United Arab Emirates
Corporate - Tax credits and incentivesLast reviewed - 23 March 2023
Corporate - Tax credits, incentives and reliefs
Foreign Tax Credit
A credit is available for foreign taxes paid on a UAE Taxable Person’s income. The foreign tax credit is limited to the amount of CT due on the relevant income. Any unutilised foreign tax credit cannot be carried forward and or back and will ultimately be lost.
Small Business Relief
The UAE CT Law provides tax relief for small businesses. A tax resident person may elect to be treated as not having derived any Taxable Income where the revenue for the relevant and previous tax periods do not exceed a threshold and meet certain conditions (to be confirmed by Cabinet Decision). If a tax resident person applies for “small business relief”, certain provisions of the CT Law will not apply such as exempt income, reliefs, deductions, tax loss relief, transfer pricing compliance requirements, as specified in the relevant chapters of the CT Law. The FTA may request any relevant records or supporting information to verify the compliance within a time line (to be confirmed).
Transfers within a Qualifying Group
The UAE CT Law provides tax relief on intra-group transfer of assets or liabilities between Taxable Persons that are members of the same Qualifying Group. Taxable Persons will be treated as members of the same Qualifying Group if all the following conditions are met:
- the Taxable Persons are tax resident entities, or non-residents that have a PE in the UAE;
- the Taxable Persons are at least 75% commonly owned and have the same financial year and prepare the financial statements using the same accounting standards; and
- none of the Taxable Persons are regarded as an Exempt Person or a Qualifying Free Zone Person.
There is a clawback period of 2 years from the date of initial transfer in the case there is a subsequent transfer of such asset or liability outside the permitted group or where transferor or transferee ceases to be the member of the permitted group.
Business Restructuring Relief
Similar to intra-group transfer of assets or liabilities within a Qualifying Group, the UAE CT Law provides tax relief on mergers, spin-offs and other corporate restructuring transactions where whole or independent part of business is being transferred in exchange of shares or other ownership interest provided the following conditions are met:
- the transfer is in undertaken accordance with the applicable regulations in the UAE;
- the Taxable Persons are Resident Persons, or Non-Resident Persons that have a PE in the UAE;
- none of the Persons are regarded as an Exempt Person or a Qualifying Free Zone Person;
- have the same financial year and prepare the financial statements using the same accounting standards; and
- the transfer is undertaken for valid commercial or economic reasons.
There is a claw back period of 2 years from the date of the transfer if there is a subsequent transfer to a third party, or shares or ownership interests received are transferred or otherwise disposed of, the gains or losses on the initial transfer will be reported in the period in which the subsequent transfer made to the third-party.
Free trade zones (FTZs)
Companies and branches registered in a Free Zone are considered Taxable Persons under the UAE CT Law and are required to meet normal compliance obligations, including transfer pricing requirements. However, provided a Free Zone entity meets the conditions to be considered a Qualifying Free Zone Person (‘QFZP’), it should be eligible for a 0% UAE CT rate on its Qualifying Income. The income of a QFZP which is not Qualifying Income will be taxed at a 9% CT rate.
In order to qualify for the 0% UAE CT rate, a QFZP must meet all of the following conditions:
- It must be a Free Zone Person (i.e. a juridical person incorporated, established or otherwise registered in a Free Zone, incl. branches);
- Maintain adequate substance in the UAE;
- Derive Qualifying Income (to be defined in a Cabinet decision);
- Not have made an election to be subject to the standard UAE CT regime;
- Comply with all transfer pricing rules and documentation requirements; and
- Meet any other conditions as prescribed by the MoF.
If a QFZP fails to meet any of these conditions at any time during a tax period, it will no longer be considered a QFZP and will be subject to the standard UAE CT regime from the beginning of that tax period. Notwithstanding this, the MoF may set rules under which a person may continue as a QFZP, or cease to be a QFZP from a different date.
There are a number of areas that remain uncertain, including the definition of Qualifying Income (subject to a Cabinet decision yet to be released), the treatment of transactions between Free Zone entities and related/unrelated entities/branches in mainland UAE, what will be regarded as ‘adequate substance in the UAE’ for a Free Zone Person, and any additional conditions that may be set by a Cabinet decision.