Overview of the Federal Tax Authority’s latest guidance on Corporate Income Tax

Exempt Persons: Public Benefit Entities, Pension Funds and Social Security Funds (view guide)

The Federal Tax Authority’s (FTA) Corporate Tax Guide on Exempt Persons, released in December 2023, offers detailed guidelines for entities seeking exemption from the UAE's Corporate Tax as per the Federal Decree-Law No. 47 of 2022 (CIT Law). The guide covers Qualifying Public Benefit Entities (QPBEs), public and private pension funds, and social security funds and outlines the criteria and processes these entities must fulfill to qualify for an exemption from Corporate Income Tax (CIT).

It emphasizes that QPBEs must be established and operated primarily for charitable, social, cultural, religious, or similar public benefit activities. Importantly, these entities should not engage in business activities that are not directly related to their primary purpose. Moreover, their income and assets must be used solely to support their established objectives, without any personal benefits accruing to shareholders or members. For a public benefit entity to become a QPBE, it must not only meet these conditions but also be listed in a Cabinet Decision suggested by the Minister. This necessitates the entity to apply to the appropriate local or federal government entity with which it is registered. The guide also extends this provision to foreign organizations operating in the UAE. These organizations, if they meet the stipulated conditions and are listed in the relevant Cabinet Decision, can qualify as a QPBE.

The guide further delves into the specifics for pension and social security funds, distinguishing between public and private entities and outlining the application requirements and approval process for exemption status. It underscores the need for regulatory oversight and the exclusive use of funds for designated benefits.

It is important to note that QPBEs¹, along with public and private pension and social security funds, must register with the FTA to obtain a Corporate Tax Registration Number (TRN), even if they are considered exempt. Once registered, a fund can make an application to the FTA to be treated as an Exempt Person from 1 June 2024. Entities must submit their exemption application within 60 business days following the tax period where they meet the exemption conditions. Once approved, the effective date of exemption is typically the start of the tax period mentioned in the application, although the FTA may determine an alternative effective date under specific circumstances.

Exempt entities are not required to file regular tax returns. Instead, they must submit an annual declaration confirming their compliance with exemption conditions. This declaration is due within nine (9) months after the end of the relevant tax period. However, if an entity no longer meets the exemption criteria, it must file a tax return. For private pension funds and social security funds, an annual auditor's confirmation of compliance is required.

Furthermore, exempt entities are obliged to maintain detailed records for seven years, ensuring they can substantiate their exempt status upon request. These records should include all necessary documentation that reflects their adherence to the conditions of their exempt status. These comprehensive record-keeping requirements will be key for demonstrating compliance with the exemption criteria in case of a tax audit.

The guide further details the tax implications for entities with exempt status, such as the inapplicability of small business relief, ineligibility for certain forms of relief² and restrictions on being part of a tax (consolidated) group. The guide is essential for entities aiming for exemption from CIT in the UAE, providing a clear understanding of the criteria, application process, and compliance requirements.

Entities are advised to thoroughly review the guide and ensure strict adherence to its conditions to maintain their exempt status under UAE tax laws.

Taxation of Extractive Business and Non-Extractive Natural Resource Business (view guide)

The FTA’s Corporate Tax Guide on extractive business and non-extractive was released in December 2023 and is specifically designed for entities engaged in the extraction and processing of natural resources like oil, gas, and minerals. It provides a comprehensive overview of the criteria and conditions these businesses must meet to be exempt from CIT.

The guide defines natural resources as non-renewable, non-living resources like water, oil, gas, and minerals. It differentiates between ‘Extractive Businesses’, which involve the direct extraction of these resources, and ‘Non-Extractive Natural Resource Businesses’, which deal with the processing, refining, and distribution of these resources.

Businesses in these sectors can be exempt from CIT if they meet specific criteria.

These include:

• Possessing the necessary rights or licenses for resource extraction or processing;
• Being effectively subject to Emirate-level taxation; and
• Notifying the Ministry of Finance.

The guide also covers the taxation of income derived from business activities unrelated to extraction or processing. While the primary extractive or non-extractive activities might be exempt from CIT, other business ventures are generally subject to tax unless they qualify for another specific exemption.

Entities are required to maintain proper records for seven years and must register for CIT if they are engaged in taxable business activities alongside their exempt extractive or non-extractive operations.

The guide provides details on how taxable income should be calculated for business activities that are not exempt. This includes various adjustments and exclusions specific to businesses in these sectors. The guide also addresses tax implications for Free Zone entities that are engaged in extractive or non-extractive activities.

Overall, this guide serves as a vital resource for entities operating in the extractive and non-extractive sectors in the UAE. It offers detailed insights into their tax obligations and exemptions, helping these businesses to understand and comply with the UAE's CIT Law. Entities in these sectors should thoroughly review the guide to ensure they meet all compliance requirements and understand their tax responsibilities.

Registration of Natural Persons (view guide)

The FTA’s Corporate Tax Guide on natural persons, published in December 2023, is crucial for any natural person conducting business activities in the UAE, as it delineates the criteria, processes, and obligations for CIT registration and deregistration. The guide emphasizes that the UAE operates a self-assessment tax regime, making it imperative for natural persons to assess their tax obligations independently.

The guide outlines conditions under which natural persons are required to register for CIT. This includes resident natural persons, or non-resident natural persons with a permanent establishment in the UAE, with business activities generating turnover exceeding AED1 million. Turnover from wages, personal investments, and real estate investments is not counted towards the threshold.

The guide specifies how natural persons should calculate their turnover, including the aggregation of income from various business activities while excluding wages, personal investment income and real estate investments.

Detailed steps on how to register for CIT through the EmaraTax portal are provided. This includes documentation requirements and the timeline for the processing of registration applications.

Once registered, natural persons are obligated to fulfill various administrative duties, like filing tax returns, maintaining records, and updating registration details.

The guide discusses scenarios under which a natural person can or should deregister from CIT, such as cessation of business activities or the death of the natural person.

The guide also highlights the FTA's power to register a person for CIT, even if they have not done so themselves, alongside the individual’s right to appeal against such assessments.

The guide is an essential resource for natural persons engaged in business activities in the UAE, providing clarity on the registration process, the obligations thereafter, and the criteria for deregistration.

Tax Groups (view guide)

The FTA's Corporate Tax Guide on tax groups, released in January 2024, arrived at a pivotal moment. As most businesses entered their first tax period starting 1 January 2024, this guide was highly anticipated by the business and tax community. It provides essential guidance on tax grouping, a topic of significant interest and importance for compliance and planning. The comprehensive 95-page guide provides an in-depth look at tax grouping, including its concept and advantages. It details the criteria for forming or joining a tax group, the process of its formation and cessation, methods for calculating a tax group's taxable income, and various compliance obligations.

Only juridical³ resident persons^{4 5} are eligible to form a tax group, provided they meet the relevant conditions. One of the conditions stipulates that the parent company must own either directly or indirectly (i) 95% of the share capital of each subsidiary, (ii) 95% of the voting rights of each subsidiary and (iii) must be entitled to at least 95% of each subsidiary’s profits and net assets. Determining whether these conditions are met may require a detailed analysis of the constitutional documents of the members, including shareholder agreements, company bylaws, specific agreements made among the shareholders and potential side letters. Such analysis could turn out to be relatively complex, especially for entities with different classes of shares. In case of share transfers, it will be key to analyze the wording of the relevant Share Purchase Agreement (SPA) to determine when the shares are transferred and to establish whether the relevant tax grouping conditions were met during the entire tax period.

In addition, all members must have the same financial year and must prepare their financial statements using the same accounting standards. Exempt persons and qualifying free zone persons cannot be part of a tax group.

Tax grouping is an optional facility available to eligible businesses. Therefore, if a parent and its subsidiaries would like to form a tax group, they must first submit a joint application to the FTA, which must then be approved by the latter.

Tax groups are required to prepare consolidated financial statements to determine the taxable income of the tax group. For this purpose, the standalone financial statements of the parent company and each subsidiary which is a member of the tax group must be consolidated by way of aggregation, generally eliminating any transactions between the members of the tax group. If the consolidated revenue of the tax group exceeds AED50 million during the relevant tax period, such financial statements of the tax group are required to be audited⁶.

Once a tax group is formed, the members are treated as a single taxable person for CIT purposes. This allows a single tax return to be filed on behalf of all members of the tax group (as opposed to each member filing their own respective tax return on an individual basis). Forming a tax group also allows for the income and losses of the members of the tax group to be offset against each other. In addition, the transfer of assets and liabilities and other transactions and arrangements between members of the tax group are generally disregarded when determining the taxable income of the tax group. These characteristics offer interesting tax planning opportunities to members of a tax group.

Once a tax group has been formed, the parent company will assume the following responsibilities on behalf of the tax group:

• Jointly apply with new subsidiaries wishing to join the tax group.
• Prepare consolidated financial statements for the tax group as per applicable accounting standards (i.e., IFRS or IFRS for SMEs).
• File a tax return for the tax group within 9 months of the tax period end or as directed by the FTA.
• Settle tax payable for the tax group within the same timeframe.
• Apply for tax refunds, provided conditions are met.
• Register and deregister the tax group.
• Maintain and provide sufficient supporting financial and transfer pricing documentation.

A ‘tax group’ is distinct from a ‘Qualifying Group’ for the purposes of article 26 of the CIT Law, under which assets and liabilities may be transferred between members of a Qualifying Group on a no gain or loss basis for CIT purposes. The guide also clarifies that a tax group for CIT purposes is distinct from a tax group for VAT purposes.

Conclusion

The UAE’s Federal Tax Authority has released several Corporate Income Tax guides in late 2023 and early 2024 providing useful guidance to taxpayers navigating the complexities of the new tax regime.