Federal Decree Law No.47 of 2022 on the Taxation of Corporations and Businesses (the “Corporate Tax Law”) is, without doubt, one of the major developments in the UAE’s legislative landscape of the past years. Introducing a major compliance requirement for the entities whose permanent establishment is in UAE, the Corporate Tax Law had a number of legislative developments in March and April 202, when three Ministerial Decisions have made their entry into the tax landscape of the country.
Probably one of the most awaited developments by the business community is the small business relief package, that qualifies as an appreciable incentive, as follows:
Corporate Tax Relief for Small Businesses
Ministerial Decision No. 73 of 2023 on Small Business Relief (“SBR”) was issued pursuant to Article 21 of the Corporate Tax Law. This article provides for tax relief for UAE resident entities that are yet to meet certain thresholds in a reference period. Pursuant to the Decision, if the entities’ revenue for the relevant tax period is equal to or lower than AED 3 million, the entity is deemed not to have derived a taxable income, hence not at an obligation to pay corporate tax.
The SBR status is not granted automatically, but on the contrary, the concerned entities will need to apply with the Federal Tax Authority (“FTA”).
Certain categories of body corporates, such as members of Multinational Enterprises (“MNE”) Groups[1], Qualifying Freezone persons and Non-residents (i.e. UAE brunches of a foreign company) are not entitled to apply for SBR. However, where a business elects to apply for SBR in a relevant tax period, any tax losses incurred in such tax period cannot be carried forward to any subsequent tax period.
The SBR process has significant implications. As such, if the FTA establishes that taxable persons have artificially separated their business so as to claim the SBR and the total revenue of the business in fact exceeds 3 million AED, this would be considered an arrangement to obtain a corporate tax advantage under Anti Abuse Rules, Article 50(1) of the Corporate Tax Law, which is sanctionable by FTA.
Overall, we deem this decision as a practical and sustainable initiative for the businesses that operate in UAE, especially for the start ups and the companies that are yet to meet their learning curve in the market.
[1] Groups of companies with operations in more than one country, having consolidated group revenues of more than AED 3.15 billion.
In furtherance, two other Ministerial Decisions detail the tax compliance mechanisms for government entities and the possibility to obtain an exempt status for the payment of corporate tax.
Exemptions from Tax Registration
The Corporate Tax Law provides that taxable persons mandatorily register with the FTA, unless in an exempted category. The Ministerial Decision No. 43 of 2023 on Exemptions from Tax Registration provides for the following categories of persons exempt from corporate tax registration:
- Government entities;
- Government controlled entities;
- Persons engaged in extractive business;
- Persons engaged in a non-extractive natural resource business; and
- Non-Resident Persons that derive only UAE sourced income and do not have a permanent establishment in the UAE,
subject to certain qualifications detailed in the Corporate Tax Law and in the Decision.
As such, resident businesses active in industries and set ups non specified above would need to file and pay, as appropriate, the tax contributions.
Single Taxable Person for Government Entities
Ministerial Decision No. 68 of 2023 on Single Taxable Person for Government Entities lays down the terms and conditions for a government entity to treat all businesses or business activities undertaken by it as a Single Taxable Person (STP).
As per paragraph 6 of Article 5 of the Corporate Tax Law, a Government entity may elect to treat all the businesses or business activities undertaken by it as a Single Taxable Person (“STP”). As such, all Government entities would need to appoint a Representative Government Entity (“RGE”) with the authority to file unified tax returns for the whole group of entities and notify the FTA accordingly.
New business or business activity added to STP will be directly treated as STP if the business or activity is conducted under a license issued by a competent governmental authority, conducted with the same Emirate (in case of Local Government) and notified as such to the FTA.
Termination of a STP occurs when (i) the Representative Government Entity (RGE) application referred to the FTA to this aim or (ii) if the business or activity is no longer conducted by the Government Entity or no longer conducted under a license issued by a competent governmental authority.
The benefit of STP is the ability to minimize administrative formalities by filing a single tax return. However, by virtue of being treated as a single entity, the basic exemption limit of AED 375,000 is not available to each of the entities within STP. We however note that this development is aligned with similar rules applicable in other traditionally taxed jurisdictions.
Finally, we deem these three Ministerial Decisions as extraordinarily positive developments. They complement and develop the tax regime applicable in UAE, whereby each is deemed to support certain sectors and entities for easier, streamlined and sustainable tax compliance.
Whilst every effort has been made to ensure that the information in this article is accurate, please note that this article does not constitute legal advice and is published for information purposes only. For further information, please feel free to contact us at info@fichtelegal.com
[1] Groups of companies with operations in more than one country, having consolidated group revenues of more than AED 3.15 billion.
