The Federal Tax Authority (FTA) released the Federal Decree-Law No.47 of 2022 (Federal Decree-Law) on Friday, 9 December 2022 regarding taxation of Corporations and Businesses.  The Federal Decree-Law is broadly in line with the internationally accepted taxation principles.

It may be noted that though the Federal Decree Law provides the broad framework of the Corporate Tax law, however, taxpayers would need to wait for and carefully examine the Executive Regulations, Cabinet Decisions, Public Clarifications/ Guides, etc. to ascertain the final impact for them.

We have also summarized hereunder, key differences in provisions of the Decree Law vis-à-vis Public Consultation Document issued earlier:

  1. Expenditure disallowance in relation to exempt/ non-taxable income: Dividend, income from foreign permanent establishment, non-resident’s income from operating ships or aircraft may be exempt subject to certain conditions èCorresponding expense will not be tax deductible
  2. Small Business Relief to be announced for Resident Person in a separate Cabinet Decision: In such cases, the businesses will be treated as having no taxable income during the relevant Tax Period and may be subject to simplified compliance obligations (including relief from maintaining transfer pricing documentation). To claim small business relief, an election must be made to the FTA.
  3. Certain business activity may be out of scope of Corporate Tax: The Cabinet Decision would specify the categories of Business or Business Activity conducted by a resident or non-resident natural person that are subject to Corporate Tax èCertain categories of Business or Business Activity conducted by natural person(not specified in Cabinet decision) may be outside the scope of Corporate Tax.
  4. Separate section introduced to clarify the categories of income which would be considered as State Sourced Income: It is clarified that following income categories shall be considered as State Sourced Income:
    • Where it is derived from a UAE Resident Person
    • Where it is derived from a Non-Resident Person and the income received has been paid or accrued in connection with, and attributable to, a Permanent Establishment of that Non-Resident Person in the UAE.
    • Where it is otherwise accrued in or derived from activities performed, assets located, capital invested, rights used, or services performed or benefitted from in the UAE.
  1. Option provided to account gains/ losses on actual realization basis while calculating Taxable Income (when accounts are prepared on accrual basis): This option is available for all assets and liabilities that are subject to fair value or impairment accounting or held on capital account at the end of a Tax Period.
  1. Specific Interest Deduction Limitation Rule: No deduction to be allowed for interest expenditure incurred on a loan obtained, directly or indirectly, from a Related Party for profit distribution to a Related Party, redemption, repurchase, reduction or return of share capital to Related Party, capital contribution to Related Party, acquisition of an ownership interest in a person who is or becomes a related party following the acquisition.
  2. Substantial Change in the Free Zone Person provision in the Federal Decree-Law vis-à-vis Public Consultation Documentation:
    • In the Public Consultation Documentation, it was mentioned that any mainland sourced income (other than the passive sourced income) would disqualify a Free Zone Person from 0% Corporate Tax Regime in respect of all their income.
    • However, in the Federal Decree-Law it is clarified that the Free Zone Person would be subject Corporate Tax at the rate of 9% on the taxable income which is not Qualifying Income èDetailed guidance on what would constitute as qualifying income is awaited. However, prima facie, it appears that mere transaction with mainland entity would not disqualify a Free Zone Person’s entire income from 0% Corporate Tax. It may have to pay 9% Corporate Tax only on such transactions with mainland entity.
  1. Transfer Pricing Provisions: The opening balance sheet for the First Tax Period for the UAE Corporate Tax purpose should be prepared taking into consideration arm’s length principle. Thus, it should be ensured that the transfer pricing policies should be implemented at the earliest so that the closing balance sheet reflect the arm’s length price.
  1. Advance Pricing Agreement: The provision of Advance Pricing Agreement(APA) is introduced wherein person who are required to comply with the transfer pricing provisions can apply for APA with the FTA,before entering into such transaction/ arrangement.
  1. General Anti Abuse Rule: The FTA can disregard any transaction or arrangement made without commercial or fiscal reason or where the main purpose or one of the main purpose is to obtain Corporate Tax Advantage. This will be applicable for transactions or arrangement entered into on or after the date this Decree-Law is published in the Official Gazette èThus, any such transaction entered now but resulting into a Corporate Tax Advantage later can be disregarded.
  1. Registration: Registration is mandatory for all taxable persons.
  1. International Agreements: International agreement would prevail over the Federal Decree Law, to the extent it limits the tax liability of a taxpayer.

Contacts

You may email us or can contact any of our team members relating to your queries on this subject:

Stany Pereira
Managing Partner
stany@pkfuae.com
Shailesh Kumar
Director- Tax Services
skumar@pkfuae.com
Mradul Gupta
Senior Manager – Tax Services
mgupta@pkfuae.com
Nandita Salgaonkar
Manager-Tax Services
nsalgaonkar@pkfuae.com
Radhika Doshi
Assistant Manager- Tax Services
rdoshi@pkfuae.com
Gaurav Verma
Assistant Manager- Tax Services
gverma@pkfuae.com

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