The Federal Decree-Law No. (47) of 2022 marked a historic development in the United Arab Emirates’ fiscal policy. With this legislation, the UAE formally introduced a Corporate Tax regime on business profits, aligning its tax framework with international standards and advancing its commitment to global tax transparency. This blog explores the key features, objectives, and implications of the law for businesses operating within the UAE.
Background and Purpose of the Decree-Law
The UAE had traditionally been known as a no-corporate-tax jurisdiction, which attracted a large number of multinational corporations and regional headquarters. However, with the increasing emphasis on Base Erosion and Profit Shifting (BEPS) and the OECD’s Pillar Two framework, the UAE recognized the need to adopt a formal corporate tax system. Federal Decree-Law No. (47) of 2022 was introduced to:
- Ensure tax neutrality and fairness
- Promote compliance with international tax standards
- Maintain the UAE’s competitiveness and appeal to global investors
- Generate sustainable revenue to support development
Scope of Application
The law applies to “Taxable Persons,” which include:
- UAE-incorporated entities
- Foreign legal entities effectively managed and controlled in the UAE
- Natural persons conducting business in the UAE
- Free zone entities (subject to special conditions)
Certain government entities and government-controlled companies may be exempt, provided they meet the exemption criteria defined under the law.
Corporate Tax Rates Under the Law
The law outlines a progressive tax rate structure as follows:
- 0% on taxable income up to AED 375,000
- 9% on income exceeding AED 375,000
- A different rate (to be determined) for large multinational enterprises under Pillar Two
This tiered approach is intended to support small businesses and startups while ensuring larger corporations contribute fairly to the economy.
PEAK Business Consultancy Services: Your Corporate Tax Guide
Implementing the new corporate tax regime is a significant compliance challenge for UAE-based businesses. PEAK Business Consultancy Services is here to support businesses through every stage of their tax transformation journey. Our experts offer:
- Entity classification and tax registration
- Corporate tax planning and restructuring
- Transfer pricing documentation
- Preparation and filing of tax returns
- Assistance with Free Zone entity qualification for 0% rate
Visit https://www.peakbcs.com/ to learn more and schedule a free consultation.
Free Zone Businesses and the 0% Tax Rate
One of the most anticipated components of the Decree-Law is the treatment of Free Zone entities. While Free Zones are still permitted to benefit from a 0% tax rate, it is conditional upon:
- Maintaining adequate substance in the UAE
- Generating qualifying income
- Not conducting business with mainland UAE entities (with exceptions)
Non-qualifying income or breach of Free Zone conditions may result in full corporate tax exposure at 9%.
Exempt Persons
Under the Decree-Law, the following categories are considered exempt persons:
- Government entities
- Government-controlled entities (if specified by Cabinet Decision)
- Extractive and non-extractive natural resource businesses
- Qualifying public benefit entities
- Investment funds and pension funds (subject to conditions)
However, proper documentation and notification to the Federal Tax Authority (FTA) are required to claim and maintain these exemptions.
Transfer Pricing Compliance
Another important facet of the law is its robust provisions on transfer pricing. Businesses that engage in related party transactions must adhere to the arm’s length principle and maintain appropriate transfer pricing documentation such as:
- Local File
- Master File
- Disclosure Forms
Failure to comply may result in penalties and adjustments to taxable income.
Tax Grouping and Loss Relief
The Decree-Law allows the formation of tax groups wherein multiple entities can consolidate their taxable income and losses, provided certain conditions are met. Additionally, businesses are allowed to carry forward tax losses and offset them against future taxable income, subject to restrictions.
Record-Keeping and Documentation
Taxable persons are required to retain books of accounts and relevant documentation for at least 7 years from the end of the tax period. This includes:
- Financial statements
- Contracts and agreements
- Transfer pricing records
- Invoices and receipts
Proper documentation will be essential for defending positions during FTA audits or tax assessments.
Penalties for Non-Compliance
Failure to comply with the obligations under the Federal Decree-Law No. (47) of 2022 may lead to administrative penalties. Common infractions include:
- Late registration or deregistration
- Failure to file or inaccurate returns
- Non-disclosure of related party transactions
- Failure to maintain proper books and records
Penalties are determined by the FTA and can be financially significant.
Conclusion
The Federal Decree-Law No. (47) of 2022 is a pivotal move in the UAE’s tax evolution, ensuring alignment with global tax norms and enhancing economic resilience. While the regime is designed to be business-friendly, understanding its requirements and aligning your operations accordingly is essential.
Don’t navigate the new tax landscape alone—partner with experts. Reach out to PEAK Business Consultancy Services for professional support in corporate tax strategy, compliance, and documentation. Let us help your business thrive while staying fully compliant with UAE tax laws.
