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Ways to get relief from UAE Corporate Tax

Different ways to get Tax Relief from UAE Corporate Tax

A Tax relief could be any government initiative or program or a policy designed to help businesses reduce their tax burden or resolve their tax liabilities which could be in the form of tax cuts, different tax slabs, different rates, revenue threshold, a tax break, tax incentives etc. While the UAE has rolled out a standard 9% corporate tax from financial year June 1 2023 or after for companies whose taxable income exceeds AED 375,000 to reduce the nation’s dependency on oil and gas, UAE is also providing tax incentives and reliefs continuing to support the business ecosystem. Let us have a look at several ways to get some of those tax reliefs as per the Federal Decree Law No. 47 of 2022: –

Forming groups

Companies with common ownership can form two types of groups while filing for corporate tax depending on the ownership percentage which would allow transfer of tax losses between companies or remove the burden of taxation from the subsidiary companies to the parent company. The two types of groups that can be formed are: –
  1. i. Qualifying group (parent company should own directly or indirectly at least 75% in the subsidiaries)
  2. ii. Tax group (parent company should own at least 95% of the subsidiaries)
When we form a Qualifying Group, all the companies in the group should file for corporate tax, however if any company incurred any losses, we can transfer those losses between companies to offset against the profits to reduce the net tax liability. However, there are conditions to form a qualifying group such as: –
  1. a) Subsidiary must be a juridical person that are Resident Persons, or Nonresident persons with a Permanent Es
  2. b) 75% ownership as mentioned above
  3. c) Neither member of the group is an exempt person or a Qualifying Free Zone Person
  4. d) Members of the Qualifying group must prepare their financial statements using the same accounting standards and same financial year
When we form a Tax Group, only the parent company need to file for corporate tax, and also can utilize any of the losses incurred by the subsidiaries to reduce the net tax liability. However, the conditions to form a tax group are: –
  1. a) Resident persons must be juridical persons
  2. b) 95% ownership of share capital directly or indirectly through one or more subsidiaries
  3. c) Holds 95% of voting rights directly or indirectly through one or more subsidiaries
  4. d) Entitled to 95% (ninety-five percent) of the Subsidiary’s profits and net assets, either directly or indirectly through one or more subsidiaries.
  5. e) Neither member of the group is an exempt person or a Qualifying Free Zone Person
  6. f) Members of the Qualifying group must prepare their financial statements using the same accounting standards and same financial year
  7. g) A formal approval from FTA is required to form a Tax group.

Tax Deductible Expenses (including interest expenses)

Every expense incurred wholly and exclusively for the purpose of the business which is not capital in nature shall be deducted in the Tax period in which it is incurred. However, we cannot claim a deduction for any expenses incurred while deriving any exempt income or expenses incurred which are not Business related and IF any expenses are incurred for more than one purpose, we can deduct the identifiable part of the expense incurred wholly and exclusively for the business or if we cannot identify, an appropriate fair portion determined on fair and reasonable basis.

Interest expenses shall be deductible up to 30% if the EBITDA (interest, tax, depreciation and amortization) however this shall not apply to Banks, Insurance providers or any other person determined by the minister.

All entertainment expenses incurred for employees of the business are 100% deductible, HOWEVER when it comes to customers, suppliers, shareholders and other business partners only 50% of the same will be deductible.

No deductions shall be allowed for interest expenses incurred on a loan obtained from a Related party (directly or indirectly) in respect of any of the following transactions

  1. a) A dividend or profit distribution to a Related Party.
  2. b) A redemption, repurchase, reduction or return of share capital to a Related Party.
  3. c) A capital contribution to a Related Party.
  4. d) The acquisition of an ownership interest in a Person who is or becomes a Related Party following the acquisition.

UNLESS we can demonstrate that the purpose of the loan obtained is not to gain a Corporate Tax advantage.

Setting the business in a Free Zone

Setting up a business in a free zone could help the business be entitled to various economic incentives and other exemptions. A free zone person if eligible to be a “Qualifying Free Zone Person” (QFZP) will be eligible for 0% taxation on income from Qualifying activities and 9% on income from excluded activities(subject to de minimis requirement) The below are the Qualifying Activities which are subject to 0% taxation: –

  1. Manufacturing and processing of goods or materials;
  2. Holding of shares and other securities;
  3. Ownership and operation of ships;
  4. Regulated reinsurance and fund /wealth management;
  5. Headquarter and financing services to related parties;
  6. Financing and leasing of aircraft, logistics and
  7. The distribution of goods in or from a designated zone subject to certain conditions.

And the below are the excluded activities which are always taxable at 9% no matter even if involved with other FZ companies: –

  1. Transactions with natural persons (subject to certain exceptions under Qualifying Activities related to shipping and aircrafts plus fund, wealth and investment management);
  2. Regulated banking, finance, leasing and insurance activities;
  3. Ownership or exploitation of intellectual property assets, and
  4. Ownership or exploitation of immovable property, except for transactions with Free Zone Persons in relation to commercial property located in a Free Zone.

If the QFZP is involved in any Excluded activities OR any other activities with a non FZ company which are not Qualifying activities it shall not be taxable provided that it is lower of 5% of total revenue or AED 5,000,000.

Small Business Reliefs (primarily for SMEs and Startups)

Certain small businesses and SMEs are eligible for Small Business Relief, PROVIDED they are subject to the following conditions: –

  1. a) Revenue must be equal or below AED 3,000,000 for all tax periods till 31 December 2026.
  2. b) They are not a Qualifying Free Zone Person.
  3. c) They are not part of a Multinational Enterprise Group who operates in more than one country and have a total consolidated group revenue of more than AED 3.15 billion and are required to prepare country by country report.

However, one should note that trying to separate their business into different entities to avail this benefit, could result in not only just paying any unpaid taxes but also could attract any unwanted penalties.

If a company elects for small business relief, it should be noted that they won’t be eligible for other benefits such as transfer/accrual of tax losses, business restructuring relief etc.

Business Restructuring Relief

This is a kind of a relief for businesses within a Qualifying group or Tax group that undergo corporate restructuring or reorganization. Companies can transfer assets and liabilities without incurring any tax liabilities.

In order to avail the same, there are few conditions: –

  1. a) The applicable laws of the state should govern the transfer.
  2. b) The taxable persons have a permanent establishment in the state.
  3. c) None of the taxable persons involved are exempt persons or Qualifying Free Zone Persons.
  4. d) The financial year end date and the accounting standards used in the financial statements must be uniform.
  5. e) The reason for such a restructure should show an economic reality and the sole reason should not be any corporate tax gain.

The assets and liabilities transferred will be treated at net book value and not at fair value and hence no gains/losses. The value of shares received in a transfer shall not exceed the NBV of the assets and liabilities transferred, less the value of any consideration received. Similarly, the value of shares received in exchange for surrendered shares shall not exceed the NBV of surrendered shares minus the value of other consideration received. Any unutilized tax losses of the transferor prior to the transfer shall become the carried forward tax losses of the transferee.

However, if the shares/ownership interests are sold to a taxable person who is not a member of the qualifying group within 2 years of transfer or if the business is sold/transferred within 2 years, the above relief will not be applicable and the transfer will be taxable at fair value.

Tax Loss relief

In the UAE, any business that incurred a tax loss, they can offset those losses against future taxable income in effect reducing their tax liability. However, we should note that a business can only offset their losses up to 75% of their taxable income in any future tax period and any remaining tax losses shall be carried forward to the next period. The tax loss relief is not available when: –
  1. a) A business has losses before the implementation of the corporate tax.
  2. b) A business has losses before becoming a taxable person
  3. c) The losses are from an asset/activity which is exempt.
It is also possible for a taxable person to transfer their losses to another taxable person provided the following conditions are met: –
  1. a) Both businesses are legal and resident entities.
  2. b) One of the taxable persons has a direct or indirect ownership interest of at least 75% in the other or a third party holding a direct or indirect ownership stake of at least 75% in both entities.
  3. c) The shared ownership mentioned above must be present throughout the entire tax period in which the tax loss occurs, until the end of the tax period in which the other taxable entity offsets the tax loss against its taxable income.
  4. d) None of the entities are exempt persons or qualify as a Qualifying Free Zone Person.
  5. e) Both entities have the same fiscal year-end date and use the same accounting standards for preparing their financial statements.