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18 Jan 2024
The United Arab Emirates (UAE) witnessed a significant shift in its tax landscape with the enactment of Federal Decree-Law No. 47 of 2022, commonly referred to as the Corporate Tax Law. Effective June 1, 2023, this legislation establishes a comprehensive framework for taxing corporations and business profits in the UAE.
FTA recently issued a Corporate Tax guide for exempt persons to better understand the implemented Corporate Tax. This guide aims to provide in-depth insights into the status of Exempt Persons under the Corporate Tax regime, focusing on Qualifying Public Benefit Entities, public and private pension or social security funds, and their wholly-owned subsidiaries. It is a valuable resource for individuals and entities seeking clarity on Corporate Tax rules applicable in the UAE.
As per the guide, individuals or entities impacted by the Corporate Tax rules concerning Qualifying Public Benefit Entities, public and private pension or social security funds, and their subsidiaries in the UAE should carefully review this guide for a comprehensive understanding.
What is an Exempt Person?
The Corporate Tax Law designates certain entities as "Exempt Persons," including Qualifying Public Benefit Entities, public and private pension or social security funds, and wholly-owned subsidiaries.
Qualifying Public Benefit Entities
- Conditions for Meeting Qualifying Public Benefit Entity Status
Organizations contributing to social welfare, defined as Qualifying Public Benefit Entities, must meet specific conditions in Article 9 of the Corporate Tax Law and is listed on the Cabinet's Decision at the Ministery's suggestion. These include establishment for specific purposes, non-engagement in unrelated business activities, exclusive use of income or assets for intended purposes, absence of personal benefits for non-exempt Persons, and additional conditions outlined by the Cabinet.
- Monitoring Compliance
Monitoring compliance with exemption requirements is crucial, with the Federal Tax Authority (FTA) having the authority to request information to ensure ongoing eligibility for Exempt Person status.
- Effective Date of Exemption
Subject to meeting certain criteria, the Qualifying Public Benefit Entities will become exempt from Corporate Tax from the beginning of the Tax Period when they have been listed on the Decision.
- Tax Benefits for Donations
Taxable Persons donating to listed Qualifying Public Benefit Entities can claim Corporate Tax deductions, emphasizing the tax benefits of contributing to socially beneficial organizations.
Public and private pension funds and social security funds
- Pension and Social Security Funds
Public and private pension or social security funds, vital for societal welfare, can apply for exemption from Corporate Tax, subject to meeting specific conditions and approval by the FTA.
- Subsidiary of a Fund or Social Security Fund
Wholly owned and controlled pension or social security fund subsidiaries may apply for Corporate Tax exemption, provided they meet specified conditions.
- Contributions to Pension or Social Security Funds
Employers making pension or social security fund contributions can benefit from tax deductions, irrespective of the fund's Exempt Person status.
Failure to Meet Conditions and Corporate Tax Consequences
- Cessation of Exempt Person Status
Should an Exempt Person fail to meet the stipulated conditions during a Tax Period, they will cease to be considered an Exempt Person from the commencement of that Tax Period. This underscores the importance of continuous compliance.
- Liquidation or Termination
In cases of liquidation or termination, there is a provision for an Exempt Person to maintain their status from the initiation until the completion of the procedure. Timely notification to the Federal Tax Authority (FTA) within 20 business days upon starting or initiating the procedure is a prerequisite. Ceasing Exempt Person status occurs on the day following the conclusion of the liquidation or termination process.
- Rectifying Temporary Failures
Temporary failures to meet conditions may allow an Exempt Person to continue as such under specific circumstances. To qualify:
- The failure should result from a situation beyond the Exempt Person's control.
- An application to the FTA must be submitted within 20 business days from the date of failure to meet the conditions.
- Rectification of the failure is mandatory from the submission of the application, extendable by an additional 20 business days if beyond reasonable control.
- Submission of evidence to the FTA supporting appropriate compliance monitoring procedures is required within 20 business days upon receiving the request.
- Failure for Corporate Tax Advantage
Should it be concluded that the failure's primary purpose is to gain an advantage inconsistent with the Corporate Tax Law's intent, the Exempt Person will lose their status from the day of failure. This aligns with the General Anti-abuse Rule.
Corporate Tax consequences of benefitting from Exempt Person status
- Small Business Relief Unavailable
While Small Business Relief is a notable Corporate Tax benefit allowing eligible Taxable Persons to be considered as having no Taxable Income for the relevant Tax Period, it does not extend its provisions to Exempt Persons covered in this guide.
- Qualifying Group Relief and Business Restructuring Relief Exclusions
Membership in a Qualifying Group is not an option for an Exempt Person. Additionally, conditions for Business Restructuring Relief explicitly state that neither the transferor nor the transferee can be an Exempt Person. Consequently, Exempt Persons covered in this guide find themselves ineligible for Qualifying Group Relief and Business Restructuring Relief.
- Transfer of Tax Losses Not Permissible
Corporate Tax Law allows the offsetting of Tax Losses against the Taxable Income of another Taxable Person under specific conditions. However, this provision excludes Exempt Persons. Therefore, as outlined in this guide, those under the Exempt Person status cannot transfer any Tax Losses from their activities or business operations to a Taxable Person.
- Ineligibility for Tax Group Membership
The Tax Group provision, designed to facilitate the grouping of entities subject to Corporate Tax in a cohesive manner, expressly excludes Exempt Persons. In alignment with this principle, an Exempt Person under Article 4 of the Corporate Tax Law cannot establish or become part of a Tax Group.
Compliance Requirements
Tax Registration Qualifying Public Benefit Entities must register with the Federal Tax Authority (FTA) for Corporate Tax purposes and obtain a Corporate Tax Registration Number (TRN). This application process commenced on October 1, 2023.
Entities not listed in the Cabinet Decision as Qualifying Public Benefit Entities will be treated as Taxable Persons and must register for Corporate Tax based on their entity type, such as a juridical person that is a Resident Person.
- Public and private pension and social security funds are categorized as Taxable Persons and must register for Corporate Tax. Application for exemption is applicable to both public and private funds. But the relevant conditions shall be met by only Private Fund, whereas on the other hand, these conditions don't apply to Public Funds.
- Wholly owned subsidiaries in the UAE, as juridical persons, follow the same process as the funds mentioned above. They must register for Corporate Tax and can apply for exemption from June 1, 2024, subject to meeting all relevant conditions.
- Application for Exemption and Applicable Timelines
Entities meeting exemption conditions should apply within 60 business days from the end of the Tax Period in which the conditions were met. The exemption becomes effective from the specified Tax Period start date, if approved. The FTA may determine an alternative effective date under specific scenarios outlined in the regulations.
- Administration
Exempt Persons are exempted from filing a Tax Return. Instead, they must submit an annual declaration to the FTA within 9 months from the end of the relevant Tax Period. This declaration affirms ongoing compliance with exemption conditions and the validity of records with the FTA.
Entities no longer meeting exemption conditions must file a Tax Return within 9 months from the end of the relevant Tax Period.
- Confirmation by the Auditor
Auditors of private pension funds or social security funds must annually confirm compliance with exemption requirements. This confirmation, provided to the fund and submitted to the FTA, ensures transparency and accountability in the exemption process.
- Record Keeping
Exempt Persons must maintain records demonstrating their exempt status for seven years from the end of the relevant Tax Period.
In conclusion, the Corporate Tax Law in the UAE has introduced a structured framework, offering clarity on Exempt Person status for various entities. This guide provides a roadmap for navigating the complexities of the Corporate Tax regime, emphasizing the importance of compliance and due diligence. However, for precise advice, readers are encouraged to consult relevant legislation and seek professional assistance in ensuring compliance with the evolving tax landscape in the UAE.
