Throughout April 2023, the United Arab Emirates (“UAE”) Authorities have published several Cabinet Decisions (“CD”), Ministerial Decisions (“MD”), and Federal Tax Authority Decisions that are focused on further clarifying the Corporate Tax regime in the UAE that is to kick for tax periods starting on or after 1 June 2023.
While the definition of Qualifying Income, which appears to be the concentration of the major concerns of the businesses, remains unknown, the recent publications are also significant to note, especially the Ministerial Decision on Small Business Relief. Below we provide a summary of all publications made by the FTA in April 2023 that may impact your business and should be considered with the Corporate Tax regime at your doorstep.
Ministerial Decision No. 73 of 2023 on Small Business Relief
Below is a summary of the Decision on Small Business Relief aimed at helping startups and small companies gain their ground by lifting corporate tax obligations for the initial years of the business.
Know your Small Business Relief
The Ministry of Finance has issued Ministerial Decision No. 73 of 2023 on Small Business Relief following Article 21 of the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (CT Law).
Below is a summary of key points relevant to your business.
In a nutshell
Small businesses with total revenue of less than AED 3 million (~USD 817,500) in the relevant and previous Tax Period may elect to be treated as not having derived any Taxable Income.
We understand that the relief does not apply automatically; id est, the taxpayer is expected to apply for the small business relief as envisaged by Article 21 of the CT Law.
When it applies?
Small business relief is available for the Tax Periods starting from FY on or after June 1, 2023, until financial years that end before or on December 31, 2026 (resulting in a total of 3 years max). For example, if FY is January – December, small business relief will apply to the 2024, 2025, and 2026 Tax Periods (please see the illustrative chart below).
Who is eligible?
Small business relief would be available for Resident Taxable persons, i.e., juridical persons and individuals, with revenues below the established threshold.
And as per the Ministerial Decision, Qualifying Free Zone Persons and members of MNEs would not be able to apply for the relief. We believe the reason behind this decision is that:
- Qualifying Free Zone Persons can already apply a beneficial tax regime available for Free Zone persons, provided underlying conditions are met; hence there should be no point in giving another tax incentive that could be abused for bad tax practices.
- Members of MNE are probably not eligible due to the commitments towards the BEPS, specifically Pillar Two, which covers the global minimum taxation principle. It may be illogical to provide a beneficial tax regime to such companies when the ultimate goal was to set a minimum level of taxation.
What happens if the threshold is exceeded?
Per the Ministerial Decision, the relief would become unavailable for current and future Tax Periods. In other words, the taxpayer won’t be able to apply for relief if he exceeds the threshold, even if his revenues dropped in subsequent Tax Periods below the threshold. Below is an illustrative chart that depicts the applicability of small business relief as per the abovementioned scenario.
Will compliance obligations be lifted with the small business relief?
The taxpayer should still maintain his accounting records and submit the Corporate Tax returns.
Transfer Pricing requirements
There will be no need to maintain any transfer pricing documentation. However, we believe transactions with related parties and connected persons should still be carried out at arm’s length.
This conclusion is based on the literal interpretation of the CT Law. Specifically, Article 21 lists the provisions of the CT Law that would not apply to taxpayers that elected to apply for small busines
s relief. Among others, ‘Article 55 – Transfer Pricing Documentation’ is specifically mentioned when ‘Article 34 – Arm’s Length Principle’ or ‘Chapter Ten – Transactions with Related Parties and Connected Persons’ are not listed.
Based on the above, we believe the law intends to lift the TP documentation preparation obligation yet to keep the transactions between the parties at the market rate. The challenge for the taxpayers would be proving the maintenance of the arm’s length principle in the absence of any primary documentation.
Small business relief applied; what other reliefs are available?
If the taxpayer elects to apply for the small business relief, the other ‘tax reliefs’ envisaged by the CT Law would not be available. These include carrying forward the Net Interest Expenses (limited by the thin capitalization rule) and tax losses.
Also, as per Article 21, applicants of small business relief would not be able to benefit from the intra-group transfers (Article 26) and business restructuring (Article 27) reliefs.
We believe it is logical to limit the other reliefs of the taxpayers when small business relief is applied; otherwise, it could lead to potential abuse of the tax regime.
Can I split/segregate my business to maximize the tax benefit?
No. Segregation of the business to obtain a tax advantage will be captured by the General Anti-Abuse Rules (GAAR) as envisaged by Article 50 of the CT Law. In this regard, all artificial manipulations with the business structure of your business could trigger the GAAR limitation, which may lead to an assessment of tax, administrative fines, and penalties.
We believe that restructuring the businesses where the business needs are the primary driver should be generally allowed, even if there is a tax advantage. At that, this would require building a solid defense file to prove that gaining a corporate tax advantage was not the cause.
Ministerial Decision No. 43 of 2023 on Exception from Tax Registration
The Decision lists persons excluded from the obligation of registering for the purposes of Corporate Tax.
The following are listed in the Decision as exempt from registration obligation:
- A Government Entity;
- A Government Controlled Entity;
- A Person engaged in an Extractive Business in UAE that has an interest in a right, concession, or Licence, which is subject to Emirate-level taxation;
- A Person engaged in a Non-Extractive Natural Resource Business that has an interest in a right, concession, or Licence, which is subject to Emirate-level taxation; and
- A non-resident Person deriving only UAE Sourced income under Article 13 of the UAE CT Law and does not have a Permanent Establishment in the UAE.
Cabinet Decision No. 37 of 2023 on Qualifying Public Benefit Entities
The Decision provides a list of Qualifying Public Benefit Entities that are exempt for the purposes of Corporate Tax. It includes entities in the UAE as well as Federal Entities.
The Cabinet Decision does not lift the CT compliance obligation, i.e., only provides an exemption from payment.
Based on the envisaged right to suggest an amendment to the list of entities by any Government Entity, the list appears to be non-exhaustive and subject to changes.
To ensure the exemption, the listed entities must cooperate and provide all the relevant documentation, data, and information to the Ministry of Finance and the Federal Tax Authority to ensure that the underlying requirements of the CT Law are met .
Federal Tax Authority Decision No. 7 of 2023 on Provisions for Exemptions from Corporate Tax
The Decision is dedicated to procedures for registration and application for exemption of certain categories of Taxable Persons for the purposes of Corporate Taxation.
The Decision establishes the deadlines for CT registration for certain categories of taxpayers.
| Category |
Deadline to obtain Tax Registration Number |
| Qualifying Public Benefit Entities |
1 October 2023 |
| Qualifying Investment Funds |
1 June 2024 |
| Public pension or social security funds, including funds that are subject to regulatory oversight | |
Wholly owned subsidiaries of:
|
If the Authority approves the application for Tax Registration, the abovementioned persons may be entitled to submit an application for exemption from Corporate Tax where the relevant exemption conditions set by the CT Law are met.
The Authority may request the above Exempt Persons to file an annual declaration confirming the fulfillment of exemption conditions.
Such Persons shall apply for exemption within 60 business days from the end of the Tax Period in which the Person met the conditions for the exemption.
If the Authority approves the exemption application, the exemption shall be effective from the start of the Tax Period specified in the application.
The Authority may determine an alternative date as the effective date of the exemption, where any of the following scenarios (or other similar) take place:
- If the Tax Period specified in the registration form is incorrect, the exemption shall be effective from the correct date.
- If the applicant is acquired during a Tax Period by any of the following persons, the exemption shall not be granted from the start of the Tax Period if the underlying conditions for exemption were not met at that time:
- Government Entities
- Government Controlled Entities
- Qualifying Investment Funds
- Regulated pension or social security funds.
- If the Tax Period included in the application for exemption is incorrect and the FTA receives sufficient supporting information to evidence that the conditions have been met within a later Tax Period (exemption shall be effective after the date of fulfillment of the conditions)
- Any other instances as specified in a decision issued by the Cabinet.
Federal Tax Authority Decision No. 5 of 2023 on Conditions for Change in Tax Period
The Decision provides guidance and conditions on the change in the Tax Period, which was considered ambiguous due to the potential impact of the General Anti-Abuse Rule on the change.
This Decision provides that the Tax Period of the Taxable Person can be changed if the following conditions are met:
- The change is for one of the following reasons:
- Liquidation of the Taxable Person;
- To align the Financial Year with:
- Financial Year of another Resident Person for the purpose of forming a Tax Group or joining an existing Tax Group, or
- Financial Year of its domestic or foreign head office, subsidiary, parent or ultimate parent company, for the purpose of financial reporting, or for benefiting under a tax relief available under the UAE CT Law.
- There is a valid commercial, economic, or legal reason to change the Tax Period.
- The Taxable Person has not yet filed the Tax Return for the Tax Period sought for change.
- The application for change in the Tax Period is in respect of any of the following:
- To extend the current Tax Period to a maximum of 18 months; or
- To shorten the next Tax Period between 6 and 12 months.
The application for a change of Tax Period shall be made before the lapse of 6 months from the end of the original Tax Period. The Decision further clarifies that where the Taxable Person has applied to shorten the Tax Period, the application shall not be in respect of a prior or the current Tax Period.
Federal Tax Authority Decision No. 6 of 2023 on Tax Deregistration Timelines
This Decision covers time limitations for tax deregistration applications
An application for Tax Deregistration is to be filed within the following timelines:
- For natural persons, within three (3) months from the date of cessation of the Business or Business Activity; and
- For Juridical Persons, within three (3) months from the date the entity ceases to exist, the date of cessation of the Business, dissolution, liquidation, or otherwise.
Ministerial Decision No. 82 of 2023 on Determination of Categories of Taxable Persons Required to Prepare and Maintain Audited Financial Statements.
This Decision lists categories of taxpayers obliged to maintain audited financials
The decision provides that the following Taxable Persons shall prepare and maintain audited financial statements:
- Taxable Persons deriving revenues exceeding AED 50,000,000 ($13.6 million); and
- Qualifying Free Zone Persons.
Per se, the Cabinet Decision aligns with the existing legislation requirement of obtaining Audited Financial Statements for the Qualifying Free Zone Persons and businesses with revenues exceeding 50M AED.
On the other hand, the Authority got another lever to enforce compliance with legislation requirements, minimizing the chances of oversight.
Ministerial Decision No. 83 of 2023 on Determination of Conditions under which the presence of a Natural Person in the State would not create a Permanent Establishment for a Non-Resident Person.
The Decision revolves around the Determination of Conditions under which the presence of a natural person in the State would not create a Permanent Establishment for a non-resident person for the purposes of the UAE CT Law.
The Decision provides that the presence of a natural person in the UAE shall be considered a consequence of a temporary and exceptional situation where all of the following conditions are met:
- The presence of the natural person in the UAE is a consequence of exceptional circumstances of a public or private nature.
- The natural person or the Non-Resident Person cannot reasonably predict exceptional circumstances.
- The natural person did not express any intention to remain in the State when the exceptional circumstances end.
- The Non-Resident Person does not have a Permanent Establishment (PE) in the UAE before the occurrence of the exceptional circumstances.
- The Non-Resident Person did not consider that the natural person is creating a PE or deriving income in the UAE as per the tax legislation applicable in other jurisdictions.
The “exceptional circumstance” mentioned above is defined by the Decision as a situation or an event which:
- Is beyond the control of the natural person
- Occurred while natural person was already in the UAE
- Natural person could not reasonably predict or prevent
- Prevented the natural person from leaving the UAE as originally planned.
The Decision provides some examples of exceptional circumstances, which can be any of the following, but are not limited to them only:
Public nature
- Adoption of public health measures by competent authorities in the UAE or in the jurisdiction of the original workplace, or by the World Health Organisation.
- Imposition of travel restrictions by the competent authorities in the UAE or in the jurisdiction of the original workplace.
- Imposition of legal sanctions on the natural person preventing him from leaving the UAE’s territory.
- Acts of war or occurrence of terrorist attacks.
- Occurrence of natural disasters or force majeure beyond reasonable control.
- Any other circumstances similar to those provided for above, as prescribed by the Authority.
Private nature
- Occurrence of an emergency health condition affecting the natural person or their relatives (till fourth degree), including by way of adoption or guardianship.
- Any other circumstances similar to the above as prescribed by the Authority.
How can we help?
Rethink, as an entity, provides tax advisory, optimization, registration, implementation, compliance, and training services in UAE.
We designed our Corporate Taxation services to suit High-Growth Firms and their specific business needs at each stage of advisory, implementation, subsequent tax compliance, and management.
With our team of tax advisors, finance experts, and tax accountants, we can provide you with a bundle of services, ensuring the implementation is cost-effective for High-Growth Firms.
Who are we?
Re/think is a boutique accounting, HR, advisory, regulatory compliance, and tax advisory firm with offices in Dubai and Abu Dhabi (ADGM) focused on providing businesses of varying sizes with timely, proactive, and customized business solutions from start-up and early development to the latest stages of a business lifecycle.
