultation document provides an overview of potential conditions that may need to be met to obtain certain treatments under the UAE CT, mainly in relation to the formation of a tax unit group, the transfer of tax losses between subsidiaries and the exemption of certain income streams. .
According to the consultation document, companies that operate in a UAE free zone and trade with the mainland of the UAE are unlikely to benefit from the 0% TRQ rate. Therefore, companies will need to consider the segregation of Free Zone and Mainland activities to achieve the 0% TC rate.
Furthermore, the consultation document appears to confirm the need for companies to have financial (accounts) and other record keeping procedures in place – even if the company is exempt from the UAE CE. Businesses are encouraged to review the main relevant issues of the UAE CE framework, including aspects that are unclear and could have a significant impact on their business, and provide their feedback on the application of the document. consultation to these problems, improvements and optimizations accordingly.
More in detail
In scope entities
As expected, all companies established in the UAE fall within the scope of the UAE CT Law. The consultation document highlights the potential exemption from the UAE CE for the following companies:
- 100% owned government entities listed in a Cabinet decision;
- natural resource extraction and exploration subject to emirate-level decrees;
- charities and other organizations of public utility;
- public and private regulated social security and pension funds; and
- Investment Funds.
The consultation document provides some initial details on the applicability of each exemption.
Further, the consultation paper stresses that limited partnerships, general partnerships and other unincorporated vehicles should be treated as transparent for the purposes of the UAE TC. Limited liability partnerships and other types of partnerships (where there is limited liability) must be subject to the UAE TC framework.
Treatment of free zone entities
Free zone entities should be treated as subject to 0% CT provided they maintain adequate substance and comply with regulatory requirements. This applies to income generated outside the UAE and other entities in any other free zone.
The income of a mainland branch of a free zone entity will be subject to the UAE IC, without the free zone entity losing the 0% rate of ICT for its free zone income .
Passive income (such as dividends, interest, royalties, and capital gains) generated by Mainland Entities by a Free Zone Entity will be subject to 0% CT applicable to the Free Zone.
However, other payments made by a Mainland Entity to a Free Zone Entity should be treated as non-deductible in the Mainland Entity. Revenue from these payments would also disqualify the free zone entity from eligibility for the 0% TC rate.
Overview of the UAE CT Framework
A number of key features are set out in the consultation document. The main ones are:
- Provisions for fixed place of business and permanent establishment of a dependent agent (as per OECD guidelines) should be included as part of the UAE TC.
- Exemption from dividend income and/or capital gains if more than 5% equity is held and the foreign subsidiary has been subject to at least 9% corporation tax (or equivalent).
- A foreign branch exemption may be available.
- Interest expense should be limited to 30% of EBITDA.
- Inclusion of transfer pricing regulations, application of arm’s length principles (in line with OECD guidelines) and the need for transfer pricing documentation (including disclosure of related party transactions and related persons).
Treatment of tax losses
Tax losses could offset 75% of taxable income in a tax year. Excess tax losses must be carried forward indefinitely, although they may be subject to a change of ownership clause.
Tax losses incurred before the introduction of UAE CT or enrollment in UAE CT should not be usable.
Tax losses can be shared between entities that have at least 75% common ownership. Tax losses of free zone entities that benefit from the 0% CT rate cannot be shared.
Group tax consolidation
A fiscal unit can be formed between group entities when there is at least 95% ownership in the entities. This will make it possible to produce a single consolidated tax return by the group.
The entities within the tax unit are jointly and severally liable for the tax position.
How should CT be administered?
The deadline for filing tax returns and paying tax is estimated at 9 months after the end of the financial year. The CT return would be on a self-assessment basis and will be reviewed by the AFC in accordance with the Tax Procedures Act.
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