UAE Corporate Tax Law will continue incentives for entities based in Free Zones

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The UAE Ministry of Finance (MoF) has released a public consultation document inviting comments from stakeholders on the proposed legislation. A progressive step by the ministry, which offers companies the opportunity to play a key role in the formulation of the UAE corporate tax law.

Although there is no personal income tax, income from activities performed by individuals under a business license would be subject to tax. In addition, federal and emirate governments, their departments and companies carrying out sovereign activities, companies engaged in the extraction of natural resources, charities, pension funds, investment funds (under conditions) would be exempted .

Since the January announcement, a widely discussed topic has been the taxation of free zone entities. The consultation document sets the following broad outlines:

* The UAE corporate tax system will honor tax incentives currently offered;

* The zero percent CT rate will be applicable if the Free Zones Entity earns revenue outside the UAE or inside the Free Zones;

* Audited financial statements are essential;

* Mainland branches of free zone entities will be taxed at the normal mainland income tax rate;

* Free zone entities with passive income such as dividends, royalties and mainland interest will be subject to a 0% corporate tax rate. Similarly, those entities located in designated areas for VAT purposes that supply goods to the mainland will also be eligible for the 0% rate;

* Free zone entities can be a regional supply center; however, payments made by continental entities will not be a deductible expense;

* Any other income from the mainland to the free zone will disqualify it from the 0% rate; and

* Free zone entities can irrevocably decide to be subject to the normal corporate tax rate.

For the calculation of taxable income, the accounting result would be the starting point. The default tax year would be the Gregorian calendar year. Dividends and capital gains would be exempt under certain conditions. Spending on interest payments was limited to 30% of EBITDA and only 50% of entertainment expenses would be allowed as a deduction.

Compensation for losses

Businesses can deduct losses from prior periods against future taxable income up to 75% of taxable income. Tax losses can be carried forward indefinitely provided that the same shareholders hold at least 50 percent of the share capital. In case of new owners, only 50% of losses can be carried forward for the same business.

Corporate tax groups can be formed for companies with a common shareholding of at least 95 percent. In addition, the transfer of losses between group companies is permitted where there is 75% or more common ownership.

Transfer pricing provisions in line with OECD guidelines have been introduced. Taxpayers with related party and related person transactions should submit a disclosure form, maintain a master file and a local file. Country-by-country reporting (CbCR) compliance requirements would be maintained.

Currently, a 0% withholding tax has been prescribed on domestic and cross-border payments without the requirement to file withholding tax returns.

Register with FTA

The first step towards corporate tax compliance would be that companies will need to register with the Federal Revenue Authority (FTA) to obtain a tax registration number. Taxpayers would be required to file the tax return on the FTA portal and settle tax debts within nine months of the end of the tax period.

In addition, it was also provided that taxpayers would have the possibility to request clarifications regarding uncertain tax positions from the ALE. Regarding the overall minimum tax (BEPS and Pillar 2), the Ministry of Finance would announce the principles of integration with the UAE corporate tax.

The document is well thought out and covers the main legislative aspects of a robust corporate tax system. Certain aspects such as the deferral of unauthorized interest expenses, amortizations and the interaction of the free zone with the mainland require more clarity. The document is open for public comment until May 19.

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