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The government of the United Arab Emirates (hereinafter referred to as UAE), through their Ministry of Finance, has announced three new Ministerial Decisions which will have the effect of exempting UAE-based entities with direct investments in foreign companies from Corporate Tax.
The decisions further clarify the definition of consolidated financial statements for the purpose of tax grouping implications and in particular where such financial statements will be the aggregate of the parent company's and each subsidiary's (tax group member) independent financial statements after intra-group transactions are removed.
Per the Undersecretary of the Ministry of Finance Younis Haji Al Khouri, the three new decisions shall enhance the flexibility of UAE's Corporate Tax regime and ensure a supportive business environment for all sectors.
Accounting Standards and Methods
The Accounting Standards and Methods Ministerial Decision No.114 of 2023 establishes clear standards for companies compiling Financial Statements that will be utilized as a basis for calculating Corporate Tax’s taxable income.
The ruling establishes that International Financial Reporting Standards (IFRS) are the legitimate accounting standards in the UAE and that larger enterprises with revenues above AED 50,000,000 (USD 13.6M) must use said standards. The decision also provides medium-sized companies with revenues of less than AED 50,000,000 with the option of using “IFRS for SMEs” (a simplified system for Small and Medium Enterprises). To further decrease the compliance cost, the ruling clarifies that enterprises with less than AED 3,000,000 (USD 816,000) in revenue are allowed to use cash basis accounting.
Pensions and Social Security Funds
The Ministerial Decision No.115 of 2023 on Pensions and Social Security Funds establishes additional requirements for private regulated pension funds and social security funds to be exempt from Corporate Tax. The ruling assures that the UAE private pension or social security funds' exempt status is recognized when investing globally, and that double tax treaty advantages can be achieved.
Furthermore, the decision specifies the maximum payments per beneficiary as well as the yearly certification of compliance by a statutory auditor to verify the exemption's integrity.
Participation Exemption
The Ministerial Decision No.116 of 2023 is designed to boost investment and support economic growth by exempting dividends and capital gains from certain eligible investments from taxation. By adopting this exemption, the UAE seeks to attract both domestic and foreign investors, therefore encouraging an active economic climate.
The rule outlines Corporate Tax exemptions on dividends, profit distributions, and capital gains arising from a Participating Interest, specified as a 5% or higher ownership interest in another entity's shares or capital held for at least 12 months. The exemption applies if the subsidiary is located in a jurisdiction with a Corporate Tax rate of more than 9% or can establish an effective tax rate of at least 9% on profits, income, or equity.
The ruling further emphasizes that the relief would apply to various categories of ownership interests (such as preferential shares, ordinary shares, redeemable shares, as well as membership and partner interests) as long as the total purchase cost of the ownership interests is equal to or exceeds AED 4,000,000 (USD 1,09M).
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