UAE Ministry of Finance publishes Explanatory Guide on Corporate Income Tax law

On 12 May 2023, the UAE Ministry of Finance published an Explanatory Guide on Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses (CIT law). The Explanatory Guide provides commentary on each article of the CIT law and therefore constitutes an important document for taxpayers in interpreting and applying the CIT law.

We have summarised some of the most important points from the Explanatory Guide hereafter:

• The term “Free Zone Person” includes a branch of a UAE mainland or foreign juridical person that is registered in a Free Zone but does not include a foreign juridical person that is considered a Resident Person by virtue of being effectively managed and controlled in the UAE on the basis of the place of effective management and control of that juridical person being situated in a Free Zone (see p. 8).
• The term “Dividend” is not defined in the CIT law, but is given a very broad definition in the Explanatory Guide. Any payment or benefit which in substance or effect constitutes a distribution of profits made or provided in connection with the acquisition, redemption, cancellation or termination of shares or other ownership interests or rights or any transaction or arrangement with a Related Party or Connected Person that does not comply with the arm’s length principle (article 34 of the CIT law) is also considered a dividend. This definition is of great importance for calculating taxable income and the application of the participation exemption (see p. 8).
• Regular taxpayers are subject to 0% CIT on Taxable Income up to and including AED 375,000. Qualifying Free Zone Persons will not be able to benefit from the 0% tax bracket. Instead, they will be eligible for a 0% tax rate on Qualifying Income. Any non-Qualifying Income will in principle be subject to 9% corporate tax (see p. 10).
• The Explanatory Guide provides further clarifications regarding the scope of Exempt Persons, such as Government Entities, Government Controlled Entities, Persons engaged in an Extractive Business and Persons engaged in a Non-Extractive Natural Resource Business, Qualifying Public Benefit Entities, Qualifying Investment Funds, Pension or social security funds and juridical persons incorporated in the UAE that are wholly owned and controlled by certain Exempt Persons. Persons who believe they are eligible for a CIT exemption should carefully assess the various conditions and will have to ensure that the conditions continue to be met throughout each tax period (see p. 11-32).
• The place of effective management and control of a juridical person is where key management and commercial decisions concerned with broader strategic and policy matters necessary for the conduct of the company’s business as a whole are regularly and predominantly made and given. Other factors to consider are the location of the company’s board of directors (or any equivalent body), the location of controlling shareholders, the location of any other Person or body to whom the decision-making powers have been delegated by the board of directors, or the place of residence of directors or executive management (see p. 33-34).
• Where a non-resident person has a nexus in the UAE, such person may become subject to UAE CIT. The Explanatory Guide clarifies that this clause allows the Cabinet to determine that a Person can be a Non-Resident Person, and as such within the scope of CIT, through some other form of connection to the UAE. Further clarification is expected to be provided in due course through a Cabinet Decision (see p. 35).
• The Permanent Establishment (PE) concepts under UAE CIT law follow the principles provided in Article 5 of the OECD Model Tax Convention on Income and Capital, although there are some notable differences (see p. 39-42).
• Guidance on which arrangements are considered unincorporated partnerships and clarification of the look-through treatment (fiscal transparency) of such partnerships (see p. 45-48).
• Expenditure incurred for staff entertainment is not subject to the deductibility limitation for entertainment expenditure (50%) and is therefore fully deductible (see p. 73).
• In case of a violation of any provisions of the CIT law, penalties can be imposed by the Federal Tax Authority in accordance with the tax procedures law and its executive regulations (p.102).

 

Key takeaway

The Explanatory Guide provides an explanation of the meaning and intended effect of each article of the Corporate Income Tax Law. Taxpayers should familiarize themselves with the guide to interpret and apply the law in a correct manner.