The Ministry of Finance in the UAE issued three new ministerial decisions to regulate corporate and business tax, pursuant to Federal Decree No. (47) of 2022. They include Ministerial Resolutions No. 114 of 2023 regarding accounting standards and methods, and Ministerial Resolution No. 115 of 2023 regarding pension and social insurance funds, And Ministerial Resolution No. 116 of 2023 regarding exemption from participation.
Younis Haji Al-Khoury, Undersecretary of the Ministry of Finance, stated that the aim of the three new decisions is to enhance the flexibility of the corporate tax system in the United Arab Emirates and to create an environment conducive to business in various sectors.
Al-Khoury explained that the decisions cover many important aspects in the sectors of private pension funds and social insurance funds, which are often exempted from corporate tax in countries.
Adoption of international accounting standards
The decision to adopt international accounting standards and facilitate accounting procedures for companies and small businesses reflects the Ministry of Finance’s desire to reduce the burden of compliance for businesses within the corporate tax system.
The decision regarding pension and social insurance funds includes setting additional conditions for private pension funds and social insurance funds organized in the United Arab Emirates to be exempted.
retirement and social security
The Resolution on Retirement and Social Security Funds specifies additional conditions for pension and social security funds organized in the United Arab Emirates, with the aim of exempting them from corporate tax.
The decision ensures compliance with international tax practices, as private pension funds and social security funds in the UAE are exempted from corporate tax when it comes to international investments, and benefit from the benefits of double tax avoidance agreements.
The decision also details the maximum contributions per participant and the requirements for an annual audit of compliance, by a statutory auditor, to ensure the exemption is transparent.
Accounting standards and methods
The Ministerial Resolution on Accounting Standards and Methods provides clear guidance to companies on the preparation of their financial statements, which will be used as a starting point for calculating taxable income for corporate tax purposes.
The decision confirms that the International Financial Reporting Standards (IFRS) are the approved accounting standards that must be applied by large companies in the UAE, which generate revenues of more than 50,000,000 dirhams.
However, the decision provides facilities for medium and small companies whose revenues do not exceed 50,000,000 dirhams, as the financial reporting standards for small and medium enterprises (IFRS for SMEs) are applied.
In order to reduce the burden of compliance, the decision states that the cash basis of accounting can be used by companies that generate revenues of less than 3,000,000 dirhams.
The decision also provides clarifications about consolidating the financial statements for the purposes of the tax group, as it requires the preparation of independent financial statements by compiling the financial statements of the parent company and subsidiaries as members of the tax group, with the exception of transactions within the tax group in accordance with the provisions of the corporate tax law.
participation exemption
A corporate tax exemption is allowed for dividends or shares, dividends, and capital gains from participation interests, which are defined as ownership interests of 5% or more of the stock or capital of another entity, continuing for at least 12 months.
The participation exemption applies only to subsidiaries in another country, where a corporate tax rate of at least 9% is applied, or where corporate tax is applied to profits, income or shares at an aggregate rate of at least 9%.
The decision also stipulates that the participation exemption can be applied to various types of ownership stakes, including ordinary shares, preferred shares, redeemable shares, partner shares and companies, provided that the total acquisition cost of these shares exceeds 4 million dirhams.
This decision ensures that UAE-based companies that own investments in foreign entities that meet the requirements for corporate tax in the UAE are not subject to this type of investment.
