A Practical Guide to the UAE Corporate Tax (CT) Public Consultation Document

Background & Purpose of the Consultation

On 31 January 2022, the UAE Ministry of Finance announced the introduction of a federal Corporate Tax (CT) on business profits. The new regime applies to financial years beginning on or after 1 June 2023.

To ensure transparency, a Public Consultation Document was released on 28 April 2022, outlining the proposed design and framework. It covered key areas such as scope, exemptions, free zones, group treatment, transfer pricing, and administration. The consultation also sought business feedback before the legislation was finalized.

Scope of Taxation

Taxable Persons

• UAE-incorporated legal entities (companies).
• Foreign companies with a Permanent Establishment (PE) or effective management in the UAE.
• Natural persons conducting business activities in the UAE.

Exempt Entities

• Federal & Emirate government entities.
• State-owned sovereign activities.
• Natural resource companies (taxed at Emirate level).
• Approved charities, pension funds, and investment funds.

This wide scope reflects the UAE’s alignment with international tax norms.

Free Zone Entities and the 0% Tax Regime

Under the UAE Corporate Tax regime, Free Zone entities (FZPs) can enjoy a 0% tax rate on qualifying income, including:

• Business with non-UAE persons
• Transactions with other Free Zone entities
• Regulated financial services for foreign markets
• Passive income (dividends, interest, royalties)
• Qualifying group transactions

They may still retain 0% if:

• They have a mainland branch (branch income taxed at 9%)
• Earn passive income from mainland entities
• Deal with mainland group companies (deductions may be restricted)
• Sell goods from designated Free Zones to mainland under approved conditions

Note:  Non-qualifying mainland income cancels 0% benefits.
Once a Free Zone opts into the normal 9% regime, the decision is irrevocable.

Corporate Tax Rates & Thresholds

• 0% on taxable income up to AED 375,000.
• 9% on taxable income above that threshold.

The tiered structure ensures SMEs and startups receive relief, while larger companies contribute more.

Computation of Taxable Income: Deductions & Adjustments

Taxable income is based on financial accounting profits adjusted for tax rules.

Key Adjustments

• Interest expense: Deductible up to 30% of EBITDA (exceptions for financial services).
• Entertainment expenses: 50% deductible.
• Non-deductible expenses: fines, penalties, non-approved donations.
• Loss relief: carried forward indefinitely, but capped at 75% of taxable income in future years.

This framework aligns with OECD best practices.

Participation Exemption & Foreign Income Treatment

Participation Exemption

Dividends and capital gains from foreign subsidiaries are exempt if:

• Holding ≥ 5% shares.
• Foreign entity subject to ≥ 9% tax.

Foreign Branch Profits

Two options:

• Tax in UAE and claim Foreign Tax Credit (FTC).
• Elect to exempt foreign branch income if conditions are met.

This flexibility helps multinational UAE businesses avoid double taxation.

Groups, Loss Relief & Restructuring

• Tax Groups: UAE companies (95% ownership) can form a single tax group.
• Loss transfers: Allowed if 75% common ownership exists.
• Restructuring relief: Mergers and spin-offs may qualify for neutral treatment (no immediate tax impact).

This promotes efficient group structuring.

Transfer Pricing & Related Party Transactions

The UAE regime introduces OECD-aligned transfer pricing rules.

• Related party transactions must follow the arm’s length principle.
• Documentation requirements may include local and master files.
• Connected persons broadly defined (ownership, family links, control).

Businesses with cross-border dealings must be audit-ready.

Administration, Filing & Compliance

• Registration: All taxable entities must register with the FTA.
• Tax period: Aligned with accounting year.
• Filing deadline: 9 months after financial year-end.
• Payment deadline: Within same 9-month period.
• Self-assessment: Businesses file returns; FTA retains audit rights.
• Record keeping: Robust documentation essential, especially for Free Zone Persons.

Key Changes Since Consultation

Since the consultation, the following points have been confirmed in law:

• 9% tax rate above AED 375,000.
• Participation exemption and foreign branch election.
• Deduction limits (interest, entertainment).
• Loss carry-forward rules (indefinite with offset cap).

The final law clarified uncertainties while maintaining international competitiveness.

Implications & Strategic Considerations for Businesses

• Scope assessment: Determine whether classified as resident, Free Zone Person, or foreign PE.
• Free Zone monitoring: Ensure income remains qualifying to retain 0% status.
• Loss planning: Strategically use carried forward losses within 75% cap.
• Restructuring: Consider group treatment and transfer relief.
• Transfer Pricing: Immediate compliance readiness required.
• Accounting policies: Must align with IFRS and be audit-ready.

Unclear Areas & Stakeholder Feedback

The consultation requested views on:

• Clearer definitions of qualifying Free Zone income.
• Thresholds for transfer pricing disclosure.
• Possible safe harbors for SMEs.
• Transitional rules for assets and pre-CT profits.
• Interaction with global tax developments (OECD Pillar

Recommendations for Businesses Preparing

Businesses should act early:

• Align accounting records with IFRS.
• Map income sources and identify non-deductible items.
• Assess Free Zone compliance with qualifying income rules.
• Explore group structuring for tax efficiency.
• Establish transfer pricing documentation.
• Model liabilities under multiple scenarios.
• Monitor FTA updates and cabinet decisions.

Summary

The UAE Corporate Tax regime, effective from June 2023, introduces a comprehensive framework impacting all businesses.

Key elements include:

• 9% tax rate above AED 375,000.
  Free Zone 0% regime (conditional).
• Participation exemption for foreign subsidiaries.
• Deduction limits, loss carry-forwards, group relief.
• Transfer pricing compliance.

Businesses must adapt strategies for compliance and efficiency in the new era.

How ebs Chartered Accountants Can Help

At ebs Chartered Accountants, we help UAE businesses navigate corporate tax with:

• Registration support with the FTA.
• Advisory on exemptions for Free Zones and foreign income.
• Group structuring strategies.
• Transfer Pricing documentation aligned with OECD standards.
• Audit readiness and compliance review.

FAQs

When does the UAE Corporate Tax come into effect?

It applies to financial years starting on or after 1 June 2023.

Will Free Zone companies pay Corporate Tax?

Only on non-qualifying income; qualifying income may be taxed at 0%.

Can prior period tax losses be carried forward?

Yes, indefinitely, but only 75% of taxable income can be offset each year.

Are foreign dividends and gains exempt under UAE CT?

Yes, if the UAE company holds at least 5% in the foreign entity and meets conditions.

Is Transfer Pricing compliance mandatory?

Yes, for related party transactions, using arm’s length principles per OECD guidelines