- Overview
- Definition of Economic Substance?
- How does it affect “tax heavens”?
- What are the Economic Substance requirements?
- Which Entities are subject to the Substance Regulations?
- How is the information provided to the tax authorities?
- Which UAE businesses are required to submit an Economic Substance Report?
- What is a Relevant Activity?
- The Submission of the ESR Notification
- ESR Notification Filing – important clarifications
- Economic Substance Report and Notifications Have to be Submitted Annually
- Deadline for ESR Notification
- Penalties for Failure to provide a Notification
- Motei & Associates is in a position to offer you assistance in the below:
Whether you are an ambitious start-up, an individual entrepreneur investing in an existing business, or a foreign corporation establishing a formal presence in the UAE, clear and skilled advice will ensure that you are making the right business decision to reduce your risk and increase your chances of achieving a successful, well-managed business.
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We advise on the full spectrum of the UAE companies’ law and can efficiently contribute to the achievement of our clients’ goals and objectives and help them navigate the legal complexity and market challenges to successfully executing their business strategy.
Economic Substance Regulations (ESR)
- Economic Substance Regulations (Cabinet of Ministers Resolution No. 31 of 2019), (the “Regulations”) on 30 April 2019.
- Guidance on the application of the Regulations was issued on 11 September 2019 (Ministerial Decision No. 215 of 2019),
- and Cabinet Decision No. 58/2019 on the Determination of Regulatory Competencies lists the Regulatory Authorities tasked with the administration and enforcement of the Regulations.
- Amendments to the Regulations were made by Cabinet of Ministers Resolution No. (57) of 2020 on 10 August 2020, and updated Guidance was issued on 19 August 2020 (Ministerial Decision No. (100) of 2020.
Which UAE businesses are required to submit an Economic Substance Report?
During a Reportable Period, businesses that are not Exempted Licensees and who generate Relevant Income from any of the following Relevant Activities must file an Economic Substance Report:
- Banking Business
- Insurance Business
- Investment Fund Management Business
- Lease-Finance Business
- Headquartered Business
- Shipping Business
- Holding Company Business
- Intellectual Property Business
- Distribution and Service Centre Business
Definition of Economic Substance?
Economic substance refers to a transaction that has a purpose besides the reduction of tax liability. The concept is used in the examination of tax shelters to monitor if there is exploiting of the tax laws, and if such behavior is identified , to determine and prevent it from repeating.
Economic substance refers to the purpose and substance of a transaction or arrangement beyond merely reducing tax liabilities. It is a concept used to evaluate whether certain tax structures, often employed in offshore jurisdictions, are genuinely conducted for legitimate business reasons or if their primary intent is to exploit tax laws and avoid paying taxes.
Offshore jurisdictions are known for their favorable tax regimes and financial secrecy, making them attractive for individuals and businesses seeking to minimize their tax obligations. However, tax authorities, like Internal Revenue Service Departments, closely scrutinize these structures to determine if they meet the requirements of economic substance.
When tax authorities examine tax shelters or complex transactions, they evaluate whether these arrangements serve a legitimate business purpose and have genuine economic effects beyond mere tax savings. In essence, they assess whether the transaction involves actual economic activity and substance or if it is merely a superficial arrangement created to exploit tax loopholes.
By implementing economic substance, tax authorities aim to prevent tax evasion and ensure that tax planning is driven by genuine business considerations rather than solely by the desire to reduce tax liabilities.
This helps maintain the integrity of tax systems, promote fairness, and ensure that taxes are paid in accordance with the underlying economic activities and substance of transactions.
How does it affect "tax heavens"?
The BEPS Project aims to end the use of shell companies used to stash profits offshore or unduly claim tax treaty protection and neutralize all schemes that artificially shift profits offshore.
Though the BEPS Project is not about dictating whether countries should have a specific corporate income tax rate, it will have an impact on regimes that seek to attract foreign investors without requiring any economic substance.
What are the Economic Substance requirements?
An entity (other than a holding entity, and entities that conduct intellectual property business, for which there are different criteria) conducting a relevant activity will satisfy the economic substance requirements if:
- it is managed and directed in the jurisdiction;
- core income generating activities (CIGA) are undertaken in the jurisdiction in relation to the relevant activity;
- it maintains adequate physical premises in the jurisdiction;
- there are adequate employees in the jurisdiction with suitable qualifications;
- there is adequate expenditure incurred in the jurisdiction in relation to the relevant activity; and
- it files a confidential economic substance report each year with the applicable authority in its jurisdiction which will assist the authority in assessing compliance.
Which Entities are subject to the Substance Regulations?
The precise scope of the Substance Regulations varies to a certain degree from jurisdiction to jurisdiction, however the general guidance rule is that most non-domestic companies, LLCs and partnerships will fall within the definition of “Relevant Entity” for the purposes of the Substance Regulations.
How is the information provided to the tax authorities?
The master file and the local file will be delivered by MNEs directly to local tax administrations. Country-by-Country Reports should be filed in the jurisdiction of tax residence of the ultimate parent entity and shared between jurisdictions through automatic exchange of information, pursuant to government-to-government mechanisms such as the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, bilateral tax treaties, or Tax Information Exchange Agreements (TIEAs). In limited circumstances, secondary mechanisms, including local filing can be used as a backup.
Which UAE businesses are required to submit an Economic Substance Report?
All the entities holding a trade for the UAE (particularly the free zone and offshore entities) must notify their concerned Regulatory Authorities regardless of whether they are carrying out the Relevant Activities within the UAE.
Aside from informing the Relevant Activities to the Regulatory Authority, providing the information with reference to the Licensee also serves as the primary purpose of the ESR Notification. Therefore, all the information provided in the ESR Notification is highly required in filing the Economic Substance Report for the same period.
The Economic Substance Regulations do not apply to all corporate entities in the UAE – rather, ESR applies to specific relevant entities that are carrying out relevant activities as per the Cabinet Resolution. Affected businesses are required to have sufficient number of employees, physical presence, expenditure, and performance of core income-generating activities within the UAE.
What is a Relevant Activity?
While all relevant entities will be required to make a filing setting out particulars relating to their business, an in-scope entity will only be required to meet the economic substance test if it carries on a “relevant activity”.
During a Reportable Period, businesses that are not Exempted Licensees and which generate Relevant Income from any of the following Relevant Activities must file an Economic Substance Report
- Banking Business
- Insurance Business
- Investment Fund Management Business
- Lease-Finance Business
- Headquartered Business
- Shipping Business
- Holding Company Business
- Intellectual Property Business
- Distribution and Service Centre Business
The importance of full compliance with the newly introduced substance regulations can’t be understated with the potential liability to acquire extensive penalties.
- ESR Related Requirements for Headquarters Businesses
The Ministry of Finance provided a non-exhaustive list containing matters licensees are to consider prior to the end of any financial period:
- Hold board meetings (a quorum must be reached for directors that are physically present in UAE)
- Make sure minutes of the board meeting are duly signed and kept on record in UAE
- Assess all relevant activities the entity has performed during a financial period with the approach of substance over form
- Assess type and amount of income earned from relevant activities during a financial period
- Identify the type and amount of expenditure and assets based in UAE including premises with respect to relevant activities
- Make sure access to assets incl. premises of the business can be demonstrated may it be through financial records and/or agreements
- Ensure supervision and control over outsourcing arrangements of the entity can be demonstrated through contractual agreements
- Determine the number of full time employees and other personnel that are based in UAE and responsible for carrying out relevant activities of the licensee
The Submission of the ESR Notification
An entity conducting more Relevant Activities is regarded as a “Licensee.”
The filing of the ESR Notification is a must for those entities carrying out the Relevant Activities within the UAE during the relevant Financial Year.
These entities include:
a. A Corporate Entity
- Limited Liability Company
- Public Joint Stock Company
- Private Joint Stock Company
- etc.
b. Partnership
- Limited Liability Partnership
- General Partnership
ESR Notification Filing – important clarifications
- ESR Notification Filing for an entity that carries out a relevant activity for part of the year An entity may carry out a Relevant Activity for part of the year. Nevertheless, the Licensee must notify the Regulatory Authority of all relevant activities performed during the financial year, regardless of whether those activities are conducted throughout the year.
- ESR Notification Filing for the UAE Parent Company with UAE Branches Parent companies and head offices in the UAE are responsible for notifying their Regulatory Authority about their Relevant Activities and the Relevant Activities of their UAE branches. Accordingly, there is no difference between whether or not the UAE parent company is performing Relevant Activities.
- ESR Notification Filing for a Multiple Licensee For the UAE parent company/head office, it is their obligation to notify their Regulatory Authority regarding their Relevant Activities as well as the Relevant Activities of their UAE branches. This is applicable regardless of if the UAE parent company/head office is carrying out their own Relevant Activities or not.
- ESR Notification Filing for a Licensee which is in the process of Liquidation Licensed entities in the process of liquidation which may perform relevant activities in the year of liquidation must file their ESR Notifications and Economic Substance Reports (if applicable) for the period up to liquidation.
Economic Substance Report and Notifications Have to be Submitted Annually
Companies and establishments that are involved in ‘relevant activities’ in the UAE are required to submit economic substance notifications and reports to the regulatory authority on an annual basis.
In the affirmative, they are required to submit an ESR Notification by 30 June of each calendar year. Depending on their business activities, the entity would need to file an ESR Report with the UAE Ministry of Finance (MoF) by the end of their financial year, or by 31 December the calendar year.
Deadline for ESR Notification
The Notification must be filed within six months from the Licensee’s financial year-end.
Penalties for Failure to provide a Notification
If a tax shelter or transaction is deemed to lack economic substance and is deemed abusive, it can be disallowed by tax authorities. This means that the tax benefits sought by the taxpayer are denied, and the individual or business may be subject to penalties, fines, or other consequences imposed by the relevant tax authority.
- If the Licensee or Exempted Licensee failed to submit the Notification before the deadline, the Licensee is subject to an administrative penalty of dirhams twenty thousand (AED 20,000).
- If the Licensee or Exempted Licensee provides inaccurate information to the Regulatory Authority or the National Assessing Authority and knows of the inaccuracy at the time the information is provided but fails to inform the authorities, as mentioned earlier means the Licensee or Exempted Licensee is subject to a penalty amounting to dirhams fifty thousand (AED 50,000).
Motei & Associates is in a position to offer you assistance in the below:
- Assessing whether the business activities conducted by the entity fall within any of the Relevant Activities and whether any exemption can be availed
- Assistance in filing the notification
- Assessing whether the Economic Substance Tests are met
- Advising on documentation to be maintained by the entity to support any future inquiries from the authorities
- Assistance in filing the official report, as well as any supporting documentation
- Identify gaps between existing substance and the level of substance required under ESR and advise on remedial measures
- Assistance in responding to inquiries from the regulatory authorities/FTA
COMPANY COMPLIANCE / ULTIMATE BENEFICIAL OWNERSHIP (UBO)S
HISTORY OF UBO
The UBO history can be traced back to efforts of multiple international organizations among which are the Financial Action Task Force (FATF) and the International Monetary Fund to address the misuse of corporate structures for illegal purposes and provide guidance to help countries identify, design and implement appropriate measures as well as assess and mitigate the money laundering and terrorist financing risks associated with foreign companies to which their countries are exposed.
The Financial Action Task Force (FATF) makes recommendations for combating financial crime, reviews members’ policies and procedures, and seeks to increase acceptance of anti-money laundering regulations across the globe. Because money launderers and others alter their techniques to avoid apprehension, the FATF must update its recommendations every few years.
GLOBAL ECONOMY EXPANSION/UBO CONCERNS
In the wake of the rapid expansion of the global economy and increased international trade, the proliferation of financial crimes such as money laundering has become a pressing concern for countries worldwide. To address this challenge, the concept of Ultimate Beneficial Ownership (UBO) has gained significant prominence in recent years.
UBO refers to the individual(s) who ultimately enjoy the benefits and exercise control over a legal entity, often operating behind a complex network of corporate structures across geographical borders. Recognizing the detrimental impact of illicit activities on their economies and societal well-being, countries have been increasingly adopting UBO regulations to enhance transparency and combat such illegal practices.
By focusing on identifying the true beneficiaries and controllers of legal entities, UBO measures aim to:
- Establish Accountability identify the individuals who ultimately benefit from and control legal entities, ensuring accountability and preventing anonymity.
- Prevent Anonymous Transactions UBO regulations assist in detecting and investigating financial crimes, enhancing law enforcement efforts, and protecting national security.
- Promote Financial Integrity by implementing UBO acts, countries demonstrate their commitment to international standards, strengthen their financial systems, and foster trust and confidence among investors and business partners.
- Ensure Joined Commitment by embracing UBO acts, countries demonstrate their commitment to international standards and best practices, fortify their financial systems.
The global adoption of UBO regulations reflects a collective determination to create a transparent and accountable financial environment, ensuring the sustainable growth and prosperity of nations in the face of evolving financial crimes.
WHO IS AN ULTIMATE BENEFICIAL OWNER?
Ultimate Beneficial Owner Vs Beneficial Owner
Legally, an ownership can be classified into two; 1. Legal and 2. Beneficial ownership. A legal owner is a person who holds the legal title under their name. Alternatively, a beneficial owner is the person who enjoys the benefits of ownership even though the title is in another name.
In other words, a registered shareholder (person or company) is deemed as the legal owner of the shares registered under his/its name, but he/it may be holding such shares for the interest and benefit of a beneficial owner pursuant to a trust or nominee arrangement.
There can be multiple beneficial owners in one company, but the Ultimate Beneficial Owner (UBO) is often the natural person who ultimately owns and controls a company, hence, benefits the most from all beneficial owners, however, this person does not have to be known directly as the owner.
Ultimate beneficial owner regulations (UBO regulations) in the UAE
The Ultimate Beneficial Owner Regulations governed by UAE Cabinet Resolution No. (58) of 2020 (“Regulations”), establishes mandatory compliance requirements for Relevant Entities in the United Arab Emirates (UAE) aiming to regulate Beneficial Owner Procedures.
All companies licensed and registered in the UAE – except those that are wholly owned by a local or federal government body, or those set up in the DIFC or ADGM financial free zones – are required to maintain registers with updated information and adequate records of its ultimate beneficial owners (UBOs), beneficial owners (BO’s), shareholders, and nominee directors.
Companies Registrars must maintain, at all times, updated UBO Register to include the following information for each UBO:
- Full name, nationality, and date and place of birth.
- Place of residence or notice address.
- Valid Passport or identification number, country, and date of issue and expiry.
- The basis on which the natural person is identified as a beneficiary.
- The date on which the person became a UBO, and if applicable, the date on which they ceased to be one.
The BO Register – identifying shareholders, partners, directors/nominee directors to be maintained by Registrars must include the following information for each partner or shareholder:
- The number and class of shares/equity held, and the voting rights attached.
- The date on which the shareholder/partner acquired the shares/equity.
- For shareholders/partners that are natural persons, the same information is required as for UBOs.
For shareholders/partners that are legal entities:
- Name, legal form, and memorandum/articles association.
- Address of main office or headquarters, and if the legal entity is foreign, the name and address of its legal representative in the UAE must be included.
- Names of the persons holding senior management positions (including their passport or identification number, country of issue, date of issue, expiry date).
ADDITIONAL CLARIFICATIONS
Maintenance of Registers
Entities must record data on Actual Beneficiaries, stating the reasons for their designation and the dates when they assumed this role. Updated information on Directors and Nominee Directors should be documented. It is essential for entities to store other essential documents and Ultimate Beneficial Owner (UBO) forms that have been submitted to the relevant Regulatory Authority.
Undertaking to Create the Registry
Notification of Changes
Any amendments or modifications to the initial information provided by the Relevant Entities must be promptly notified to the relevant authority within fifteen (15) days of the change.
Entities are required to appoint a person residing in the UAE as a point of contact. This individual will facilitate communication between the licensing authority and the entity, specifically regarding UBO data and other essential information requirements.
Data Entry and Updates
Penalties for Non-Compliance
UAE Cabinet Resolution No. (53) of 2021 Concerning the Administrative Penalties against Violators of The Provisions of the UAE Cabinet Resolution No. (58) of 2020 Concerning the Regulation of Beneficial Owner Procedures.
The UAE Ministry of Economy has announced significant penalties for entities that fail to comply with the Regulations. These penalties aim to enforce adherence to the Ultimate Beneficial Owner Regulations, thereby ensuring transparency and accountability within the UAE’s business landscape.
Confidentiality Measures
CORPORATE TAX
OVERVIEW
UAE Corporate Tax Introduction: A Legal Overview
Effective from financial years commencing on or after 1 June 2023, the UAE introduces Corporate Tax, marking a significant shift in its fiscal policy landscape. This move, guided by Provisions of the Federal Decree-Law No. 47 of 2022, and subject to Federal Decree-Law No. 60 of 2023 amending certain provisions on the Taxation of Corporations and Businesses, aligns the UAE with international tax standards and underscores its commitment to economic diversification and global tax transparency.
Designed to maintain the UAE’s competitive edge as a global business hub, this regime reflects a strategic advancement towards achieving the nation’s developmental and transformational goals.
Historical Context
Historically celebrated for its zero-tax environment, the UAE has been a magnet for global businesses and investors. The UAE’s remarkable economic growth and international prominence are significantly attributed to the strategic establishment of Offshore Jurisdictions, Free Zones (FZs), Special Economic Zones, positioning the country as a global hub for trade, finance, and innovation and offering unparalleled incentives such as 100% foreign ownership, full repatriation of profits, and, until recently, a zero-tax framework, these zones have successfully attracted a myriad of businesses and investors from across the globe.
The introduction of VAT in 2018 marked a strategic shift towards revenue diversification, heralding a new era in tax policy that aligns with the global tax regimes.
Definition of Corporate Tax
Corporation tax is a form of direct tax imposed on the net income or profit of a business. In some other countries, corporate tax is referred to as “corporate income tax” or “business profits tax.”
Reasons for Introduction of Corporate Tax in the UAE
The introduction of Corporate Tax by the United Arab Emirates (UAE) is underpinned by several strategic objectives:
- Economic Diversification: This initiative aims to diminish the nation’s dependency on oil revenues by cultivating a diversified economic landscape, encouraging growth across various sectors.
- Global Compliance: By adopting Corporate Tax, the UAE aligns with international tax standards, distancing itself from the perception of a tax haven, and reinforcing its standing in the global economy.
- Sustainable Development: The move ensures the UAE’s fiscal sustainability, securing the state’s capacity to deliver essential services to its populace and support long-term development goals.
Based on the Federal Decree-Law No. (47) of 2022, and amended by Decree No. (60) of 2023 on the Taxation of Corporations and Businesses (the ‘CT Law’) in the UAE:
1. EFFECTIVE DATE
The CT Law is effective for financial years commencing on or after 1 June 2023. It applies to all businesses and corporations operating in the UAE, including free zones, with specific provisions for entities engaged in natural resource extraction which are generally subject to emirate-level taxation.
The below scenarios exemplify the practical application of the Corporate Tax law, based on varying financial year schedules, underscoring the need for businesses to prepare for compliance within the stipulated timelines:
- A business operating with a FY that commences on 1 July 2023 and concludes on 30 June 2024 will fall under the UAE Corporate Tax regime starting from 1 July 2023. This date marks the beginning of their FY immediately following the 1 June 2023 threshold for Corporate Tax applicability.
- Conversely, a business with its FY spanning from 1 January 2023 to 31 December 2023 will be subject to the UAE Corporate Tax starting 1 January 2024. This is because 1 January 2024 represents the onset of the business’s first financial year which begins after the 1 June 2023 commencement date of the Corporate Tax law.
2. APPLICABILITY
The UAE’s Corporate Tax regime will apply to a broad spectrum of economic activities and entities, ensuring a comprehensive and equitable tax landscape. The entities subject to Corporate Tax include:
- Licensed Business Activities: Entities and individuals engaging in business under a commercial license, encompassing a range of sectors such as commercial, industrial, and professional activities within the UAE.
- Free Zone Businesses: While maintaining its commitment to the economic incentives offered to free zone entities, the Corporate Tax regime will apply to businesses within these zones that meet regulatory requirements and refrain from conducting business operations in the mainland UAE market.
- International Entities: Foreign companies and individuals conducting ongoing or regular business activities in the UAE are subject to Corporate Tax, emphasizing the law’s inclusive scope.
- Banking Sector: Financial institutions involved in banking operations fall under the purview of Corporate Tax, reflecting the sector’s significant role in the national economy.
- Real Estate and Construction: The Corporate Tax extends to companies involved in real estate management, development, agencies, construction work, and brokerage activities, underlining the sector’s impact on economic development.
3. SCOPE OF TAX
Applies to net income from commercial, industrial, professional activities, real estate investments, and other assets within the UAE.
- Broad Definition of Taxable Income: Includes all forms of revenue, gains, and profits, adjusting for permissible deductions and exemptions.
- Inclusive Tax Framework: Captures income from both domestic and international sources, under specified conditions.
- Comprehensive Revenue Sources: Encompasses dividends, capital gains, and income from intellectual property.
- Alignment with International Standards: Demonstrates the UAE’s commitment to a transparent, equitable tax system and global tax compliance.
- Objective: Aims to prevent tax evasion and ensure fair tax distribution among businesses in the UAE.
4. TAX RATES
The UAE’s corporate tax rates were meticulously chosen to balance global competitiveness with adherence to international standards. Emphasizing economic growth, the structure includes:
- Competitive Tax Rates: Designed to foster investment, with specifics provided in the law.
The UAE Corporate Tax structure is designed with a tiered rate system to accommodate both natural and legal persons, as well as entities operating within the free zones: - Tax-Free Threshold: Offers relief for small businesses, promoting economic inclusivity.
- Progressive Rate Structure: Applies to larger enterprises, in line with international norms.
- Global Alignment: Reflects adherence to worldwide corporate tax practices, balancing competitiveness with fairness.
5. EXEMPTIONS AND EXCLUSIONS
The UAE Corporate Tax regime specifies exemptions for certain entities and income types, ensuring a tailored approach to taxation that aligns with economic and strategic objectives.
The key exempted Parties and Income Categories include:
- Government-Owned Entities: Public entities and organizations wholly owned by the UAE government may be exempt if they are not engaged in commercial activities.
- Extractive Industries: Companies involved in the extraction of natural resources are typically subject to taxation at the emirate level and may be exempt from federal Corporate Tax.
- Non-Profit Organizations: Charities, social institutions, and other non-profit organizations that do not engage in commercial activities are exempt.
- Investment Funds: Certain investment funds may qualify for exemption, provided they meet specific criteria set forth by the law.
- Pension Funds and Social Security Funds: Pension funds and social security funds that are not engaged in commercial activities may be exempt from Corporate Tax.
- Qualifying Public Benefit Entities: Entities recognized as serving the public interest and not engaged in commercial activities might be exempt, subject to specific conditions.
Notably, the Corporate Tax will not be applicable to:
- Salaries and other compensations derived from employment, whether in the public or private sectors, remain outside the scope of Corporate Tax.
- Individuals’ Bank Earnings: Interest and other income from bank deposits or savings programs accrued by individuals are exempt from Corporate Tax.
- Personal Real Estate Investments: Real estate investments made by individuals in their personal capacity are not subject to Corporate Tax.
- Foreign Investors’ Returns: Income such as dividends, capital gains, interest, royalties, and other investment returns earned by foreign investors are exempt.
- Personal Securities Income: Dividends, capital gains, and any other income generated by individuals from the ownership of shares or securities in a personal capacity are also exempt from Corporate Tax.
6. TAX GROUPING
Under the CT Law, the provision for tax grouping permits entities within a Corporate Group to be recognized as a singular taxable entity, subject to specific eligibility criteria. This framework simplifies tax compliance by consolidating filings and enables the offsetting of profits and losses across the group. This strategic measure is designed to streamline administrative processes for businesses and support efficient fiscal management, reflecting the UAE’s forward-thinking approach to corporate taxation.
7. TRANSFER PRICING
The UAE’s Corporate Tax Law adopts stringent transfer pricing regulations in line with OECD standards, ensuring arm’s length transactions between associated entities. Firms are required to maintain rigorous documentation and employ recognized transfer pricing methodologies, reinforcing transparency and market conformity.
8. COMPLIANCE REQUIREMENTS
- Tax Registration Obligation: Entities are mandated to register for corporate tax compliance.
- Accounting Record-keeping: Maintaining accurate accounting records consistent with international standards is essential for financial transparency.
- Mandatory Annual Returns: Filing of Annual Tax Returns is required by law.
- Documentation Standards: Adherence to specified documentation and disclosure protocols ensures filing integrity.
9. ANTI-AVOIDANCE MEASURES
The law includes provisions to:
- Anti-Avoidance Measures: The law incorporates provisions aimed at preventing tax avoidance and evasion, focusing on transactions lacking economic substance.
- Scrutiny of Transactions: Arrangements primarily intended to minimize tax liabilities are subject to detailed examination.
- Adjustments for Compliance: Transactions identified as tax avoidance schemes may be adjusted to reflect accurate tax obligations.
10. REGISTRATION AND FILING DEADLINES
Entities are obligated to register for Corporate Tax with the Federal Tax Authority (FTA), providing comprehensive business information and financial statements. Annual tax return filings are a requisite, with the initial filing deadline contingent upon the entity’s financial year-end, applicable to financial years commencing on or after 1 June 2023. This process underscores the importance of timely compliance to fulfill tax obligations under the new law.
11. ADMINISTRATION AND ENFORCEMENT
The administration, collection, and enforcement of Corporate Tax fall under the purview of the Federal Tax Authority (FTA). The FTA also offers guidance and support to taxpayers, facilitating compliance with the tax law and ensuring a smooth implementation process.
12. ENTITIES SUBJECT TO TAX
The Corporate Tax Law applies to all business entities in the UAE, with exceptions for natural persons, non-profit organizations, and other specified entities not engaged in a business or commercial activity. The law covers both onshore and Free Zone businesses, albeit with specific provisions for businesses operating within the UAE’s free zones.
13. TAX CALCULATION AND RATES
Following the UAE’s Corporate Tax Law, the calculation of Corporate Tax is based on the net income of businesses, as precisely recorded in their financial statements and as identified:
For Natural and Legal Persons:
- A 0% tax rate applies to taxable income up to AED 375,000, providing relief for small businesses and startups.
- Taxable income exceeding AED 375,000 is subject to a 9% Corporate Tax rate, ensuring a competitive and equitable tax environment.
For Entities in Free Zones (Qualified Persons):
- Qualifying income earned by entities based in free zones is taxed at 0%, maintaining the UAE’s commitment to free zone incentives.
- A 9% tax rate is applied to taxable income that does not meet the criteria for qualifying income, as detailed in Cabinet Resolution No. (55) of 2023.
14. PENALTIES
Failure to comply with the CT Law, including late registration, filing, or payment of due taxes, may result in penalties. The law outlines a framework for penalties related to non-compliance, emphasizing the importance of adherence to tax obligations.
- Compliance Requirements: Adherence to the CT Law, including timely registration, filing, and tax payment, is mandatory.
- Penalty Framework: The law specifies a penalty structure for non-compliance, underlining the critical nature of fulfilling tax duties.
- Importance of Compliance: Emphasizes the necessity of meeting all tax obligations to avoid penalties.
Country-by-country reporting (“CBCR”)
HISTORY OF CbCR
Introduced in 2013 as part of the Base Erosion and Profit Shifting (BEPS) project by the Organization for Economic Co-operation and Development (OECD), CbCR has rapidly gained global recognition and adoption. This transformative reporting framework requires multinational enterprises to disclose essential financial and tax-related information on a country-by-country basis, providing tax authorities with invaluable insights into their global operations. In recent years, the adoption of CbCR has been accelerated as more countries recognize its significance in curbing tax avoidance, ensuring fair taxation, and enhancing transparency in the international tax landscape.
GLOBAL ECONOMY EXPANSION / CbCR OF PROFIT AND TAX COMPLIANCE CONCERNS
The expansion of the global economy has brought unprecedented opportunities for businesses to thrive across borders. With this growth comes the challenge of ensuring fairness and transparency in international taxation.
Country-by-Country Reporting (CbCR) has emerged as a crucial mechanism to address these concerns. By mandating multinational enterprises to disclose detailed financial and tax-related information on a country-by-country basis, CbCR enables Tax Authorities and Regulatory Organizations to gain a comprehensive understanding of multinational corporations’ operations and tax contributions worldwide.
The BEPS Action 13 report (Transfer Pricing Documentation and Country-by-Country Reporting) provides a template for multinational enterprises (MNEs) to report annually and for each tax jurisdiction in which they do business the information set out therein.
All large multinational enterprises (MNEs) are required to prepare a country-by-country (CbC) report with aggregate data on the global allocation of income, profit, taxes paid and economic activity among tax jurisdictions in which they operate. This report is called the Country-by-Country (CbC) Report and is shared with tax administrations in among jurisdictions, for use in high level transfer pricing and BEPS risk assessments.
CbCR REGULATIONS IN THE UAE
Working together in the OECD/G20 Inclusive Framework on BEPS, over 135 countries and jurisdictions are implementing 15 Actions to tackle tax avoidance, improve the coherence of international tax rules, ensure a more transparent tax environment and address the tax challenges arising from the digitalisation of the economy.
The United Arab Emirates (UAE) joined the Base Erosion and Profit Shifting Inclusive Framework (BEPS IF) on 16 May 2018, and has since taken significant steps to implement the BEPS minimum standards (i.e., Actions 5, 6, 13, and 14), maintain compliance and demonstrates its commitment to fair and responsible tax practices, bolstering its reputation as a responsible global player in the international tax landscape and attractive regional and global hub for foreign direct investment.
UAE REGULATIONS
The UAE Ministry of Finance (MoF) has issued:
- ‘Cabinet of Ministers Resolution No.31 of 2019’ (“The Resolution”) introducing formal regulations for demonstrating economic substance, which come into effect from 30 April 2019.
- ‘Cabinet Resolution No. 32 of 2019 on Organizing the Reports Submitted by Multinational Corporations’ on 30 April 2019, compliance obligations (UAE CbCR rule) for multinational entity groups (MNE) based and/or operating in the UAE, effective for financial years commencing on or after 1 January 2019 (“FY19” or “reporting period”).
- Cabinet Resolution No. 44 of 2020, which replaces the existing Cabinet Resolution no. 32 of 2019 is the UAE legislation governing CbC Reporting.
CbCR eligibility criteria
The UAE CbCR rules shall apply to MNE groups:
- with consolidated revenues of Arab Emirate Dirham (AED) 3.15 billion or above in the FY immediately preceding the reporting period RFY, based on the consolidated financial statements of that preceding year (i.e., FY22); and
- if the Ultimate Parent Entity of the Multinational Enterprises (MNE) Group is resident in the UAE; or
- if a UAE-resident constituent entity (CE) of the MNE group (with its UPE outside the UAE) is nominated as the Alternate Parent Entity (APE); or
- if the MNE group has a UAE-resident CE, which is neither the UPE or an APE.
CbC Notification and Reporting is part of the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan 13 providing local tax authorities visibility to revenue, income, tax paid and accrued, employment, capital, retained earnings, tangible assets and activities.
CbCR Notification
- The CbCR requirements are applicable for the UAE-headquartered Multinational Enterprises Groups of companies meeting the above criteria.
- The UAE tax resident, Ultimate Parent Entity of the MNE Group, must submit the notification confirming that the notifying company is the Ultimate Parent Entity of the MNE Group, a resident in the UAE and that the CbCR requirements are applicable.
- The submission of the CbCR notifications must be made no later than the last day of the financial reporting year of the MNE.
CbC Report – A reporting form containing the following details:
(a) Verification from the notifying entity confirming its status as the Ultimate Parent Entity of the Multinational Enterprise (MNE) Group, established in the UAE, with an acknowledgment of the applicability of UAE Country-by-Country Reporting (CbCR) requirements to the MNE Group; and
(b) Identification of this entity, inclusive of the trade license number, address, business activity, and fiscal year-end.
– The UAE-headquartered Groups of companies that meet the criteria should comply with CbC Reporting legislation in the UAE.
– The CbC Report should be submitted in English.
– The CbC Report should maintain consistency in reporting by using the same sources of data from year to year in completing the CbC Report.
The data can be obtained from the following sources:
- Consolidation reporting packages; or
- Separate entity statutory financial statements; or
- Regulatory financial statements; or
- Internal management accounts.
– The submission period is within 12 months from the end of the reporting year (RY) of the MNE Group.
– The CbC Report is to be prepared and submitted in a specific format:
- Table I – to include the quantitative information per tax jurisdiction such as third party and related party revenues, stated capital, taxes accrued and paid, employee count, etc.
- Table II – to include the qualitative information per constituent entity on the main business activities undertaken during the year.
- Table III – to include any additional information necessary to facilitate the understanding of Tables I and II (such as assumptions on exchange rates, source of data, reason behind change of source of data etc.)
– The CbC Report and the effective records should be kept by a CbC Reporting Entity for 5 years following the date on which the CbC Report is submitted to the MoF.
Administrative Offences and Penalties for non-compliance with Country-by-Country Reporting (CbCR)
1. An administrative penalty shall be imposed on the Reporting Entity that fails to comply with the obligations set out in the Resolution under Article 8 as follows:
(a) If the Reporting Entity fails to meet the deadline specified in Article (4) of the Resolution,
(b) If the Reporting Entity fails to maintain the documents and information required to be collected in the course of meeting its reporting obligations under this Resolution for a minimum period of five (5) years after the date of reporting the Report to the Competent Authority.
(c) If the Reporting Entity fails to provide the Competent Authority with any information required in accordance with this Resolution.
(d) If the Reporting Entity fails to provide the information required to be reported under this Decision in a complete and accurate manner.
2. If the Ultimate Parent Entity fails to provide the notification referred to in Clause (1) of Article (2) of this Resolution within the timeline stipulated in that Clause, it is liable:
(i) to pay an administrative penalty of UAE Dirhams One Million (AED 1,000,000); and
(ii) to pay an administrative penalty of UAE Dirhams Ten Thousand (AED 10,000) for each day that the failure continues with a maximum of UAE Dirhams Two Hundred Fifty Thousand (AED 250,000).
MOTEI & ASSOCIATES IS IN A POSITION TO OFFER YOU GUIDANCE AND ASSISTANCE IN PREPARING CbC NOTIFICATION AND REPORTING.
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