The UAE’s Federal Tax Authority (FTA) allows businesses to make various elections in their Corporate Tax Returns, tailoring tax obligations to the unique needs of each entity. Below is an overview of the available elections, their implications, and practical examples to help businesses understand their applications.
1. Realisation Basis Election
This election enables businesses preparing financial statements on an accrual basis to account for gains and losses on a realisation basis. Unrealised gains and losses recorded in financial statements are disregarded for corporate tax purposes.
- The election can only be made in the Tax Return for the first Tax Period.
- Once elected, it is irrevocable, except under exceptional circumstances and with FTA approval.
Example: ABC Investments LLC holds a portfolio of publicly traded shares. At the end of the financial year, the market value of the shares has increased by AED 500,000. However, ABC Investments LLC has not sold these shares during the year, meaning the gain is unrealised.
By electing the Realisation Basis, ABC Investments LLC can exclude the AED 500,000 unrealised gain from its taxable income for the year. Tax on the gain will only be calculated when the shares are eventually sold, and the gain becomes realised.
This election allows ABC Investments LLC to align its tax liabilities with actual cash flows, ensuring that it only pays corporate tax on gains once they are realised through a sale.
___________________________________________________________________
2. Transitional Rules Election
Businesses can exclude gains (and sometimes losses) related to specific assets or liabilities acquired before the first tax period from their taxable income. This applies to: Qualifying Financial Assets or Liabilities, Qualifying Immovable Property, and Qualifying Intangible Assets.
- Only available in the first tax period.
- Irrevocable except under exceptional circumstances.
Example: A company owns a commercial building that was purchased 5 years before the start of its first taxable period and has been recorded at its historical cost in the financial statements. The building has significantly appreciated in value since its purchase. If the company elects transitional relief, any gain attributable to the period before the first taxable period will not be included in taxable income when the property is sold in a subsequent tax period.
___________________________________________________________________
3. Small Business Relief Election
Enables small businesses with revenue of AED 3 million or less to opt out of calculating Taxable Income and paying Corporate Tax.
- Revenue must not exceed AED 3 million in the relevant or previous Tax Periods.
- Not available for members of a multinational enterprise (MNE) group or Qualifying Free Zone Persons.
- Requires annual re-election.
Example: A freelance graphic designer operating as a sole proprietorship in the UAE earns AED 2.5 million in revenue during a tax period. Since the revenue is below the AED 3 million threshold, the freelancer can elect for Small Business Relief. By doing so, they are not required to calculate their taxable income or pay corporate tax for that period, simplifying their tax filing process.
This election helps small businesses focus on operations without the administrative burden of corporate tax compliance, provided they meet the eligibility criteria.
___________________________________________________________________
4. Transfers Within a Qualifying Group Election
Allows asset and liability transfers between entities within a Qualifying Group without triggering tax liabilities.
- Both entities must meet the definition of a Qualifying Group.
- Irrevocable once elected unless exceptional circumstances apply with FTA approval.
Example: A holding company, ABC Ltd., owns a warehouse valued at AED 5 million. ABC Ltd. transfers the ownership of this warehouse to its 100%-owned subsidiary, XYZ Ltd., to consolidate its operations.
Without Qualifying Group Transfer Relief, this transfer would be treated as a taxable transaction, and ABC Ltd. might have to report gains or losses on the transfer in its corporate tax return.
However, because ABC Ltd. and XYZ Ltd. meet the requirements for Qualifying Group Transfer Relief—being part of the same qualifying group with 100% ownership—the transaction is treated as tax-neutral. This means no immediate corporate tax consequences arise for ABC Ltd. or XYZ Ltd.
This relief simplifies intra-group restructuring, provided the transfer meets all conditions, such as maintaining the qualifying group status for a set period post-transfer.
___________________________________________________________________
5. Business Restructuring Relief Election
Eliminates Corporate Tax implications for specific transactions during a business reorganization or restructuring.
- Must be elected for each applicable restructuring transaction.
- Does not automatically apply to future transactions.
Example: Company A and Company B, both in the same industry, decide to merge their operations to create a new legal entity, Company C. As part of the merger, Company A transfers its machinery and inventory to Company C, and Company B transfers its real estate assets to Company C.
Without Business Restructuring Relief, these asset transfers could result in immediate tax implications, as any gains on the assets’ values would be taxable.
However, by electing Business Restructuring Relief and meeting the Federal Tax Authority’s (FTA) conditions—such as the transfer being part of a genuine restructuring and not primarily tax-driven—Company A and Company B can defer tax on any gains arising from the asset transfers. This allows both companies to focus on restructuring without facing immediate tax liabilities.
___________________________________________________________________
6. Foreign Permanent Establishment (PE) Exemption Election
Excludes income and expenses of foreign permanent establishments (e.g., overseas branches) from the Taxable Income of Resident Persons.
- PE must be subject to Corporate Tax or a similar foreign tax at a rate of at least 9%.
- Election applies annually and must meet all conditions.
Example: ABC LLC, a UAE-based company, operates a permanent establishment (PE) in Germany, such as a manufacturing facility. The German PE generates taxable income and is subject to a corporate tax rate of 15% in Germany. Under the UAE Corporate Tax framework, ABC LLC’s global income, including income from the German PE, would generally be included in its UAE taxable income.
By electing the Foreign Permanent Establishment Exemption, ABC LLC can exclude the income and associated expenses of the German PE from its UAE taxable income. This election is beneficial because the PE’s income is already subject to tax in Germany at a rate above the UAE’s corporate tax rate of 9%. This prevents double taxation and simplifies tax compliance by ensuring only the profits generated within the UAE are taxed under the UAE Corporate Tax Law.
Things to Keep in Mind
- Elections must be made in the Tax Return for the applicable Tax Period.
- Many elections are permanent and apply to future years, so they should be chosen carefully.
- Some elections, like Small Business Relief, reduce the number of fields required in the Tax Return.
Source: Corporate Tax Guide | CTGTXR1 | November 2024
Recent Comments