Corporate tax: UAE announces rules on tax grouping and interest capping

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The UAE Ministry of Finance (MoF) has issued three new ministerial decisions for corporate tax, which is set to come into effect for businesses whose financial year starts on or after June 1, 2023.

“The new decisions reflect how the UAE’s corporate tax regime maintains flexibility and ensures straightforward tax processes to enable compliance while reinforcing the country’s position as a leading business and investment hub,” said Younis Haji Al Khouri, Under-Secretary of the Ministry of Finance.

Tax grouping

The decision further clarifies the conditions under which UAE resident entities that are 95 per cent or more commonly owned can form or join a tax group and be treated as a single entity for corporate tax purposes.

“With tax grouping, groups are treated as if they were one entity which alleviates the administration and compliance burden,” said Al Khouri.

MoF said the UAE parent company must own at least 95 per cent of the voting rights and shares in each UAE entity under the tax grouping rule. The creation of a tax group simplifies the calculation and reporting of taxable income by allowing the parent company to file a single tax return based on the aggregated taxable profit or loss of the group, with transactions between the members of the tax group being generally disregarded.

The decision also clarifies the notification procedure if a subsidiary leaves a tax group or if the tax group ceases to meet the qualifying conditions.

Interest capping rule

The ministerial decision sets out the maximum cap of interest that can be deducted by businesses that are not banks, insurance providers or natural persons (individuals) undertaking a business or business activity in the UAE.

The net interest expenditure that can be deducted is capped at 30 per cent of adjusted earnings before interest, tax, depreciation, and amortisation (EBITDA) or a safe harbour amount of Dhs12m.

Al Khouri said the interest capping rules provide clarity to businesses when expensing debt financing costs and are built on OECD best global practice.

Tax groups with members who are banks and/or insurance providers must exclude these members’ income and expenditure when determining the 30 per cent EBITDA threshold.

Similarly, the UAE said long-term infrastructure projects meeting relevant conditions will not face restrictions on interest expenditure deductibility under the interest capping rule, in recognition of the importance of infrastructure projects to the country.

MoF also said that interest incurred on debt instruments entered into before the law comes into effect will not be subject to the limitation rule as the country seeks to bolster its appeal as a leading business and financing hub.

Unincorporated partnerships

The UAE said an unincorporated partnership will not be considered a taxable person in its own right provided it is not a corporate entity unless requested to be treated as a taxable entity.

“Once an unincorporated partnership elects to be treated as a taxable person in its own right, its decision is irrevocable once approved, and any change in the partnership composition must be notified to the Federal Tax Authority within 20 business days,” the finance ministry clarified.

Similarly, a foreign partnership that is treated as an unincorporated partnership must submit an annual declaration confirming that it is not taxed under foreign jurisdiction laws and each partner is taxed individually based on their share of income.

For a family foundation to be treated as an unincorporated partnership where one or more of its beneficiaries are public benefit entities, the ministry of finance said it must be confirmed that either the public benefit entity does not derive income treated as taxable Income, or, if they do, that such income is distributed to the respective beneficiaries within six months from the end of the relevant tax period.

Read: UAE to offer corporate tax relief to ‘public benefit’ entities