UAE corporate tax: MoF issues 3 new ministerial decisions

With the country preparing to welcome the new corporate tax regime from June 1, the UAE Ministry of Finance (MoF) has announced three new ‘Ministerial Decisions’ for the purposes of Federal Decree-Law No 47 of 2022 on the Taxation of Corporations and Businesses, reported the state news agency, WAM.

Younis Haji Al Khouri, Undersecretary of MoF, said, “The three new decisions aim to enhance the flexibility of UAE’s corporate tax regime and ensure a supportive business environment for all sectors.

“The decisions cover several important aspects related to private regulated pension funds and social security funds normally exempt from corporate tax in other countries.

“Designating International Financial Reporting Standards (IFRS) as the applicable accounting standards and further simplifying accounting processes for SMEs reflects the Ministry of Finance‘s commitment to imposing a minimal compliance burden for businesses in scope of the corporate tax regime.”

“In addition, the participation exemption will prevent double corporate tax on the profits of one entity and eliminate international double taxation,” he added.

These include the following:

• Ministerial Decision No 114 of 2023 on the Accounting Standards and Methods
• Ministerial Decision No 115 of 2023 on Pensions and Social Security Funds
• Ministerial Decision No 116 of 2023 on Participation Exemption

How the decision will impact corporate tax

According to WAM, the decision on Pensions and Social Security Funds sets out further conditions for private regulated pension funds and social security funds in the UAE to be exempt from corporate tax.

It aligns with international tax practices so that UAE private pension or social security funds exempt status is also recognised when investing internationally, and double tax treaty benefits can be obtained.

It also details the maximum contributions per beneficiary and the annual confirmation of compliance by a statutory auditor to ensure integrity of the exemption.

The decision on Accounting Standards and Methods provides clear guidelines for businesses preparing their financial statements that will be used as the starting point to calculate taxable income for corporate tax purposes.

It confirms that IFRS are the applicable accounting standards in the UAE and must be used by larger businesses that have revenues of more than Dhs50,000,000.

It provides SMEs that have revenues not exceeding Dhs50,000,000 with the option of applying IFRS for SMEs. To reduce the compliance burden even further, the decision confirms that the cash basis accounting may be used by businesses that have less than Dhs3,000,000 in revenue, reported WAM.

It also offers clarity on what consolidated financial statements for tax grouping purposes mean. Where, such financial statements will be the aggregation of the parent company and each subsidiary’s (that is a member of the tax group) standalone financial statements once intra-group transactions are eliminated.

The decision on Participation Exemption provides for corporate tax exemptions on dividends, profit distributions, and capital gains from a participating interest, which is defined as a 5 per cent or greater ownership interest in another entity’s shares or capital, held for at least 12 months.

The exemption applies if the subsidiary is in a jurisdiction with a corporate tax rate of at least 9 per cent or can demonstrate an effective tax rate of at least 9 per cent on profits, income, or equity.

The decision explains that the relief will apply to various ownership interest types, including preferential shares, ordinary shares and redeemable shares and membership and partner interest, where the aggregated acquisition cost of the ownership interests is equal to or exceeds Dhs4,000,000.

This ensures UAE-based companies with specific investments in foreign entities that meet the required conditions will not have UAE corporate tax levied on such investments.

Photo courtesy: WAM