Corporate Tax in UAE

The UAE Corporate Tax period for an entity is determined based on its financial year-end. As such, entities with a:

• 31 May financial year-end should file their first UAE Corporate Tax Return for the financial year-ending 31 May 2024.
• 30 September financial year-end should file their first UAE Corporate Tax return for the financial year-ending 30 September 2024.
• 31 December financial year-end should file their first UAE Corporate Tax return for the financial year-ending 31 December 2024.

Entities will only file one Corporate Tax Return and settle Corporate Tax liability within 9 months from the end of each Tax period and there is no requirement for making advance tax payments or preparing provisional tax returns.

Taxable Person must file Tax Return and settle the Corporate Tax Payable within 9 months from the end of the relevant Tax Period, or by such other date as determined by the FTA.

Tax Return shall include at least the following information, as applicable:

• Tax Period to which the Tax Return relates.
• Name, address and TRN of the Taxable Person.
• Submission date of the Tax Return.
• Accounting basis used in the financial statements.
• Taxable Income for the Tax Period and Corporate Tax Payable
• Amount of Tax Loss relief claimed and transferred.
• Available tax credits claimed.

Taxable Person may make an application to the FTA for a Corporate Tax refund if Withholding Tax Credit available exceeds the Corporate Tax Payable, or where the FTA is otherwise satisfied that the Taxable Person has paid excess Corporate Tax.

Taxable Person shall maintain all records and documents for 7 years following the end of the Tax Period to which they relate.

Tax Period shall be the Financial Year or part thereof for which a Tax Return is required to be filed. Financial Year is Gregorian calendar year, or the 12 months period for which the Taxable Person prepares financial statements. Tax Period can be changed by making an application to FTA.

Taxable Person’s opening balance sheet for Corporate Tax purposes shall be the closing balance sheet prepared for financial reporting purposes under accounting standards applied in the State on the last day of the Financial Year that ends immediately before their first Tax Period commences.

Resident Person is any of the following Persons:

• Juridical person that is incorporated or otherwise established or recognised under the applicable legislation of the State, including a Free Zone Person.
• Juridical person that is incorporated or otherwise established or recognised under the applicable legislation of a foreign jurisdiction that is effectively managed and controlled in the State.
• Natural person who conducts a Business or Business Activity in the State.
• Any other Person as may be determined in a decision issued by the Cabinet at the suggestion of the Minister.

Non-Resident Person is not considered a Resident Person and that either:

• Has a Permanent Establishment in the State.
• Derives State Sourced Income.
• Has a nexus in the State.

PE for a foreign company is determined by below two main tests:

Fixed place of business test

It includes a place of business enlisted below:

• A place of management where management and commercial decisions that are necessary for the conduct of the Business are, in substance, made.
• Branch, office, factory, or workshop.
• Land, buildings, and other real property.
• An installation or structure for the exploration of renewable or non-renewable natural resources.
• Mine, an oil or gas well, a quarry or any other place of extraction of natural resources, including vessels and structures used for the extraction of such resources.
• Building site, a construction project, or place of assembly or installation, or supervisory activities in connection therewith, but only if such site, project or activities, whether separately or together with other sites, projects or activities, last more than (6) six months, including connected activities that are conducted at the site or project by one or more Related Parties of the Non-Resident Person.

Fixed place of business shall not include PE that is used to:

• Display, store or deliver foreign company’s goods to another person for processing.
• Purchasing goods or collecting information for Non-Resident Person.
• Conducing activities that are preparatory or auxiliary in nature, including promotion and marketing activities, seminars or conventions and market research are examples of preparatory activities.

Above mentioned provisions are not applicable to that PE of Non-Resident Person if the same Non-Resident Person or its Related Party have another PE to carry on a Business in the UAE and the overall activities of the Non-Resident Person and its Related Party is not of a preparatory or auxiliary nature and together would form a cohesive Business operation, had the activities not been fragmented.

Minister may prescribe the conditions under which the mere presence of a natural person in the State does not create a PE for a Non-Resident Person where such presence is a consequence of a temporary and exceptional situation or where the natural person is employed by the Non-Resident Person, and all of the following conditions are met:

• Activities being conducted in the State by the natural person are not part of the core
• income-generating activities (CIGA) of the Non-Resident Person or its Related Parties.
• Non-Resident Person does not derive State Sourced Income.

Dependent agent test

Agents of the foreign company who conclude contracts without material intervention by foreign company will also constitute PE for a foreign company in UAE, excluding those agents who carried on foreign company’s business in the ordinary course of their business which implies that they do not exclusively work for foreign company and is legally & economically independent from the foreign company.

The Taxable Income of each Taxable Person shall be determined separately, on the basis of adequate, standalone financial statements prepared for financial reporting purposes in accordance with accounting standards accepted in the UAE.

The Taxable Income for a Tax Period shall be the Accounting Income for that period, and to the extent applicable, adjusted for the following:

• Any un-realised gain or loss. (Option is available to take into account un-realised gain or loss of current assets and current liabilities at the end of that period)
• Transactions with Related Parties and Connected Persons.
• Exempt Income
• Tax Loss
• Reliefs
• Deductions

Where a Taxable Person who is not a member of a multinational group that is required to prepare a Country-by-Country Report (CbCR) or a Qualifying Free Zone Person, derives revenue that is below AED 3 million in Tax Periods commencing on or after 01 June 2023 untill 31 December 2026, that Taxable Person may elect with FTA to claim for ‘Small Business Relief’ in order to be treated as having no taxable income during the relevant Tax Period and may be subject to simplified compliance obligations including no transfer pricing documentation requirements and opting for cash basis of accounting rather than IFRS based.

However, the basic compliance requirements are applicable to Taxable Person who claims ‘Small Business Relief’ which includes obligations to register for Corporate Tax purposes, file a Tax Return and retain all relevant documents and records to support their Corporate Tax filings.

UAE resident group of companies can form a tax group and treated as single taxable person where all of the below cases are met:

• Parent company holds atleast 95% of the share capital and voting rights of its subsidiaries, either directly or indirectly through one or more Subsidiaries. Parent Company is entitled to at least 95% of the Subsidiary's profits and net assets, either directly or indirectly through one or more Subsidiaries.
• Neither parent company, nor subsidiary can be an exempt entity or a Qualifying Free Zone Person.
• All group entities use same financial year and prepare their financial statements using the same accounting standards.
• Sub-subsidiary can be part of tax group, if parent company together with other subsidiaries own at least 95% of share capital.
• UAE branch of the parent company or any of its subsidiaries, can be part of tax group.

To form a Tax Group, an application shall be made to the FTA by the Parent Company and each Subsidiary seeking to become members of the Tax Group. A Subsidiary can join an existing Tax Group following submission of an application to the FTA by the Parent Company and the relevant Subsidiary. A Tax Group shall be formed, or a new Subsidiary shall join an existing Tax Group from the beginning of the Tax Period specified in the application or from the beginning of any other Tax Period determined by the FTA.

Tax grouping allow UAE groups to be taxed as a single entity. Upon forming tax group, parent company will file Corporate Tax Return and pay tax on behalf of the tax group, based on consolidation of the financial results, assets and liabilities of each Subsidiary for the relevant Tax Period, eliminating transactions between the Parent Company and each Subsidiary that is a member of the Tax Group. However, this provision shall not apply where an asset or liability has been transferred between members of the Tax Group and either the transferor or transferee leaves the Tax Group within 2 years from the date of the transfer, unless the associated income would have been exempt from Corporate Tax or not taken into account under any other provisions of the Corporate Tax Law. Any income that was not taken into account with regards to this transfer shall be taken into account on the date the transferor or transferee leaves the Tax Group, and shall result in a corresponding adjustment of the cost base for Corporate Tax purposes of the relevant asset or liability.

The Parent Company and each Subsidiary shall remain responsible for complying with the provisions of Withholding Tax.

A Subsidiary shall leave the Tax Group in the following circumstances:

• Following approval by the FTA of an application by the Parent Company and the relevant Subsidiary.
• Where the relevant Subsidiary no longer meets the conditions to be a member of the Tax Group as specified in this section.

Subsidiary shall be treated as leaving that Tax Group from the beginning of the Tax Period specified in the application or where conditions to be member of the Tax Group ceases to met, as the case may be. FTA can determine this leaving from beginning of any other Tax Period.

A Tax Group shall cease to exist in any of the following circumstances:

• Following approval by the FTA of an application by the Parent Company.
• Where the Parent Company no longer meets the conditions to form a Tax Group as specified in this section.

Tax Group shall be treated as ceased from the beginning of the Tax Period specified in the application or where conditions to form a Tax Group ceases to met, as the case may be. FTA can determine this cease from beginning of any other Tax Period.

The Parent Company of a Tax Group can make an application to the FTA to be replaced by another Parent Company without a discontinuation of the Tax Group, in any of the following circumstances:

• The new Parent Company meets the conditions to form Tax Group as specified in this section.
• The former Parent Company ceases to exist and the new Parent Company or a Subsidiary is its universal legal successor.

Group Restructuring/Reorganising relief

Transfer of assets or liabilities within a Group does not change ultimate ownership, therefore consequent tax liability due to realisation of gains on transferred assets or liabilities is exempt, provide that:

• Transfer of assets and liabilities is between Resident Persons or Non-Resident Persons which have Permanent Establishment in the UAE that has a direct or indirect ownership interest of at least 75% in the other Taxable Person, or a third Person has a direct or indirect ownership interest of at least 75% in each of the Taxable Persons.
• Transferred assets or liabilities remain within the same group for a minimum of 2 years.
• Taxable Persons are not Exempt from Corporate Tax.
• Taxable Persons are not Qualifying Free Zone Persons.
• Financial Year of each of the Taxable Persons ends on the same date.
• Both Taxable Persons prepare their financial statements using the same accounting standards.

Transfer of assets or liabilities is considered at tax net book value, so that neither a gain or loss needs to be taken into account when calculating taxable income or loss.

If above mentioned conditions do not remain to be met, or a Taxable Person ceases to be member of the Group, then any gain or loss that would have arisen upon initial transfer will be included in Corporate Tax Return in the tax period in which conditions ceases to be met.

Mergers, spin-offs, or other corporate restructuring transactions resulting in transfer of a business or independent part of it to another Person who is Taxable Person or will become Taxable Person as a result of the transfer in exchange for shares or other ownership interests are exempt, provided that the:

• Taxable Persons are Resident Persons or Non-Resident Persons which have Permanent Establishment in the UAE.
• Taxable Persons are not Exempt from Corporate Tax.
• Taxable Persons are not Qualifying Free Zone Persons.
• Financial Year of each of the Taxable Persons ends on the same date.
• Taxable Persons prepare their financial statements using the same accounting standards.
• Transfer is undertaken for valid commercial or other non-fiscal reasons which reflect economic reality.
• Business is not subsequently transferred to a third party for a minimum period of 2 years from restructuring. If this condition does not remain to be met, the transfer shall be treated as having taken place at Market Value at the date of the transfer.

Transfer of assets or liabilities as part of qualifying restructuring transactions is considered at tax net book value, so that neither a gain or loss needs to be taken into account when calculating taxable income or loss.

Value of the shares or ownership interests received shall not exceed the net book value of the assets transferred & liabilities assumed and book value of the shares or ownership interests surrendered, less the value of any other form of consideration received.

Unutilised tax losses of transferor can be carried forward to transferee, subject to conditions to be prescribed by the Minister. Where a Taxable Person transfers an independent part of its Business, un-utilised Tax Losses shall be carried forward to the extent that can be reasonably attributed to the independent part of the Business being transferred.

Tax losses incurred by entities from effective date of Corporate Tax implementation or from date when an entity is registered for Corporate Tax purposes, whichever is later, are adjustable against taxable income in subsequent financial periods, upto a maximum of 75% of the taxable income in each financial period, or any other percentage as specified in a Cabinet decision.

Tax losses can be off-set in following circumstances:

• 50% of share capital are held by same shareholders from beginning of tax incurring period till end of period in which loss is off-set. If ownership changes more than 50%, then new owners should carry out similar business. Where there have been any changes in business, these result from the development or exploitation of assets, services, processes, products or methods that existed before the ownership change. For the purposes of determining relevant factors whether a Taxable Person has continued to conduct the same Business or Business Activity following a change in the direct or indirect ownership include:
• Taxable Person uses some or all of the same assets as before the ownership change.
• Taxable Person has not made significant changes to the core identity or operations of its Business since the ownership change.

Above provisions is not applicable to entities listed on recognised stock exchange.

• Losses incurred through non-exempt activities or assets.

Transfer of Losses among Group Entities:

Group companies that do not want to form a tax group or do not meet minimum 95% common ownership requirement, can still obtain benefit through tax loss transfer among group entities to adjust against taxable income, provided below conditions:

• Either Taxable Person has a direct or indirect ownership interest of at least 75% in the other or are at least 75% commonly owned which must exist from the start of the Tax Period in which the Tax Loss is incurred to the end of the Tax Period in which the other Taxable Person offsets the Tax Loss.
• Loss transfers are not allowed from exempt entities or Qualifying Free Zone Person.
• Total tax loss off-set cannot increase from 75% of taxable income of loss-receiving entity in financial period.
• Both Taxable Persons prepare their financial statements using the same accounting standards and end financial year on the same date.

Transfer of Unutilised Tax Losses in Tax Group:

Subject to the provisions related to tax loss adjustment upto 75% of taxable income and the provisions related to continued ownership mentioned under this section, an un-utilised Tax Losses of a Subsidiary that joins a Tax Group (“pre-Grouping Tax Losses”) shall become carried forward Tax Losses of the Tax Group and can be used to offset the Taxable Income of the Tax Group. However un-utilised Tax Losses of a Tax Group cannot be used to offset the Taxable Income of the Subsidiary that joins a Tax Group.

Where a Subsidiary leaves a Tax Group, Tax Losses of the Tax Group shall remain with the Tax Group, except for any un-utilised pre-Grouping Tax Losses of the relevant Subsidiary.

On cessation of a Tax Group, un-utilised Tax Losses of the Tax Group shall be allocated as follows:

• Where the Parent Company continues to be a Taxable Person, all Tax Losses shall remain with the Parent Company.
• Where the Parent Company ceases to be a Taxable Person, Tax Losses of the Tax Group shall not be available for offset against future Taxable Income of individual Subsidiaries, except for any un-utilised pre-Grouping Tax Losses of such Subsidiaries. However, this provision shall not apply where there is continuation of Tax Group under new Parent Company.

Qualifying FZEs are subject to regular Corporate Tax on its income sourced from its branch in mainland or abroad and income sourced from Non-FZ Persons from Commercial immovable property or from any Person incase of Non-Commercial immovable property. FZEs are required to be registered for Corporate Tax purpose and file Corporate Tax Returns, however those Qualifying FZEs which maintains adequate substance in the UAE and comply with transfer pricing rules & maintain relevant transfer pricing documentation, can be benefited from 0% CT rate on Qualifying Income which is categorised below:

• Income, including incidental income, derived from FZ Persons, except Excluded Activities. The beneficiary of Goods and Services must be that FZ Persons.
• Income derived from Non-FZ Person from Qualifying Activities.
• Any other income satisfying de minimis requirements, i.e. (Non-Qualifying Revenue divided by Total Revenue – Excluding taxable income mentioned in first paragraph from both numerator and denominator figures) should not exceed a percentage of the total Revenue or an amount specified by the Minister, whichever is lower.

Any other mainland sourced income will be taxed at 9% Corporate Tax rate in respect of the taxable income.

Exemption for dividend and capital gains

Dividends and other profit distributions paid by UAE companies, including FZE benefitted from 0% Corporate Tax rate, is exempt from tax.

Dividends and other profit distributions paid by foreign companies and capital gains from selling shares of UAE and foreign companies is exempt, provided UAE shareholder company must own at least 5% shares in foreign company (also UAE company in-case of capital gain) which is held, or has the intention to hold, for minimum 12 months and that company is subject to tax at atleast 9% rate. This rate of 9% is not applicable to those companies whose principle objective and activity is the acquisition and holding of shares or equitable interest and substantially derive its income from shareholdings in companies where it held at least 5% shares in companies.

Capital gains from sale of shares in Qualifying FZE or Exempt Entity is exempt, provided the shareholding company holds ownership interest of atleast 5% in FZE or Exempt Entity and subject to any conditions that may be prescribed by the Minister.

Exemption also applies to foreign exchange gains or revaluation gains in relation to 5% ownership interests mentioned under this section.

Exemptions in relation to 5% ownership interests mentioned under this section derived by a taxable person is not applicable where:

• The Company can claim a deduction for the dividend or other distributions made to the Taxable Person under the applicable tax legislation.
• Taxable Person has recognised a deductible impairment loss in respect of its ownership interest in the company prior to 12 months period mentioned in this section.
• Taxable Person or its Related Party who is subject to Corporate Tax under this Decree-Law has recognised a deductible impairment loss in respect of a loan receivable from the company where it holds atleast 5% ownership interest, unless impairment loss is reversed in subsequent tax period, then associated income of a Taxable Person shall be exempt in that Tax Period upto the amount of income from atleast 5% ownership interest that was not exempted due to recognition of deductible impairment loss.
• Loss realised on the liquidation of a Participation.

Exemption shall not apply for a period of (2) two years where 5% or more ownership interest was acquired in exchange for the transfer of an ownership interest that was not held for minimum of 12 months period mentioned in this section or acquired from company not subject to 9% Corporate Tax rate or an exempted Transfers within Qualifying Group or Business Restructuring Relief.

Foreign branch of UAE entity profit exemption

Resident Person which has Foreign Permanent Establishments (branches) that is subject to Corporate Tax rate of atleast 9% in foreign jurisdiction can elect exemption of profits from all its foreign branches.

Alternatively, UAE company can claim foreign tax credit which is lower of:

• Taxes paid in foreign jurisdiction; or
• UAE Corporate Tax payable on the foreign sourced income

Unutilised foreign tax credit will not be refunded, nor will be carried forward or back to other tax periods.

Transfer of assets or liabilities between a UAE company and its Foreign Permanent Establishment shall be treated as having taken place at Market Value at the date of the transfer for the purposes of determining the Taxable Income of that Resident Person.

Non-Resident Person Operating Aircraft or Ships in International Transportation

Income earned by foreign operators of ships and aircrafts will be exempt from UAE Corporate Tax in respect of:

• Providing international transportation of passengers, mail, parcels, livestock, goods or merchandise by sea or air.
• Chartering or Leasing ships or aircrafts used in international transportation; or
• Chartering or Leasing equipment which are integral to the airworthiness of aircraft or seaworthiness of ships used in international transportation

This exemption is applicable where the country of the foreign shipping or airline company grants similar exemption to UAE operators of ships and aircrafts.

The partners in an Unincorporated Partnership can make an application to the FTA for the Unincorporated Partnership to be treated as a Taxable Person. On approval of application, one partner in the Unincorporated Partnership shall be appointed as the partner responsible for any obligations and proceedings in relation to the Corporate Tax Law on behalf of the Unincorporated Partnership.

Unless the application mentioned above is not made, partners in an Unincorporated Partnership shall be treated as individual Taxable Persons. The assets, liabilities, income and expenditure of the Unincorporated Partnership shall be allocated to each partner in proportion to their distributive share in that Unincorporated Partnership, or in the manner prescribed by the FTA where the distributive share of a partner cannot be identified.

Foreign Partnership:

Foreign Partnership shall be treated as an Unincorporated Partnership for the purposes of the Corporate Tax Law where all of the following conditions are met:

• The Foreign Partnership is not subject to tax under the laws of the foreign jurisdiction.
• Each partner in the Foreign Partnership is individually subject to tax with regards to their distributive share of any income of the Foreign Partnership as and when the income is received by or accrued to the Foreign Partnership.
• Foreign Partnership submits an annual declaration to the FTA to confirm the above two clauses in the form and manner prescribed by the FTA.
• Adequate arrangements to share tax information of the partners exist for cooperation between the UAE and the jurisdiction in which Foreign Partnership is established.

Any foreign tax incurred by the Unincorporated Partnership shall be allocated as a Foreign Tax Credit to each partner in proportion to their distributive share in the Unincorporated Partnership.

All operational business expenses are deductible for calculating taxable income except:

• Expenditure not incurred for the purposes of the Taxable Person’s Business.
• Expenditure incurred in deriving Exempt Income.
• Losses not connected with or arising out of the Taxable Person’s Business.
• Such other expenditure as may be specified in a decision issued by the Cabinet at the suggestion of the Minister.

Deduction of capital expenditure is recognised by way of depreciation or amortisation deductions over the economic life of the asset or benefit.

Common expenses shall be apportioned to identifiable portion of expenditure incurred for the purpose of deriving Taxable Income or if un-identifiable, then apportionment shall be made on fair and reasonable basis.

General Interest Deduction Limitation Rule

Taxable Person’s Net Interest Expenditure shall be deductible up to 30% of the Taxable Person’s accounting earnings before the deduction of interest, tax, depreciation, and amortisation (EBITDA) for the relevant Tax Period excluding exempt income. This limit shall not apply to Net Interest Expenditure that does not exceed an amount specified by the Minister.

Un-adjustable Net Interest Expenditure may be carried forward and deducted in the subsequent 10 Tax Periods in the order in which the amount was incurred subject to the afore-mentioned limit of 30%.

Above provisions shall not apply to:

• Bank.
• Insurance Provider.
• Natural person undertaking a Business or Business Activity in the State.
• Any other Person as may be determined by the Minister.

Specific Interest Deduction Limitation Rule

Where a loan is obtained from a Related Party and is used to finance below transactions, then the interest on the Related Party loan will not be deductible unless the taxpayer can demonstrate that the main purpose of obtaining the loan and carrying out the transaction is not to gain a Corporate Tax advantage. However, no Corporate Tax advantage shall be deemed to arise where the Foreign Related Party is subject to atleast Corporate Tax at 9% under the applicable legislation of a foreign jurisdiction on the Interest.

• Dividend or profit distribution to a Related Party.
• Redemption, repurchase, reduction or return of share capital to a Related Party.
• Capital contribution to a Related Party.
• Acquisition of an ownership interest in a Person who is or becomes a Related Party following the acquisition.

Taxable Person shall be allowed to deduct 50% of any entertainment, amusement, or recreation expenditure incurred during a Tax Period, for customers, shareholders, suppliers or other business partners.

No deduction is allowed for:

• Donations, grants or gifts made to an entity that is not a Qualifying Public Benefit Entity.
• Dividends, profit distributions or benefits of a similar nature paid to an owner of the Taxable Person.
• Amounts withdrawn from the Business by a natural person or a partner in an Unincorporated Partnership.
• Bribes or other illicit payments.
• Fines and penalties, other than amounts awarded as compensation for damages or breach of contract.
• Recoverable Input VAT.
• Tax on income imposed outside UAE.
• Any other expenditure specified in a decision issued by the Cabinet at the suggestion of the Minister.

Natural person investment income is not subject to Corporate Tax, therefore any structure including contractual trust, private trust company or a foundation used to hold and manage personal assets and investments should also not subject to tax. For this reason, Family Foundation can apply to FTA to be treated as Unincorporated Partnership and hence not be subject to tax. Approval of the application by FTA would result in the beneficiaries of the Family Foundation being seen as directly owing or benefiting from the activities and assets of the Family Foundation for the purpose of Corporate Tax. Family Foundation can make an application to the Authority to be treated as an Unincorporated Partnership where all of the following conditions are met:

• Family Foundation was established for the benefit of identifiable natural persons, or for the benefit of a public benefit entity, or both. Public benefit entity includes non-profit organisation that carries out charitable, social, religious, cultural, educational, and other public benefit activities.{" "}
• The principal activity of the Family Foundation is to receive, hold, invest, disburse, or otherwise manage assets or funds associated with savings or investment.
• Family Foundation does not conduct any activity that would have constituted a Business, had the activity been undertaken, or its assets been held, directly by its founder, settlor, or any of its beneficiaries.
• Main or principal purpose of the Family Foundation is not the avoidance of Corporate Tax.
• Where beneficiary is public benefit entity, the Family Foundation shall meet one of the following conditions:

i) Public benefit entity is not deriving income that would be deemed as taxable income if it has derived income in its own right.

ii) Where public benefit entity has derived income mentioned in above clause, the income is distributed to the relevant beneficiaries of the public benefit entity within 6 months from the end of relevant tax period.

All amounts must be quantified in AED. Any amount quantified in another currency must be converted at the applicable exchange rate set by the Central Bank of UAE, subject to any conditions that may be prescribed by the FTA.

Corporate Tax due is settled in the following order:

• First, by using the available Withholding Tax Credit.
• Then, by using the available Foreign Tax Credit.
• Thereafter, by using any credits or other forms of relief as specified in a Cabinet decision.
• Residual amount of Corporate Tax Payable must be settled within 9 months from the end of the relevant Tax Period, or by such other date as determined by the FTA.

A 0% withholding tax or any other rate as specified in a Cabinet decision (refer as ‘WHT’) shall apply to certain types of UAE sourced income paid to non-residents, insofar such income is not attributable to a Permanent Establishment of the Non-Resident Person in the UAE.

WHT shall apply to any other income as specified in a Cabinet decision.

Withholding Tax payable shall be deducted from the gross amount of the payment and remitted to the FTA in the form and manner and within the timeline prescribed by the FTA.

Withholding Tax Credit and Foreign Tax Credit cannot exceed Corporate Tax due under the Corporate Tax Law. Any excess Withholding Tax Credit shall be refunded. However utilised Foreign Tax Credit shall not be carried forward or back or refunded.

‘Arms-length' principle and transfer pricing rules set out in the OECD Transfer Pricing Guidelines are applied to transactions and arrangements with:

• Related Party, including below:
1. Individuals related to the fourth degree of kinship or affiliation.
2. Parent-Subsidiary relationship.
3. Shareholder with 50% or more shares or controls an entity.
4. Commonly owned entities by an owner holding 50% of more shares in each entity or controls them.
5. Branch or Permanent Establishment (PE).
6. Partners in unincorporated partnership.
7. Trustee, founder, settlor or beneficiary of a trust or foundation, and its Related Parties.

Connected Person, including owners, directors or officers of the Taxable Person or partners in an unincorporated partnership and their related parties. Payment or benefit provided by a Taxable Person to its Connected Person shall be deductible only to the extent that it corresponds with the Market Value. However, this provision is not applicable to Taxable Person whose shares are traded on a Recognised Stock Exchange, or that is subject to the regulatory oversight of a competent authority, or any other Person as may be determined in a decision issued by the Cabinet.

*Controls established when a Person can:

• Exercise 50% or more of the voting rights of another Person.
• Determine the composition of 50% or more of the Board of directors of another Person.
• Receive 50% or more of the profits of another Person.
• Determine, or exercise significant influence over, the conduct of the Business and affairs of another Person.

Arms-length result of a transaction or arrangement will be determined using one of the internationally recognised transfer pricing methods, or different method where an entity can justify that use of recognised method cannot determine arms-length result.

Application of the selected transfer pricing method or combination of transfer pricing methods may result in an arm’s length range of financial results or indicators acceptable for establishing the arm’s length result of a transaction or arrangement between Related Parties, subject to any conditions specified in a decision issued by the Authority.

Where the financial results or indicators does not fall within the arm’s length range, the Authority shall adjust the Taxable Income of Taxable Person and corresponding adjustment to Related Party to achieve the arm’s length result that best reflects the facts and circumstances of the transaction or arrangement. Such adjustment shall be made based on the information that can or will be made available to the Taxable Person.

Where a foreign competent authority makes an adjustment to an arrangement or transaction involving a Taxable Person to meet the arm’s length standard, such Taxable Person can make an application to the Authority to make a corresponding adjustment to its Taxable Income.

Transfer pricing methods

• Comparable Uncontrolled Price (CUP) method:

It is used to compare the price charged for goods/services transferred in a controlled transaction to the price charged in a comparable uncontrolled transaction in comparable circumstances. If there is difference between the two prices, this may indicate that the conditions of the commercial and financial relations of the associated entity are not arm's length, and that the price in the uncontrolled transaction may need to be substituted for the price in the controlled transaction.

CUP method is preferable over all other methods to apply arm's length principle, where justifiable adjustments can be made to comparable uncontrolled transactions or arrangements to determine arm's length result of controlled transactions or arrangements.

• Resale price method

Application of this method begins with the price at which a product that has been purchased from an associated entity is resold to an independent entity. This ‘Resale Price margin' represent amount out of which the reseller would seek to cover its selling and administration expenses. What is left after subtracting price margin can be regarded as an arm's length price for associated entities.

The ‘Resale Price margin' of the reseller in the controlled transaction may be determined by reference to the resale price margin that the same reseller earns on items purchases and sold in comparable uncontrolled transactions (internal comparable). Also, a resale price margin earned by an independent entity in comparable uncontrolled transactions (external comparable).

Resale price method is acceptable if reasonably accurate adjustments can be made to eliminate material effects of differences of the controlled transactions with the comparable uncontrolled transactions or between the entities undertaking those transactions.

• Cost plus method

Application of this method begins with the costs incurred by the supplier of goods or services in a controlled transaction to an associated purchaser. An appropriate cost-plus margin is then added to this cost, to arrive at a price which may be regarded as an arm's length price. This method is most useful when semi-finished goods are sold between associated entities, or where the controlled transaction is the provision of services.

Cost-plus markup of the supplier in the controlled transaction is established by reference to the cost-plus markup that the same supplier earns in comparable uncontrolled transactions (internal comparable). Also, the cost-plus mark-up that would have been earned in comparable transactions by an independent entity (external comparable).

Cost-plus method is acceptable if reasonably accurate adjustments can be made to eliminate material effects of differences of the controlled transactions with the comparable uncontrolled transactions or between the entities undertaking those transactions. In addition, when applying the cost-plus method, one should pay attention to apply a comparable mark-up to a comparable cost basis. For instance, cost basis of the suppliers may not be comparable without adjustment if one employs leased assets and other employs owned business assets for their activities.

• Transactional net margin method

This method examines the net profit as a percentage of appropriate base i.e. costs, sales, assets) that a taxpayer realizes in a controlled transaction. This this method operates in a similar manner to cost-plus or resale price methods, therefore in order to apply this method reliably, it should be applied consistent to the manner of application of resale price or cost-plus methods.

This means in particular, the net profit derived from controlled transaction should ideally be established by reference to the net profit earns in comparable uncontrolled transactions (internal comparable). Where it is not possible, then by reference to the net profit that would have been earned in comparable transactions by an independent entity (external comparable). A functional analysis of the controlled and uncontrolled transactions is required to determine any adjustments may be necessary to obtain reliable results.

This method is unlikely to be reliable if each party to the transaction makes unique and valuable contributions, in which case, transactional profit split method will generally be the most appropriate method. This implies that CUP, Cost-plus and Resale price (traditional transaction method) or transactional net margin method may be applicable in cases where one of the parties makes all the unique and valuable contributions involved in the controlled transaction, while the other party does not make any such contribution. In such a case, the tested party should be the less complex one, to examine the financial indicators.

As a matter of principle, only those items that (a) directly or indirectly relate to the controlled transaction and (b) are of an operating nature, should be taken into account in the determination of the net profit indicator for the application of this method.

• Transactional profit split method

This method applies when one-sided methods (traditional transaction methods or transactional net margin method – where one entity to the controlled transaction performs benchmark functions) are not appropriate, because each party to the transactions makes a unique and valuable contributions which cannot be benchmarked.

This method is used where level of integration, or sharing of risks between the related parties i.e. contributions of each party cannot be evaluated in isolation from other parties. For instance, Group contribution to generate a premium brand, so the profits pertaining to premium part of the brand is split from rest of the profits from usual/basic part of the brand, by considering the entire Group as one entity to functionally study them from perspective of controlled transaction/premium brand.

• Below are the approaches to apply Transactional Profit Split method
1. Contribution analysis

Under this approach, the relevant profits from the controlled transactions are allocated between the related entities engaged in the controlled transaction in a way that aims to reflect a reasonable approximation of the divisions that would have been agreed by independent entities in similar circumstances.

2. Residual analysis

This approach is usually used to apply Transactional Profit Split method where one or more parties to the controlled transaction make a contribution which is routine and could be benchmarked based on comparable.

Under this approach below two steps are performed:

1. Allocation of arm's length profits to each entity to compensate if for its routine or benchmarked contributions. Typically, this is done by the application of one-sided transfer pricing methods, such as considerations of the returns earned by independent entity engaged in activities that are comparable to those routine or benchmarkable contributions. In this first step, unique and valuable contributions are not taken into account. Each related party is allocated an appropriate ‘routine' return from the pool of relevant profits.
2. Allocation of residual profits, i.e. remaining profits after allocation of ‘routine' profits, on an economically valid basis aimed to achieve a reasonable approximation of the divisions that would have been agreed by independent entities in similar circumstances. Typically, relative value of the contributions by each party to the residual profits is considered in this step.
• Comparable profit split method

Using this approach relies on a comparison on the allocation of profits between independent entities engaged in comparable activities in similar circumstances to those of controlled transactions.

It relies heavily on external market data to determine how the relevant profits should be split between the related parties. Such information is very useful but rarely available in practice, hence it is practically difficult to use this approach.

Transfer pricing documentation

Master file and a local file Files in form specified by the FTA are required to be maintained, containing information regarding the Taxable Person’s transactions and arrangements with its Related Parties and Connected Persons.

Upon request by the FTA, a Taxable Person shall provide any information to support the arm’s length nature of the Taxable Person’s transactions or arrangements with its Related Parties and Connected Persons, within 30 days following the request by the FTA, or by any such other later date as FTA direct.