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The UAE Ministry of Finance has announced three new Ministerial Decisions for the purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses.
These include Ministerial Decision No.114 of 2023 on the Accounting Standards and Methods; Ministerial Decision No.115 of 2023 on Pensions and Social Security Funds; and Ministerial Decision No.116 of 2023 on Participation Exemption.
Younis Haji Al Khouri, Undersecretary of the Ministry of Finance, said, "The three new decisions aim to enhance the flexibility of UAE's Corporate Tax regime and ensure a supportive business environment for all sectors. The decisions cover several important aspects related to private regulated pension funds and social security funds normally exempt from corporate tax in other countries.
"Designating International Financial Reporting Standards as the applicable accounting standards and further simplifying accounting processes for SMEs reflects the Ministry of Finance's commitment to imposing a minimal compliance burden for businesses in scope of the Corporate Tax regime. In addition, the participation exemption will prevent double corporate tax on the profits of one entity and eliminate international double taxation.”
The decision on Pensions and Social Security Funds sets out further conditions for private regulated pension funds and social security funds in the UAE to be exempt from Corporate Tax. The decision ensures alignment with international tax practices so that UAE private pension or social security funds exempt status is also recognised when investing internationally, and double tax treaty benefits can be obtained.
In addition, the decision sets out details of maximum contributions per beneficiary and the annual confirmation of compliance by a statutory auditor to ensure integrity of the exemption.
The decision on Accounting Standards and Methods provides clear guidelines for businesses preparing their Financial Statements that will be used as the starting point to calculate taxable income for corporate tax purposes.
The decision confirms that International Financial Reporting Standards (IFRS) are the applicable accounting standards in the UAE and must be used by larger businesses that have revenues of more than Dhs50,000,000.
The decision provides small and medium businesses that have revenues of less than Dhs50,000,000 with the option of applying IFRS for SMEs. To reduce the compliance burden even further, the decision confirms that the cash basis accounting may be used by businesses that have less than Dhs3,000,000 in revenue.
The decision also provides clarity on what is meant by consolidated financial statements for tax grouping purposes. Where, such financial statements will be the aggregation of the parent company and each subsidiary’s (that is a member of the tax group) standalone financial statements once intra-group transactions are eliminated.
The decision on Participation Exemption provides for Corporate Tax exemptions on dividends, profit distributions, and capital gains from a Participating Interest, which is defined as a 5% or greater ownership interest in another entity's shares or capital, held for at least 12 months. The exemption applies if the subsidiary is in a jurisdiction with a Corporate Tax rate of at least 9% or can demonstrate an effective tax rate of at least 9% on profits, income, or equity.
The decision also clarifies that the relief will apply to various ownership interest types, including preferential shares, ordinary shares and redeemable shares and membership and Partner Interest, where the aggregated acquisition cost of the ownership interests is equal to or exceeds Dhs4,000,000.
This ensures UAE-based companies with specific investments in foreign entities that meet the required conditions do not suffer any UAE Corporate Tax on such investments.
With a standard statutory tax rate of 9 percent and a 0 percent tax rate for taxable profits up to Dhs375,000 to support small businesses and startups, the UAE corporate tax regime will be amongst the most competitive in the world.
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