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MD261 repeals the earlier Ministerial Decision No. 127 of 2023 and applies retrospectively from 1 June 2023.
This article highlights the key amendments introduced by MD261 and their implications.
Key Amendments
Family Foundations
Overview
Under Article 5(2) of MD261, juridical persons wholly owned and controlled by Family Foundations treated as Unincorporated Partnerships may now apply to the Federal Tax Authority (FTA) for the same tax-transparent status, provided the following conditions are met:
Ownership and Control:
The juridical person must be wholly owned and controlled by the Family Foundation, either directly or indirectly through an uninterrupted chain of entities also treated as Unincorporated Partnerships under Federal Decree-Law No. 47 of 2022 (the CT Law).
Compliance with the CT Law:
The juridical person must satisfy the requirements of Article 17(1) of the CT Law.
Implications
Entities such as holding companies and juridical persons owned by Family Foundations can elect for tax transparency under these provisions.
Income derived by these entities will be assessed directly at the level of the natural person beneficiaries of the parent Family Foundation.
This amendment provides greater flexibility for Family Foundations in structuring their ownership and tax arrangements.
Unincorporated Partnerships
Overview
Article 3 of MD261 revises the notification requirements for Unincorporated Partnerships treated as Taxable Persons under the CT Law:
Previously, partnerships were required to notify the FTA within 20 business days whenever a partner joined or left the partnership.
MD261 now allows such changes to be reported as part of the Tax Return for the relevant Tax Period in which the change occurred.
Implications
This amendment simplifies compliance for Unincorporated Partnerships, reducing the administrative burden of immediate notifications.
Foreign Partnerships
MD261 also introduces changes regarding the classification of foreign partnerships as Unincorporated Partnerships under the CT Law.
These amendments refine the conditions under which foreign partnerships may elect for tax transparency, ensuring consistency with the updated provisions.
Unincorporated (and foreign) Partnerships & Family Foundations – Conclusion
Ministerial Decision No. 261 of 2024 introduces meaningful changes for Family Foundations, Unincorporated Partnerships, and Foreign Partnerships, providing greater clarity and flexibility under the UAE’s corporate tax framework.
These amendments reduce compliance burdens and enhance tax structuring options for eligible entities.
Final Thoughts
If you have any queries about this article on Unincorporated (and foreign) Partnerships & Family Foundations or tax matters in the UAE more generally, please get in touch.
Alternatively, if you are a tax adviser in the UAE and would be interested in sharing your knowledge and becoming a tax native, then there is more information on membership here.
On October 15, 2024, the UAE Ministry of Finance officially announced the cancellation of the Economic Substance Regulations (ESR).
This significant development follows the introduction of the Federal Corporate Tax (CT) Law and marks a pivotal shift in the regulatory landscape for businesses operating in the UAE.
The cancellation was formalised through Cabinet Resolution No. (98) of 2024, which amends the earlier provisions of Cabinet Resolution No. (57) of 2020 on Economic Substance Requirements.
This article explores the background, implications, and key provisions of the latest resolution.
Background: Economic Substance Regulations in the UAE
The Economic Substance Regulations were initially introduced on April 30, 2019, through Cabinet Resolution No. 31 of 2019, as part of the UAE’s commitment to the OECD Inclusive Framework on BEPS and to address the EU’s concerns about the UAE’s tax framework.
This move aimed to ensure that the UAE was removed from the EU’s list of non-cooperative jurisdictions for tax purposes (EU Blacklist), which occurred on October 10, 2019.
The regulations required UAE onshore and free zone companies conducting specific “Relevant Activities” to meet an Economic Substance Test by maintaining sufficient substance in the UAE.
However, with the advent of the Federal CT Law, the relevance of ESR has diminished, leading to its eventual withdrawal.
Key Provisions of Cabinet Resolution No. (98) of 2024
Applicability of ESR
The new resolution limits the applicability of ESR to fiscal years beginning January 1, 2019, and ending December 31, 2022.
For financial years commencing after December 31, 2022, UAE entities are no longer required to comply with ESR obligations, including filing notifications or reports.
Administrative Penalties Cancelled
Penalties imposed for non-compliance with ESR obligations for financial years beginning after December 31, 2022, have been revoked.
The Federal Tax Authority (FTA) will refund fines already paid, and procedures for claiming these refunds are expected to be announced soon.
ESR Audits for the Effective Period
Although ESR obligations have ended for financial years after December 31, 2022, businesses must retain documentation for ESR submissions made during the effective period (2019–2022).
The FTA continues to audit filings for this period, and entities should be prepared for such reviews.
Implications for UAE Businesses
Transition to the UAE CT Regime
With the cessation of ESR, businesses can now direct their focus toward compliance with the UAE CT Law.
Clarifications on administrative procedures for penalties and filings related to the post-ESR period are anticipated.
Refund of Penalties and Closure of Grievances
Entities that have paid fines or filed appeals for fiscal years ending after December 31, 2022, can seek refunds and expect the resolution of their grievances.
Businesses should monitor updates from the FTA on refund procedures.
Documentation and Compliance
For the ESR period (2019–2022), entities should maintain proper records of filings and ensure readiness for potential audits.
Economic Substance Regulations – Conclusion
The cancellation of ESR signifies a shift in the UAE’s approach to economic regulation, reflecting the evolving tax framework under the UAE CT Law.
Businesses must align their operations with the new regulatory requirements while addressing any residual ESR obligations for the 2019–2022 period.
Final Thoughts
If you have any queries about this article on the UAE Ministry of Finance’s cancellation of Economic Substance Regulations or tax matters in the UAE, please get in touch.
Alternatively, if you are a tax adviser in the UAE and would be interested in sharing your knowledge and becoming a tax native, then please get in touch. There is more information on membership here.
The United Arab Emirates (UAE) has established specific deadlines for the application process of Corporate Tax (CT) Registration.
This move follows the implementation of the UAE CT law, which came into effect for the financial year starting on or after 1 June 2023.
The Federal Tax Authority’sDecision No. 3 of 2024, effective from 1 March 2024, outlines the crucial timelines for entities to comply with this registration requirement, emphasizing the nation’s commitment to a structured tax framework.
Key Registration Deadlines
Resident Juridical Persons
Entities established or recognized before March 2024 must adhere to specified deadlines based on the issuance date of their earliest license. These are set out in a table in the Decision (link provided above)
Those incorporated or recognised post the decision’s effective date must secure their Tax Registration within three months from their date of incorporation, establishment, or recognition.
Foreign Companies
Entities with a Place of Effective Management (POEM) in the UAE need to obtain registration within three months from the end of their financial year.
Non-Resident Juridical Persons
Similar timelines apply, with specific deadlines set for non-resident entities established or recognized prior to and following March 2024.
Natural Persons
Individuals engaged in business or professional activities must apply for Tax Registration by stipulated deadlines to ensure compliance.
Penalties for Non-Compliance
Failure to submit the CT Registration application within the designated timelines incurs a substantial penalty of AED 10,000, underscoring the importance of timely action to avoid financial repercussions.
Implications for Businesses
This structured approach to CT Registration necessitates careful planning and evaluation, particularly for foreign companies operating in the UAE through various business models.
The decision signifies the UAE’s proactive stance in tax regulation, aiming to streamline the process while ensuring entities contribute their fair share to the national economy.
Entities, both resident and non-resident, must diligently assess their operations within the UAE to adhere to the new registration mandates.
This includes evaluating any exposure related to Permanent Establishments, Nexus, and POEM, and initiating the registration process promptly to sidestep penalties.
Conclusion – UAE Corporate Tax Registration
The Federal Tax Authority’s recent decision marks a significant step in reinforcing the UAE’s corporate tax framework, aligning with global tax practices and enhancing the nation’s competitiveness.
Businesses operating within the UAE’s jurisdiction must now navigate these new requirements with strategic foresight, ensuring compliance to maintain their standing and avoid penal implications.
In a recent development, the United Arab Emirates (UAE) Cabinet of Ministers introduced Cabinet Resolution No. (91) of 2023, implementing a domestic reverse charge mechanism for electronic devices.
This resolution takes effect on 25 August 2023, and brings about changes in the way electronic devices are supplied and accounted for in the UAE.
What Falls Under Electronic Devices?
Electronic devices, as defined in the resolution, encompass mobile phones, smartphones, computers, tablets, and their associated parts and components.
The application of the reverse charge mechanism hinges on specific conditions that must be met.
When Does the Reverse Charge Apply?
This reverse charge mechanism applies when:
A VAT registered supplier in the UAE makes a supply of electronic devices to another registered recipient (B2B supply).
The recipient intends to either resell these devices or employ them in the production or manufacturing of electronic devices.
Prior to the supply date, the recipient must furnish the supplier with a written declaration. This declaration must confirm two key points: (1) the intended use of electronic devices for resale or manufacturing and (2) the recipient’s VAT registration with the Federal Tax Authority.
The supplier must not only receive and maintain this declaration but also verify the recipient’s VAT registration through the approved methods established by the Federal Tax Authority.
UAE Reverse Charge – Effective Date
This decision took effect from 30 October 2023.
UAE Reverse Charge – Conclusion
As such, businesses involved in electronic device supply, be it for resale or production, should act proactively to align their processes and adapt their accounting and reporting systems accordingly.
By doing so, they can ensure seamless compliance with these new provisions, avoid discrepancies, and ultimately maintain the efficiency of their business operations.
If you have any queries about the UAE reverse charge, or UAE tax matters in general, then please get in touch.
One of the key highlights of the new tax regime is the introduction of the Free Zone Corporate Tax, which applies to “Free Zone Persons.”
This term refers to juridical entities that are incorporated or registered within a Free Zone.
However, it’s important to note that this tax regime is only applicable within the designated areas of the Free Zones.
Businesses can contact their respective Free Zone Authority to confirm whether the Free Zone qualifies for zero percent tax.
Free zone Corporate Tax regime
Under the Freezone Corporate Tax regime, only income derived from activities exclusively conducted within the Free Zone will be subject to taxation.
This concept is reflected in the definition of “Qualifying Income,” which includes income generated from transactions with other Free Zone Persons, as well as domestic and foreign sourced income resulting from the performance of any “Qualifying Activities” listed in the related Ministerial Decision.
Qualifying income of free zones – Qualifying Activities
The Qualifying Activities encompass various sectors, such as manufacturing of goods or materials, processing of goods or materials, holding of shares and other securities, ship ownership and operation, reinsurance services, fund management services subject to UAE regulatory oversight, and wealth and investment management services also subject to UAE regulatory oversight.
Other qualifying activities include headquarter services to related parties, treasury and financing services to related parties, financing and leasing of aircraft, logistics services, distribution within or from a designated zone meeting specific conditions, and any activities ancillary to the aforementioned sectors.
Excluded activities
However, income derived from certain specific “Excluded Activities” will not be considered as “Qualifying Income” regardless of whether it originates from a Free Zone Person or is part of a Qualifying Activity.
Excluded Activities encompass income derived from transactions with natural persons, income derived from certain regulated financial services activities, income derived from intangible assets, and income derived from immovable property, excluding transactions with Free Zone Persons involving commercial immovable property located within a Free Zone.
De minimis
To ensure compliance with the tax regime, there are de minimis requirements in place.
If a Free Zone Person earns income from Excluded Activities or any other income that does not qualify as Qualifying Income, they will be disqualified from the tax regime unless the non-qualifying revenue remains below the lower of either 5 percent of their total revenue or AED 5 million.
It’s worth noting that revenue attributed to a Free Zone Person’s domestic or foreign permanent establishment, as well as revenue from immovable property within a Free Zone that does not qualify for the tax regime, will not be considered for the de minimis threshold. Instead, the associated taxable income will be subject to the regular UAE Corporate Tax rate of 9 percent.
Breaching the de minimis
In cases where the de minimis requirements are not met, or if a Free Zone Person no longer satisfies other qualifying conditions, they will lose the benefits of the Free Zone Corporate Tax regime for a minimum period of five years.
During this period, they will be treated as an ordinary Taxable Person and subjected to Corporate Tax at a rate of 9 percent on their Taxable Income exceeding AED 375,000.
Qualifying income of free zones – Conclusion
The implementation of the UAE Corporate Tax regime and the introduction of the Freezone Corporate Tax mark significant developments in the country’s tax landscape.
These changes aim to ensure clarity and fair taxation practices while providing opportunities for businesses to thrive within the Free Zones.
If you have any queries about Qualifying income and free zones or UAE tax matters more generally, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article
Today, Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses (hereinafter referred to as the “Corporate Tax Law”) was issued by the United Arab Emirates (“UAE”).
The UAE Corporate Tax Law provides the legal basis for the introduction of corporate tax in the UAE. It will be effective for financial years starting on or after 1 June 2023.
Why is the UAE introducing corporate tax?
The introduction of Corporate Tax is intended to help the UAE achieve its strategic objectives and accelerate its development and transformation.
Further, by introducing a regime that better reflects international standards, it is hoped these changes will fortify the UAE’s growth as a jurisdiction for business and investment.
Persons subject to UAE corporate tax
Taxable persons – generally
The following will be “Taxable Persons”:
UAE companies and other non-natural persons that are incorporated or effectively managed and controlled in the UAE;
Natural persons (individuals) who conduct a Business or Business Activity in the UAE as specified in a Cabinet Decision to be issued in due course; and
Non-resident non-natural persons (foreign legal entities) that have a Permanent Establishment in the UAE
Taxable persons in a Free Zone
Non-natural persons established in a UAE Free Zone are also within the scope of Corporate Tax as “Taxable Persons”. As such, they will need to satisfy the requirements set out in the Corporate Tax Law.
An important qualification is around so-called Qualifying Free Zone Persons. These characters will pay 0% on their Qualifying Income. We discuss these terms below.
The scope of UAE corporate tax
General
The UAE Corporate Tax Law taxes income with regard to the following bases:
The residence status of the person; an
The source of the relevant income
Residence
Broadly, the exposure to UAE corporate tax is as follows:
Resident Person: such a person is taxable on income derived from both domestic and foreign sources
Non-Resident Person: such a person is taxed only on income derived from sources within the UAE
Determining residence
General
Residence for Corporate Tax purposes is not determined by where a person resides or is domiciled but instead by specific factors that are set out in the Corporate Tax Law. If a Person does not satisfy the conditions for being either a Resident or a Non-Resident person then they will not be a Taxable Person and will not therefore be subject to Corporate Tax.
Resident Persons
Companies and other non-natural persons that are incorporated or otherwise formed or recognised under the laws of the UAE will automatically be considered as Resident Persons.
This covers non-natural persons incorporated in the UAE under either mainland or the applicable Free Zone legislation.
In addition, foreign companies and other foreign non-natural persons may also be treated as Resident Persons. Generally, this will be where they are effectively managed and controlled in the UAE.
Natural persons will be subject to Corporate Tax as a “Resident Person” on income from both domestic and foreign sources. However, this will only be in respect of income derived from a business activity conducted in the UAE.
Non-Resident Persons
Generally, Non-Resident Persons are non-natural persons who are not Resident Persons and have a Permanent Establishment in the UAE.
They will be subject to corporate tax on taxable income that is attributable to their Permanent Establishment.
A special 0% Withholding Tax will apply to certain UAE source income arising to a Non-Resident Person.
Exempt Income
The new legislation also sets out exemptions in relation to certain types of income.
The stated aim of the exemptions is to eliminate the potential for double taxation on certain types of income.
As a result, dividends and capital gains earned from domestic and foreign shareholdings will largely be exempt from Corporate Tax.
In addition, a Resident Person can also elect in certain circumstance to not take into account income from a foreign Permanent Establishment for UAE Corporate Tax purposes.
UAE Corporate Tax rates
General
The headline rate of corporate tax is 9%.
This applies to Taxable Income exceeding AED 375,000. Below this threshold, the rate of tax is 0%
A special 0% withholding tax applies to certain types of UAE sourced income that is received by non-residents.
There is no need for UAE businesses or foreign recipients of UAE sourced income to register for the withholding tax or to undertake other filing obligations.
Withholding tax does not apply to transactions between UAE resident persons.
When is a Free Zone Person a Qualifying Free Zone Person?
General
A special rate of 0% applies to Free Zone Persons that are both:
Qualifying Free Zone Persons; and
Receive “Qualifying Income”
In such circumstances, the Free Zone Person will pay 0% on their Qualifying Income.
What is a Qualifying Free Zone (“QFP”) Person?
In order to be a QFP, a Free Zone Person must:
maintain adequate substance in the UAE;
derive Qualifying Income;
not have made an election to be subject to Corporate Tax at the standard rates; and
comply with the transfer pricing requirements under the Corporate Tax Law.
Where a Free Zone Person does not satisfy these requirements, then the standard rates apply.
Qualifying Free Zone entities that are part of a large multinational group are anticipated to be subject to a different CT rate once the Pillar Two rules are embedded into the UAE CT regime.
What is Qualifying Income?
As per Article 18 of the legislation, “Qualifying Income” is defined as that specified in a decision issued by the Cabinet at the suggestion of the Minister.
Compliance & UAE corporate tax
All Taxable Persons are required to register for Corporate Tax and to obtain a Corporate Tax Registration Number. This includes Free Zone Persons.
Taxable Persons are required to file a Corporate Tax return for each Tax Period within 9 months from the end of the relevant period.
The same deadline would generally apply for the payment of any Corporate Tax due in respect of the Tax Period for which a return is filed.
If you have any queries about the UAE corporate tax or UAE tax matters more generally, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article