UAE Ministry of Finance issues three new decisions before corporate tax is introduced

Decisions clarify basis of preparing financial statements and exemptions for private regulated pension funds and social security funds

The UAE introduced the tax starting from the financial year beginning on or after June 1, 2023. Antonie Robertson / The National

The UAE Ministry of Finance has issued three new ministerial decisions that explain exemptions and preparation of financial statements before the introduction of corporate tax in the country next month.

The first ministerial decision clarifies the basis of preparing financial statements and mechanisms for consolidating them within a tax group, the ministry said on Tuesday.

The second deals with conditions for the exemption of private regulated pension funds and social security funds from corporate tax.

The ministry has addressed the issue of determining conditions for claiming the participation exemption, including the subject to tax requirement and “the minimum historical acquisition cost for a participating interest” in the third decision.

“The three new decisions aim to enhance the flexibility of UAE's corporate tax regime and ensure a supportive business environment for all sectors,” Younis Al Khouri, undersecretary of the ministry, said.

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.

It 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”, the ministry said.

The decision also sets out details of maximum contributions per beneficiary and the annual confirmation of compliance by a statutory auditor to ensure integrity of the exemption.

In January last year, the UAE introduced the federal corporate tax with a standard statutory rate of 9 per cent starting from the financial year beginning on or after June 1, 2023.

It brought the income of companies exceeding Dh375,000 within the taxable bracket.

Taxable profits below that threshold will be subject to a 0 per cent rate.

There will be no tax on personal incomes “from employment, real estate and other investments, or on any other income earned by individuals that does not arise from a business or other form of commercial activity licensed or otherwise permitted to be undertaken in the UAE”, the ministry said at the time.

In April, the ministry also clarified that small businesses in the UAE with revenue of Dh3 million or less can benefit from a new corporate tax relief programme.

On Tuesday, the ministry said that its decision on accounting standards provided “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 are the applicable accounting standards in the UAE and must be used by larger businesses that have revenue of more than Dh50 million.

The decision provides small and medium businesses that have revenue not exceeding Dh50 million 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 Dh3 million in revenue, the ministry said.

“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 impose a minimal compliance burden for businesses in scope of the corporate tax regime,” Mr Al Khouri said.

The decision on participation exemption provides for corporate tax exemptions on dividends, profit distributions and capital gains from a participating interest.

The ministry defines a participating interest as 5 per cent or more 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 per cent or can demonstrate an effective tax rate of at least 9 per cent on profits, income or equity,” the ministry said.

The decision also clarifies that the tax relief will apply to different ownership interest types, including preferential shares, ordinary shares and redeemable shares. It will also apply to membership and partner interest where the “aggregated acquisition cost of the ownership interests is equal to or exceeds Dh4 million”.

“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,” the ministry said.