By introducing a corporate tax, the United Arab Emirates (UAE) wanted in particular to reaffirm its commitment to respecting international standards in terms of tax transparency and the prevention of harmful tax practices.
This corporate tax, which came into effect on June 1, 2023, is governed by the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (https://mof.gov.ae/wp-content/uploads/2022/12/Federal-Decree-Law-No.-47-of-2022-EN.pdf).
Taxable persons will have to register for corporate tax (https://tax.gov.ae/en/services/corporate.tax.registration.aspx) and obtain a corporation tax registration number from the Federal Tax Authority which is the competent authority in matters of corporate tax.
The corporate tax return must be filed for each tax period within 9 months of the end of the tax period.
Regarding the rate applicable to this new tax, taxable income exceeding AED 375,000 will be taxed at 9% while income below this threshold will be taxed at a rate of 0 % (Article 3 of the Law).
I. The scope of the Federal Decree-law
Although the law is applicable to a wide range of people (has), its scope of application is not absolute (b).
I. a) The principle: the subjection of legal entities and individuals operating in the United Arab Emirates
There Federal Decree-Law list in sound Article 11 persons subject to corporate tax.
Thus, the tax will apply to legal entities incorporated in the UAE and legal entities effectively managed and controlled in the UAE, as well as foreign legal entities with a permanent establishment in the UAE.
In this regard, the notice relating to this same law specifies that the definition of permanent establishment of the Federal Decree-Law was designed on the basis of the definition provided in Article 5 of the OECD Model Tax Convention on income and capital, which allows us to refer to the OECD's comments on this article in order to clearly define the contours of the concept of permanent establishment.
There Federal Decree-law defines this concept as any business establishment or other form of presence of a non-resident person in the State.
In this regard, Article 11 of the Federal Decree-law defines the notions of resident and non-resident persons.
It is learned that a resident person is a legal person constituted or otherwise established or recognized under the applicable legislation of the State, including a person residing in a free zone, a legal person constituted or otherwise established or recognized under the applicable legislation of a foreign jurisdiction which is effectively managed and controlled in the State, a natural person who carries out a commercial or industrial activity in the State, or a person determined in a decision taken by the cabinet on the proposal of the minister.
A non-resident person is defined as a person who is not considered a resident person under the preceding paragraph, and who has a permanent establishment in the State, derives income from the State, or has a connection with the State as specified in a decision taken by the Cabinet on the proposal of the Minister.
It is noted that the corporate tax law taxes income on both the basis of residence and source.
A resident person is taxed on income from national and foreign sources (see: Article 13 of the Federal Decree-law) so she is taxed on the basis of residence while a non-resident person is only taxed on income from sources within the UAE, so she is taxed on the basis of source.
Although the scope of this new tax is quite broad, there are, however, exceptions provided for by law.
I. b) The exception: the exemption of companies in the Free Zone under certain conditions
There Federal Decree-Law provides in its Articles 4 and 18 exemption cases.
First, government or government-controlled entities will benefit from an automatic exemption.
Extractive companies or non-extractive natural resource companies may also be exempt if notified to the Ministry of Finance, subject to meeting certain conditions.
Certain public interest entities may be exempted if they are listed in a cabinet decision.
In addition, pension and social security funds; certain investment funds; certain UAE Subsidiaries owned and controlled at 100% by a government entity, by a government-controlled entity, by an eligible investment fund or by a pension or social security fund, may also benefit from an exemption if the latter is requested and approved by the Federal Tax Authority, subject to meeting certain conditions.
Finally, a particularly interesting element, Free Zone companies can, in accordance with Article 18 of the Federal Decree-Law benefit from 0% taxation on their qualified income provided that meet the conditions of “Qualifying Free Zone Person”, namely:
– Maintain adequate substance in the UAE,
– Obtain qualified income,
– Not having chosen to be subject to corporate tax at standard rates, and,
– Comply with the transfer pricing requirements of the Corporation Tax Act.
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It should be noted that taxable persons and taxable income are two distinct elements, hence the importance of knowing precisely the income of a taxable person which may be subject to taxation.
II. Taxable income
There are multiple types of income taxable under this tax (has) but they may be subject to deductions (b).
II. a) Income taxable based on residence criteria or source of income
The Corporate Income Tax Act taxes income both on the basis of residence (see 1.a for the definition of resident/non-resident person) and the source of income.
A resident person is taxed on income from domestic and foreign sources, so he is taxed on the basis of residence.
A non-resident person is only taxed on income from sources within the UAE, so he is taxed on a source basis.
In this case, Article 12 of the Federal Decree-law provides that a resident legal entity/company will be subject to corporate tax on its taxable income from within or outside the UAE.
For resident individuals, it provides that income from within or outside the UAE is taxable if it relates to the business or commercial activity carried out by the individual in the UAE.
Non-resident persons are subject to corporate income tax on taxable income attributable to the permanent establishment of the non-resident person in the State, income from the State which is not attributable to a permanent establishment of the non-resident person in the State, taxable income which is attributable to the non-resident person's connection in the UAE as determined in a decision issued by the Cabinet.
Taxable persons will nevertheless be able to deduct a certain number of expenses to minimize taxation.
II. b) The possible deductibility of charges
First, legitimate business expenses incurred entirely and exclusively for the purposes of taxable income, client representation expenses, or interest expenses.
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Certain income will be exempt, in particular to avoid double taxation. This is the case for dividends and capital gains from UAE or foreign shares.
In addition, a resident person may elect, subject to certain conditions, to disregard income from a foreign permanent establishment for UAE corporate tax purposes.
The client's representation costs may be subject to a partial deduction of 50 % from the amount of the expense.
Interest expenses may also, in certain cases, be deducted.
However, a certain number of expenses cannot be deducted at all.
This is particularly the case for bribes, fines and penalties (other than amounts awarded as compensation for damages or breach of contract), donations, grants or donations made to an entity which is not an eligible public interest entity, expenses not incurred entirely and exclusively for the exercise of the taxable person's activities, expenses relating to products exempt from corporation tax.
The internal framework having been established, it would be entirely relevant to know the implications of this tax in the presence of a foreign element relating to France.
III. The consequences of this new tax on possible tax regimes involving a France-Emirates link
We can legitimately ask ourselves whether the entry into force of this new tax will have an impact on the potential application of the parent-subsidiary tax regime, which was previously impossible.
The law does indeed introduce a corporate tax that did not previously exist (has), however the rate of this tax prevents the possibility of opting for the parent-subsidiary regime (b).
III. a) The introduction of a corporate tax in the UAE/Dubai necessary for eligibility for the French parent-subsidiary regime
Let us remember that the advantage of opting for the parent-subsidiary regime is to allow, among other things, the parent company to be exempt from corporate tax on distributions with the exception of a share corresponding to costs and expenses in accordance with Article 216 of the General Tax Code of the General Tax Code (CGI).
This system thus makes it possible, in particular, to neutralise double taxation by preventing profits taxed at the level of the subsidiary under corporate tax from being taxed again under the same tax at the level of the parent company receiving the dividends paid by the subsidiary.
However, the option for the parent-subsidiary regime is subject to specific conditions provided for by Article 145 of the CGI which provides in particular that: “The tax regime for parent companies, as defined in Article 216, is applicable to companies and other bodies subject to corporation tax at the standard rate.”
Before the 1ster June 2023, the corporate tax not having come into force, the application of this tax regime proved impossible to the extent that the absence of tax defeated the condition provided for in this Article 145 of the CGI.
Although a corporate tax now exists, another difficulty remains.
III. b) Corporate taxation, however insufficient, lower than the normal rate required by French law
At first glance, we might think that the introduction of this new corporate tax will now allow the application of this regime.
However, this is not the case, the article provides for a much stricter requirement than the imposition of corporate tax on the parent company, it provides for the imposition of corporate tax on the parent company at a normal rate.
In this regard, the Official Bulletin of Public Finances defines the contours of the notion of normal rate: “The tax regime for parent companies is applicable to companies subject to corporate tax at the rate of 15 % provided for in b of I of theArticle 219 of the CGI, which constitutes the normal tax rate, within the limit of €38,120 of taxable profit per twelve-month period, applicable to companies meeting the turnover and capital holding conditions provided for in this article”
The rate of the new tax being 9%, which is less than the normal rate of 15% provided for by the CGI and the BOFIP, the introduction of this new corporate tax as described will have no impact on the possibility of opting for the parent-subsidiary regime.
However, it will be necessary to remain vigilant regarding the development of this law, which could ultimately provide for a higher rate and consequently broaden the scope of possible tax arrangements.
