The government of the United Arab Emirates has made many efforts to simplify and facilitate the smooth introduction of a corporate tax. The latest effort is the Corporate Tax General Guide published by the UAE’s Federal Tax Authority on Sept. 11.
The guide gives general guidance on corporate tax in the UAE and aims to make Federal Decree-Law No. 47 of 2022—the corporate tax law—and the related explanatory guide issued by the Ministry of Finance in May as understandable as possible. It covers key topics, such as determining the corporate tax base, calculating tax, filing tax returns, and other compliance requirements. It also addresses common questions that businesses might have.
The guide doesn’t replace or supplement the law and isn’t legally binding. Instead, it’s designed to help understand the newly introduced corporate tax. It will be updated periodically.
In its 10 chapters the guide provides a useful tool to navigate the extensive legislation and implementing decisions issued in the past year. It also includes 36 practical examples illustrating the application of the corporate tax law’s 70 articles. Notwithstanding the limits of the guide’s examples—it clarifies that the examples don’t encompass interactions with other corporate law provisions—several key points emerge.
Identification of resident taxable persons. The guide—along with its related example two—sheds light on the concept of “juridical person effectively managed and controlled in the UAE,” emphasizing the key factors to consider when determining whether a foreign juridical person has a place of effective management and control in the UAE.
Corporate tax for natural persons. The guide clarifies the definitions of “business” and “business activity.” It provides definitions and examples of vocational and professional activities and underscores that engaging in these activities within the UAE can cause natural persons to fall within the scope of corporate tax.
Nonresident persons earning only state-sourced income. The guide asserts that because the withholding tax rate is currently 0%, no corporate tax liability arises (section 5.4.3). Though this conclusion is reasonable (also considering that nonresident persons with only state-source income aren’t subject to corporate tax registration obligations), it wasn’t obvious from a literal interpretation of the law, given that withholding tax is primarily a tax collection mechanism and the corporate tax law doesn’t explicitly exempt such state-sourced income earned by nonresident persons.
Deductions. The guide provides several examples to clarify various aspects, including:
- Apportioning expenditure related to exempt income (example nine)
- Identifying expenses incurred for non-business purposes (example 13)
- Apportioning non-business expenditure (example 14)
- Determining whether an expense is of a capital or revenue nature (example 15)
- Distinguishing between entertainment expenses (eligible for 50% deduction) and non-business expenditure (non-deductible) (example 19)
Based on these examples, it appears that certain fringe benefits, such as medical expenses, insurance, company cars, tuition fees, and accommodation expenses, can be fully deductible if they exclusively benefit staff. However, if the benefits extend to owners or shareholders, they’re likely to be considered non-business expenditure. It remains unclear whether this distinction holds when owners or shareholders are employed by the company and receive market value remuneration.
The guide reaffirms that staff entertainment expenses are fully deductible. For instance, internal entertainment costs (such as staff parties) can be fully deducted for corporate tax purposes unless the staff are family members and the event is private (section 126.96.36.199.).
Foreign tax credit regime. This allows taxpayers to offset foreign taxes paid on foreign-sourced income against corporate tax due in the UAE, subject to specific conditions (section 9.3.2.).
The guide confirms that this relief is unilateral, it isn’t based on double tax treaty obligations. The foreign tax credit is an ordinary tax credit, meaning that it can’t exceed the amount of corporate tax due on the foreign-sourced income.
The guide doesn’t clarify what happens if the foreign tax credit falls within this limit but isn’t fully used in the tax year. However, based on a literal interpretation of Article 47 of the corporate tax law and the explanatory guide, there should be no limitation on carrying forward excess foreign tax credit.
Corporate tax administration. The guide usefully recaps various elections and applications outlined in the corporate tax law. It clarifies that taxable persons can unilaterally apply elections without the tax authority’s input, whereas applications need explicit approval from the authority.
Noteworthy elections allow taxpayers to do the following:
- Account for gains and losses on a realization basis. This election, discussed in detail in section 6.3.1, allows taxpayers who prepare their financial statements on an accrual basis to exclude unrealized gains and losses. The guide includes two examples.
- Apply transitional relief. This election, described in section 6.9, allows taxpayers to make specific adjustments concerning intangible assets, immovable property, and financial assets and liabilities owned before they became subject to corporate tax. The aim is to exclude from taxation the portion of latent capital gain accrued before the taxpayer became subject to corporate tax for gains realized after its introduction.
Both elections carry significant weight at this stage, as failure to apply an election when submitting the first corporate tax return results in the non-election being irrevocable.
Records and documentation taxpayers are required to maintain. Notably, apart from financial statements, the law doesn’t specify the records and documentation needed. Instead, the requirements vary depending on the type and complexity of the taxpayer’s business.
However, the guide suggests that the information kept should typically include records of transactions in the tax period (general ledger); assets and liabilities (assets and liabilities books); and stock held at the end of the period (inventory).
The guide also clarifies that taxpayers need not maintain certain documents, such as bank statements, sale and purchase ledgers, invoices and business correspondence, in their original format, as alternative formats are acceptable.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
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