The UAE’s Ministry of Finance on Tuesday set out the maximum cap of interest that can be deducted by companies undertaking a business or business activity in the UAE, under the corporate tax law.
According to Khaleej Times, the ministry announced that the net interest expenditure that can be deducted is capped at the higher of 30 per cent of adjusted earnings before interest, tax, depreciation, and amortisation (Ebitda) or a safe harbour amount of Dh12 million.
It further clarified that tax groups with members who are banks and insurance providers must exclude these members’ income and expenditure when determining the 30 per cent Ebitda threshold.
The ministry and the Federal Tax Authority (FTA) have issued a number of clarifications about the corporate tax ahead of its implementation on Thursday, June 1, 2023. The UAE will levy a nine per cent corporate tax on profits of companies earning more than Dh375,000 as well as individuals generating a turnover of more than Dh1 million.
These new regulations are part of three new Ministerial Decisions issued for the purposes of corporate tax. These include Ministerial Decision No 125 of 2023 on Tax Grouping, Ministerial Decision No 126 of 2023 on General Interest Deduction Limitation Rule, and Ministerial Decision No 127 of 2023 on Unincorporated Partnerships.
Due to the importance of infrastructure projects in the country’s development projects, the Ministry clarified that such long-term projects that meet relevant conditions will not face restrictions on interest expenditure deductibility.
In addition, interest incurred on debt instruments before the law was published to the general public on December 9, 2022, will not be subject to the limitation rule.
Younis Haji Al Khouri, undersecretary of the Ministry of Finance, said the interest capping rules provide clarity to businesses when expensing debt financing costs and are built on OECD best global practice.
With regard to tax grouping, the Ministry clarified that entities that are 95 per cent or more owned by the UAE parent can form or joint a tax group and will be treated as a single entity for corporate tax purposes.
Under the decision, the parent company must own at least 95 per cent of the voting rights and shares in each UAE entity. Also, all members of the tax group must be considered UAE residents for Corporate Tax purposes.
Forming a tax group simplifies the calculation and reporting of taxable Income by allowing the parent company to file a single tax return based on the aggregated taxable profit or loss of the group, it said.
“With tax grouping, groups are treated as if they were one entity which alleviates the administration and compliance burden,” said Al Khouri.
The Ministry of Finance also clarified that unincorporated partnership is not subject to corporate tax, unless it is a corporate entity, meaning that individual partners will be taxed on their share of the income carried on by the partnership.
“Where unincorporated partnership elects to be treated as a taxable person in its own right, its decision is irrevocable once approved, and any change in the partnership composition must be notified to the Federal Tax Authority within 20 business days,” it added.
However, a foreign partnership that is treated as an unincorporated partnership must submit an annual declaration confirming that it is not taxed under foreign jurisdiction laws, and each partner is taxed individually based on their share of income.
All companies required to register
James Swallow, commercial director, PRO Partner Group, said registering for corporate tax is required of all companies in the UAE, free zone and the mainland, and they must file corporate tax returns regardless of their exemption status.
“Companies will need to update their accounting methods to comply with the new UAE corporate tax guidelines. Companies with a financial year ending on May 31, 2023 will need to apply from June 1, 2023. Those whose financial year ends on December 31, 2023, will need to begin from January 1, 2024,” he said.
Tax consulting firm Al Dhaheri Jones & Clark on Tuesday said academic institutions including schools and universities in the UAE have emerged as the first to submit their corporate tax returns, ahead of other sectors, due to their unique financial year starting in August.
It said most schools, colleges, universities, and similar educational institutions in the UAE have a financial year that runs from September 1 to August 31. “As a result, they need to revisit their current financial reporting model and acclimatize it in line with UAE corporate tax regulations to ensure they comply with the new law.” (NewsWire)