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India-UAE CEPA: Import duties on 90 percent of Indian products to be immediately eliminated

Exporters of textiles, engineering goods, gems and jewellery optimistic about increasing their market shares

The UAE will extend zero duty access to 90 percent of goods exported from India from the first day of implementation of the India-UAE Comprehensive Economic Partnership Agreement (CEPA), possibly in April or May this year, widening market opportunities for a large number of labor-intensive sectors including garments & textiles, gems & jewelry, engineering items, plastic products, and pharmaceuticals. The CEPA, signed by Commerce and Industry Minister Piyush Goyal and his UAE counterpart Abdulla bin Touq Al-Mari on Friday, seeks to increase bilateral trade to $100 billion in five years’ time and is likely to create an estimated 10 lakh jobs in India.

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Does the UAE’s new corporate tax apply to freelancers?

The UAE has recently announced introducing a federal corporate tax on business profits for the first time starting from 2023.

While the new tax will apply to all UAE businesses and commercial activities, the UAE’s Ministry of Finance confirmed that individuals will not be subject to tax on their incomes from employment, real estate, equity investments, or other personal income unrelated to a UAE trade or business.

However, with the corporate tax applied to individuals having – or being required to obtain- a business license or permit to carry out the relevant commercial, industrial, and/or professional activity in the UAE, how will this impact freelancers?

Mohammad Al Dahbashi, the Managing Partner of ADG Legal, said holders of the new freelance permit, issued under the new labor law for self-sponsored ex-pats, should not be subject to corporate tax on their individual earnings.

If freelancers with a business license are sponsored in a free zone and carrying out any activities to other companies, the sponsor will be subject to corporate tax.

He added, “Those freelancing and providing services through a company or a license should not be taxed on the income they generate as salaries, but the company or license hosting their visa will be taxed on its net profit.”

However, Al Dahbashi said further details await from the government to confirm whether the corporate tax will be applicable only to businesses, especially with the new freelance permit that allows individuals to work without the need for a sponsor nor a valid employment contract.

ADG’s Head of Tax Practice Izzat-Begum B. Rajan shares what we know about the UAE Corporate Tax so far:

Where will the UAE’s Corporate Tax be applicable?

It will be applied across all the emirates, as it is a federal tax. As a result, the Federal Tax Authority will be responsible for the administration, collection, and enforcement of the corporate tax. The UAE Ministry of Finance will remain the “Competent Authority” for purposes of bilateral/multilateral agreements and the international exchange of information for tax purposes.

Who will be subject to the tax?

The corporate tax will apply to all UAE businesses and commercial activities, except for the extraction of natural resources, which will remain subject to emirate-level corporate taxation.

As a result:

1. All activities undertaken by a legal entity will be deemed “business activities” and hence be within the scope of the corporate tax.
2. Individuals having (or being required to obtain) a business license or permit to carry out the relevant commercial, industrial and/or professional activity in the UAE will also be subject to the corporate tax. This includes freelance workers who carry out their activities with a business license or a permit.
3. Foreign entities and individuals conducting a trade or business in the UAE “in an ongoing or regular manner” will be subject to the corporate tax.
4. Businesses established in free zones will be subject to the corporate tax, but the new tax regime will continue to honor the incentives currently being offered to those businesses that comply with all regulatory requirements and that do not conduct business with mainland UAE.

Specific sectors subject to the UAE’s corporate tax are businesses engaged in banking operations, real estate management, construction, and development, agency, and brokerage activities.

All legal entities and individuals in the scope of the corporate tax will be required to register for Corporate Tax purposes and file a yearly tax return.

Who is exempted from the corporate tax?

For individuals, the following income should not be taxed:

1. Salary and other employment income (whether received from the public or private sector).
2. The investment in real estate in a personal capacity provided the individual is not required to obtain a commercial license or permit to carry out such activity in the UAE.
3. Dividends, capital gains, and other income earned from owning shares or other securities in a personal capacity.
4. Interest and other income earned from bank deposits or saving schemes.

For businesses, the following income should not fall under the scope of the UAE’s corporate tax – the conditions for these exemptions are yet to be specified:

1. Dividends and capital gains earned from its “qualifying shareholdings”,
2. Qualifying intra-group transactions and reorganizations. Potentially, this means that businesses will have to use specific reporting and presentation templates for their accounts, segregating the revenue exempt from the tax.

Generally, foreign investors’ income from dividends, capital gains, interest, royalties, and other investment returns will not be subject to the tax.

UAE withholding tax will not be applicable on domestic and cross-border payments of any nature under the new UAE’s corporate tax regime.

When is the UAE CT applicable?

For financial years starting on or after 1 June 2023. For instance, if on any given year, a company’s financial year starts on 1 January and ends on 31 December, the new tax rules will be applicable to this company for the financial year starting on 1 January 2024.

Which income will be taxed?

The taxable income will be the accounting net profit of a business, after making adjustments for certain items (conditions to be specified).

The accounting net profit of a business is the amount reported in the financial statements prepared in accordance with internationally accepted accounting standards.

Losses incurred (as from the corporate tax effective date) can be used to offset taxable income in subsequent financial periods. As a reminder, a loss for corporate tax purposes (called a “tax loss”) would arise when the total deductions the businesses can claim are greater than the total income for the relevant financial period.

Tax credits

Foreign corporate tax paid on UAE taxable income will be allowed as a tax credit against the UAE’s corporate tax liability.

Additionally, UAE businesses will need to comply with transfer pricing rules and documentation requirements set with reference to the OECD Transfer Pricing Guidelines.

What are the tax rates?

0% for taxable income up to Dh375,000 (approx. USD 102,000);

9% for taxable income above Dh375,000; and

A different tax rate for large multinationals that meet specific criteria is set with reference to Pillar Two of the OECD BEPS rules.

What is a large multinational?

A multinational corporation is a corporation that operates in its home country, as well as in other countries through a foreign subsidiary, branch, or another form of presence (or registration). Earning income from outside its home country without a foreign presence or registration would not make a business a multinational corporation for the purpose of the application of the UAE’s corporate tax.

In the context of the global minimum effective tax rate (GMETR) as proposed under Pillar Two of the OECD BEPS rules, “large” refers to a multinational corporation that has consolidated global revenues higher than EUR750 million (approx. Dh3.15 bn).

Fiscal unity

A UAE group of companies could elect to form a Tax Group and be treated as a single taxable person (conditions to be specified). As a result, a UAE tax group would only be required to file a single tax return for the entire group. Tax losses from one group company may be used to offset the taxable income of another group company (conditions to be specified).

What still needs to be clarified by the UAE Government?

Many aspects remain unclear. Further guidelines are under preparation and will be issued in due course by the UAE Government. Specifically, we look forward to being provided with more details on:

1. Corporate Tax (online) registration, compliance, and filing rules for both businesses and individuals (including the ones established in Free zones),
2. Definition of “ongoing or regular” business activities for the application of the UAE’s corporate tax to Foreign entities and individuals,
3. The notion of “qualifying shareholdings” of a UAE business,
4. Exemptions for foreign investors,
5. Losses carry forward rules and timelines, and potential losses carry back rules, both for businesses and Tax Groups,
6. Tax Group consolidation rules,
7. The tax rate applicable to large multinationals,
8. And more generally, any other potential tax exemptions and exclusions.

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News Courtesy:khaleejtimes.com

UAE Business Tax Will Help Support Smaller Emirates, S&P Says

A new tax on corporate profits will help the United Arab Emirates diversify away from oil and support the smaller sheikhdoms that make up the Gulf nation, S&P Global Ratings said. 

If the federal government uses tax receipts for UAE-wide capital investment, that would indirectly support economic activity in individual emirates, S&P said in a report on Monday. “The broadening of the government’s revenue base should support smaller emirates’ economies,” said Trevor Cullinan, credit analyst at S&P, “however, the full impact is unclear because it is not yet known how the tax will be distributed.” 

The tax could pressure banks, corporate, and insurers, “but this will be manageable and not significantly affect their creditworthiness,” he said.

The UAE plans to levy a 9% corporate tax from June 2023. Dubai Islamic Bank, one of the city’s biggest lenders, expects the country to remain competitive after the tax comes into effect.

Last week, Fitch Ratings said the tax could have “uneven credit implications” on companies. The company predicted increased attraction in the UAE’s free zones, areas that operate under special rules and will remain exempt from the new tax. 

Dubai, the UAE’s business capital and one of its seven sheikhdoms, is home to the country’s largest number of free zones, which include the airport and an international financial center. 

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News Courtesy:bloomberg.com

UAE Introduces Corporate Tax

The United Arab Emirates (UAE) Ministry of Finance (Ministry) announced on 31 January 2022 that it will introduce a federal corporate tax regime for the first time in the UAE. Federal corporate tax law is expected to be issued soon along with executive regulations (CT Law). 

The information set out in this alert is based on currently available guidance from the Ministry and remains subject to the CT Law provisions once issued.

It is expected that the corporate tax will come into effect on or after 1 June 2023 and will apply to profits generated during financial years starting on or after 1 June 2023. The UAE Federal Tax Authority will be responsible for administering, collecting, and enforcing corporate tax in line with rules and regulations to be issued by the Ministry. 

SCOPE OF APPLICATION 

The corporate tax will apply to all UAE businesses and commercial activities undertaken by legal entities or individuals across the seven emirates. The extraction of natural resources will remain subject to an emirate-level corporation tax. 

All activities undertaken by a legal entity are deemed as “business activities” that fall within the scope of the corporate tax regime. On the other hand, an individual will be deemed to have a “business” that falls within the scope of the CT Law if the individual has (or is generally required to have) a business license or permit to carry out their relevant activities in the UAE. 

Companies incorporated in UAE’s free zones or financial free zones will also be subject to the federal corporate tax. However, it appears that such companies will continue to enjoy applicable tax breaks and incentives in the manner and for the duration set out under the legal framework of the relevant free zone authority. 

For instance, Dubai International Finance Centre (DIFC) law and the Abu Dhabi Global Market (ADGM) law provide that a DIFC- or ADGM-incorporated company is subject to a zero tax rate for a period of 50 years from the time the law in question enters into effect. Accordingly, DIFC- and ADGM-incorporated companies could expect to remain subject to zero tax rates until 2071 and 2063, respectively. 

It remains unclear if the tax treatment will differ depending on whether free zone companies carry out their activities within or outside the free zone. 

RATES

The corporate tax rates will be as follows:

• A tax rate of 0% for taxable income up to AE$375,000 (c. US$02,095).
• A tax rate of 9% for taxable income above AE$375,000 (c. US$102,095).
• A different tax rate for large multinationals that meet specific criteria set with reference to the Global Anti-Base Erosion Model Rules (Pillar Two) of the OECD Base Erosion and Profit Shifting project.

NONTAXABLE INCOME 

Corporate tax will not apply to:

• An individual’s salary or income earned through employment. However, an individual will be subject to corporate tax if his or her income is earned from activities undertaken under a freelance license or permit.
• Investment in real estate by individuals in their personal capacity, provided the individual is not required to obtain a commercial license or permit to carry out such activity in the UAE.
• Dividends, capital gains, and other income earned from owning shares or other securities in a personal capacity.
• Interest and other income earned by an individual from bank deposits or saving schemes.

EXEMPT INCOME

The Ministry has also stated that the following will be exempt from corporate tax:

• Dividends and capital gains earned by a UAE business from “qualifying shareholdings” (i.e., ownership interest in a UAE or foreign company that meets certain conditions to be specified under the CT Law).
• Qualifying intra-group transactions and reorganizations that meet certain conditions and requirements to be set out under the CT Law.

FINAL NOTES

Introducing corporate tax in the UAE will undoubtedly have an impact on business operations, structures, and future mergers and acquisitions activities in the UAE. We encourage businesses to assess their existing structures and operations in an effort to apply the most efficient business structures and models in light of the CT Law provisions once issued and in effect. 

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News Courtesy: natlawreview.com

UAE: Tax authority extends grace period to pay penalties

The UAE’s Federal Tax Authority (FTA) on Monday extended the grace period for the re-determination of administrative penalties of tax registrants until December 31, 2022.

The decision has been taken to reduce burdens on businesses during the pandemic and enhance their abilities to contribute more to the growth of the national economy.

The reduced administrative penalties amount to 30 percent of the total unpaid penalties that were imposed before June 28, 2021. The authority further elaborated that those tax registrants who were not able to benefit from redetermination by December 31, 2021, can benefit until December 31, 2022.

Highlighting the eligibility of the tax registrants, it added that firstly, the administrative penalty should have been imposed before June 28, 2021, and the amount due was not settled in full before that date. Secondly, the tax registrant has settled all payable taxes by December 31, 2022. Thirdly, the tax registrant has also settled 30 percent of total unpaid administrative penalties no later than December 31, 2022.

The FTA confirmed that the actual values resulting from the re-determination of administrative penalties have already been reflected in the accounts of many eligible tax registrants who had met the conditions and paid the penalties by December 31, 2021.

However, a review of some tax registrants’ records is still ongoing to identify if anyone else is eligible to benefit from the re-determination of the administrative penalties scheme.

FTA called on tax registrants who’ve received notifications to provide the FTA with supporting data, to submit the required information without delay so that its team may complete the procedures for reviewing such records and implement the re-determination of administrative penalties on the accounts of eligible registrants.

Anurag Chaturvedi, CEO of Chartered House, this decision will support tax registrants to fulfill their tax obligations and boost the UAE’s competitiveness in doing business amid an ongoing pandemic.

“Federal Tax Authority has been working in the best interest of the tax registrants and they should take advantage of this amendment to stay compliant with tax laws and regulations. Furthermore, as per recent Cabinet Decision No. 105 of 2021, a taxable person can apply for a waiver in full or in part (in certain scenarios) of the administrative penalties or can apply for payment of such penalties (if penalties are more than Dh50,000) in installments,” added Chaturvedi.

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New Courtesy:khaleejtimes.com