Foreign Tax Credit

Taxable persons in the United Arab Emirates (UAE) are entitled to a tax credit for income taxes paid abroad. This credit is limited to the amount of income tax earned in the UAE.

Unused foreign tax credits cannot be transferred to future or retroactive tax periods, and, therefore, will be lost if they are not applied within the tax period in which they are generated.

Relief for Small Businesses

The Corporation Tax Act provides tax breaks for small businesses. A taxable person resident in the UAE may choose not to consider taxable income if their income during the current tax period and in previous tax periods does not exceed AED 3 million in each tax year. If this threshold is exceeded, the taxable person will be subject to UAE corporate tax at the rates established by the Corporate Tax Act.

This income threshold will apply starting June 1, 2023 and will be extended to tax periods ending before December 31, 2026. If a taxable person requests relief for small businesses, certain provisions of the SI Act will be exempted, including those relating to exempt income, deductions, compensation for tax losses and transfer pricing compliance requirements, as specified in the corresponding chapters.

The Federal Tax Authority (FTA) may require records or supporting information to verify compliance within a specified time frame (to be confirmed). In the event that a taxable person purposely segregates their business activity for the sole purpose of keeping their income below the threshold of AED 3 million and opting not to be subject, the FTA may adjust the tax liability of the taxable person in question to adequately reflect the tax base.

Transfers within a qualified group

The Act provides specific tax relief for transfers of assets or liabilities between taxable persons who belong to the same qualified group. For taxable persons to be considered part of the same qualified group and to be eligible for these deductions, they must meet the following requirements:

1. Taxable persons must be resident tax entities in the UAE or non-resident entities that have a permanent establishment in the UAE.
2. Taxable persons must be under common ownership of at least 75%, have the same fiscal year and prepare their financial statements in accordance with the same accounting rules.
3. None of the taxable persons can be considered an exempt entity or an entity in a Qualified Free Trade Zone (QFZP).
4. A recovery period of two years is established from the date of the initial transfer for any subsequent transfer of assets or liabilities outside the qualified group. This period also applies if the transferor or transferee ceases to be members of the qualified group.

Corporate Restructuring Relief

The Act provides specific tax relief for business restructuring operations, such as mergers, spin-offs and other transactions in which all or part of the company is transferred in exchange for shares or other ownership. These deductions apply under the following conditions:

1. The restructuring must be carried out in accordance with the regulations in force in the United Arab Emirates.
2. The taxable persons involved must be resident tax entities in the United Arab Emirates or non-resident entities that have a permanent establishment in the country.
3. None of the entities participating in the transaction should be considered an exempt person or a Qualified Free Trade Zone (QFZP).
4. Entities must have the same fiscal year and prepare their financial statements following the same accounting rules.
5. The transfer must be made for valid business or economic reasons.

A recovery period of two years is established from the date of the initial transfer. In the event of a subsequent transfer of the assets or liabilities to a third party, or an alienation of the shares or shares received, the profits or losses derived from the initial transfer must be reported in the fiscal period in which the subsequent transfer occurs.

Free Zones/Free Zones (ZF)

Companies registered in Free Trade Zones, as well as their branches in some cases, are considered taxable persons. These entities must comply with regular tax obligations, including requirements related to transfer pricing.

However, entities that qualify as Qualified Free Trade Zone Persons (QFZP) can benefit from a tax rate of 0% on their qualified income, provided that they meet the established criteria. Income from a QFZP that does not meet these requirements will be subject to a 9% tax rate.

To qualify for the 0% rate, a QFZP must meet the following conditions:

• The entity must be a legal entity incorporated, established or registered in a Free Trade Zone, including branches located in those zones.
• Keep a suitable substance in the United Arab Emirates, specifically within the Free Trade Zone in which it is registered.

• Earn eligible income that meets the criteria.
• Not having chosen to undergo the UAE's standard CT regimen.
• Comply with all transfer pricing regulations and documentation requirements.

• The entity's unqualified income must not exceed established minimum thresholds.

• The entity must prepare and audit its financial statements in accordance with applicable standards.
  

Suitable Substance

To maintain a suitable substance in a Free Trade Zone, the main income-generating activities (CIGAs) of the Qualified Free Trade Zone Person (QFZP) must be carried out within a Free Trade Zone. In addition, the QFZP must maintain:

• Suitable assets.
• A sufficient number of qualified employees.
• An appropriate amount of operating expenses.

The QFZP may choose to outsource its CIGAs to a related party or to a third party, provided that they are also in a Free Trade Zone. In these cases, the QFZP must adequately monitor outsourced activities.

Eligible Income

Eligible income is:

1. Revenue derived from transactions with other entities in the Free Trade Zone, excluding revenues generated by excluded activities.
2. Revenue from transactions with entities outside the Free Trade Zone, as long as they are related to qualified activities that are not excluded activities.
3. Income derived from the ownership or exploitation of eligible intellectual property (IP).
4. Any other income, provided that the Qualified Free Trade Zone Person (QFZP) meets the minimum requirements.

Excluded Activities

The excluded activities are the following:

1. Transactions with individuals: With certain exceptions in the framework of “qualified activities” related to maritime and air transport, as well as the management of funds, assets and investments.
2. Regulated banking, finance, financial leasing and insurance activities.
3. Ownership or operation of real estate: Except for transactions with individuals in the Free Trade Zone in connection with commercial assets located in a Free Trade Zone.

Eligible Activities

Eligible activities are:

• Manufacture or transformation of goods or materials.
• Trading in qualified commodities.
• Holding of shares and other securities for investment purposes.
• Ownership, management and operation of ships.
• Regulated reinsurance, fund management, wealth management and investment management.
• Headquarters, treasury and funding services to related parties.
• Financing and leasing of aircraft.
• Logistics.
  
• Distribution of goods or materials in or from a Designated Area to a customer who resells such goods or materials, or parts of them, or processes or alters such goods or materials, or parts of them, for the purpose of sale or resale.
• All activities ancillary to those listed above (that is, they do not fulfill any independent function but are necessary for the exercise of the main activity that meets the requirements).

The distribution of goods or materials must be carried out in or from a Designated Zone, and goods or materials entering the State must be imported through the Designated Zone.

In general, the excluded and qualified activities listed will have the same meaning as in the respective laws that regulate these activities, unless otherwise prescribed.

Minimum Requirements

For minimum requirements to be met, unqualified income must be less than 5% of total income or not exceed AED 5 million, whichever is lower. Unqualified income is considered to be those generated by excluded activities or by activities that do not meet the criteria of qualified activities when the counterparty is an entity outside the Free Trade Zone.

The following items shall be excluded from the calculation of non-qualified income and total income:

• Income attributable to certain real estate located in a Free Trade Zone, including both non-commercial and commercial real estate, provided that the transactions are carried out with people outside the Free Trade Zone.
• Income derived from the ownership or exploitation of intellectual property.
• Income from a permanent establishment, whether domestic or international.

If an entity located in a Free Trade Zone does not meet the requirements established in the UAE Corporate Tax Act and corresponding decisions, it will be classified as subject to a 9% tax rate for a minimum of five fiscal years.

National Permanent Establishment

The relevant decisions introduce the concept of National EP when a Qualified Free Zone Person (QFZP) maintains a center of activity or any other form of presence outside the Free Zone in the United Arab Emirates. Income attributable to a national permanent establishment must be calculated considering that establishment as a separate and independent entity and will be subject to a corporate tax of 9%.

However, this obligation will not affect the ability of the QFZP to benefit from the 0% tax rate on eligible income, nor will it be taken into account for the calculation of the minimum threshold. Therefore, a branch located in the mainland territory of a QFZP will generally be considered a permanent domestic establishment and will be subject to the 9% tax rate.