In early December, the Ministry of Finance (MoF) of the United Arab Emirates (UAE) issued Federal Decree-Law No. 47 of 2022 on the taxation of companies and enterprises, plus 158 related FAQs. The new legislation provides for the introduction and implementation of a federal corporate tax regime in the UAE. While the text sets out detailed rules in most areas, such as free trade zones, certain aspects will require cabinet decisions to provide further details.
The Decree-Law establishes a range of new elements, such as the possibility of creating a tax group, group relief provisions, the possibility of carrying forward tax losses, no-gain, no-loss transfers, and corporate restructuring relief.
The new legislation also defines the treatment of so-called qualifying free zone persons. These may benefit from an advantageous tax rate of 0% instead of the general rate of 9%, provided that they meet several cumulative conditions, including adequate substance in the UAE, qualifying income, and compliance with UAE transfer pricing requirements. However, a number of questions remain unanswered, such as the definition of qualifying income. As far as mainland companies are concerned, it appears that they can deduct payments made to a free zone entity.
Already enshrined in the Corporate Tax Law, Article 50 of the Decree-Law aims to prevent any tax advantage that is due to a lack of economic transparency. In addition, all entities must respect the arm’s length principle in regard to all agreements and transactions with related parties. To this effect, they will need to apply the transfer prices specified in the new legislation. What is more, taxpayers will have to document and demonstrate how the arm’s length principle is applied to transactions. Two distinct types of documentation are possible: the disclosure form and the documentation in the form of a master file and a local file, depending upon the financial value of the transaction (which, however, has not yet been specified).
The changes brought about by the Decree-Law are likely to cause many Dubai entities to review their internal organisation, thereby also carrying out a restructuring and impact analysis. While the new legislation is expected to enter into force in June 2013, more information to address the numerous technical questions and features that remain unresolved will follow in due course.
THE GOVERNANCE LAW FIRM
