Introduction
On 28th of July 2023, the UAE Ministry of Finance published three new Cabinet Decisions pertaining to corporate tax and tax procedural law:
-
- Cabinet Decision No. 74 of 2023 On the Executive Regulation of Federal Decree-Law No. 28 of 2022 on Tax Procedures (further also as the “CD No. 74 of 2023”).
- Cabinet Decision No. 75 of 2023 On the Administrative Penalties for Violations Related to the Application of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (further also as the “CD No. 75 of 2023”).
- Cabinet Decision No. 81 of 2023 On Conditions for Qualifying Investment Funds for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (further also as the “CD No. 81 of 2023”).
The first two legal acts came into force on 1st August 2023, whereas CD No. 81 of 2023 should come into effect the day following the date of its publication. At the time of writing this alert, CD No. 81 of 2023 is not yet officially published in the official UAE Gazette.
1. Tax Procedural Changes – CD No. 74 of 2023
On 30th September 2022, a new tax procedural law has been published under the Federal Decree-Law No. 28 of 2022, with 1st March 2023 marked as the date of entering into force, replacing Federal Decree-Law No. 7 of 2017.
However, the executive regulations that were issued under the Federal Decree-Law No. 7 of 2017 (Cabinet Decision No. 36 of 2017) remained in force, creating interpretational problems, especially around the Voluntary Disclosure obligation.
The discussed CD No. 74 of 2023 serves as executive regulations for the Federal Decree-Law No. 28 of 2022, abrogating the previous Cabinet Decision No. 36 of 2017. In addition, the Federal Tax Authority (FTA) has issued a Public Clarification document – TAXP006 – regarding CD No. 74 of 2023 which should be treated as the official interpretation of the decision by the FTA.
The most important changes introduced by the decision:
-
- Definition of the “asset” has been expanded to cover also intangible assets (including customer lists), which means that intangible assets could be seized during the audit by the FTA.
- The Taxpayer has an obligation to maintain not only records and books of the business but also documentation supporting entries in accounting records or commercial books, including documents serving as the basis for certain elections for tax purposes, calculations that led to a decision, etc.
- Periods for documentation retention have been extended for real estate-related transactions and for Voluntary Disclosure applications.
- Documentation can be submitted to the FTA in English or Arabic (previously Arabic was a default language).
- The Taxpayer must notify the FTA also when the email address, trade license activities, or legal status and partnership agreement has changed (previously change of this information did not trigger notification obligation).
- Deregistration can be made at the FTA’s discretion without an application from the taxpayer (previously the application was necessary for the process to start).
- Voluntary Disclosure is required when the error did not impact the due tax (e.g., misreporting of zero-rated activities for VAT purposes or incorrect Emirate-reporting level for VAT).
- Text messages or notifications on the FTA app are considered valid notifications.
- Requirements to be recognized as a tax agent have been revisited opening this profession for non-Arabic speakers and juridical persons.
- Tax audit needs to be preceded by at least 10 business days’ notice.
- Introduction of the reconciliation process for criminal cases in tax evasion proceedings. The FTA may reconcile if the accused pays all the administrative penalties and outstanding tax liabilities, an additional AED 50k to AED 200k (depending on the stage of the process), and 50-75% of the evaded tax. This proceeding needs to be initiated by the application from the accused.
- Tax refund proceedings can be effectively extended indefinitely if the Taxpayer is being notified and deadlines for tax assessment review requests or tax objection decisions by the Tax Dispute Resolution Committee have also been extended in the decision.
The most impactful change on day-to-day operations is a confirmation that Voluntary Disclosure needs to be submitted if the amount of payable tax is more than AED 10k as the Federal Decree-Law created some confusion amongst taxpayers and practitioners.
Also, introducing a 10-day notice to initiate a tax audit should be welcomed by taxpayers as it will eliminate doubts about whether unannounced visits from the FTA officers are to be considered as the commencement of a tax audit.
2. Explanation of the penalty regime for Corporate Tax offenses and non-compliance – CD No. 75 of 2023
The CD No. 75 of 2023 provided a list of penalties and their amounts if the offense relates to the corporate tax regime. Ultimately, the penalties for corporate tax-related offenses are lower than those for other taxes, i.e. VAT or excise duty. Below we compared them in a table:
| Description of an offense | Penalty amount in relation to CT | Penalty amount in relation to VAT or Excise Duty |
| Failure of the obligated person to keep the required records |
AED 10k for the first time AED 20k for the repeated violation (if within 24 months) |
AED 10k for the first time AED 20k in case of repetition |
| Failure to submit data in Arabic, when requested | AED 5k | AED 20k |
| Failure to submit a deregistration application | AED 1k per month, up to AED 10k | AED 1k per month, up to AED 10k |
| Failure by a Taxpayer to inform the Authority of information change that should be notified |
AED 1k for each violation AED 5k for the repeated violation (if within 24 months) |
AED 5k for the first time AED 10k in case of repetition |
| Failure of the legal representative (appointed during the bankruptcy proceeding) to notify the Authority about the appointment | AED 1k | AED 10k |
| Failure to submit a tax return on time |
AED 500 for each month (for the first 12 months) AED 1000 for each month from the 13th month onwards |
AED 1k AED 2k for the repeated violation (if within 24 months) |
| Failure to settle tax on time | 1.2% of the payable tax monthly (14% per annum) |
2% of the payable tax if settled within one month 4% of the payable tax monthly afterward, up to 300% |
| Submission of incorrect tax return | AED 500 |
AED 1k for the first time AED 2k in case of repetition |
| Submission of the Voluntary Disclosure revealing underpaid tax or overstated refund | 1% of the tax difference monthly, calculated from the due date until the VD is submitted |
5% of the tax difference (if VD is submitted within one year from the due date) 10% of the tax difference (if VD is submitted within the second year from the due date) 20% of the tax difference (if VD is submitted within the third year from the due date) 30% of the tax difference (if VD is submitted within the fourth year from the due date) 40% of the tax difference (if VD is submitted after the fourth year from the due date) |
| Failure to submit VD before being notified by the Authority that the Taxpayer will be subject to an audit |
A fixed penalty of 15% on the tax difference and 1% monthly on the tax difference (counted until the date of submission of the VD or issuance of the tax assessment, if no VD was filed) |
A fixed penalty of 50% on the tax difference and 4% monthly on the tax difference (counted until the tax assessment is issued) |
| Failure to offer facilitation to a Tax Auditor | AED 20k | AED 20k |
The above suggests that the FTA foresees initial non-compliant behavior from corporate tax taxpayers, hence lowering penalties compared to VAT or Excise Duty regime that is present in the UAE for several years. It can be assumed that once the corporate tax regime matures, penalties will increase.
3. Qualifying Investment Funds – conditions for exemption from corporate tax – CD No. 81 of 2023
Main Conditions Set by the CT Law
The Federal Decree-Law No. 47 of 2022 in Article 4(1)(f) provides an exemption from corporate tax for entities classified as Qualifying Investment Funds. Pursuant to Article 10 of the FD No. 47 of 2022, the Qualifying Investment Fund needs to meet the following conditions:
-
- Be subject to the regulatory oversight of a competent authority in the State (i.e. of UAE Securities and Commodities Authority, Dubai Financial Services Authority, Financial Services Regulatory Authority, etc.).
- Interests in the investment fund are traded on a Recognized Stock Exchange (local or foreign) or are marketed and made available sufficiently widely to investors.
- The main or principal purpose of the investment fund is not to avoid Corporate Tax.
- Conditions set by the Cabinet Decision No. 81 of 2023.
The last reference brought in several additional conditions that the Qualifying Investment Fund needs to satisfy in order to benefit from the corporate tax exemption.
Additional conditions set by CD No. 81 of 2023
Firstly, the lawmaker separated Real Estate Investment Trust (REIT) from the rest of the Qualifying Investment Funds adding to the former additional requirements to be exempted.
Secondly, the types of activities that can be conducted in a fund to be considered as the Qualifying Investment Fund has been precisely listed. The fund can be involved in the Investment Business (that is defined in Article 1 of the CD No. 81 of 2023) and another type of activity can be only ancillary or incidental (i.e., combined revenue from the other activity cannot be more than 5% of the total Revenue of the fund in the same financial year).
Thirdly, a single investor or its Related Parties cannot own:
-
- If the investment fund has 9 or fewer investors – more than 30% of the ownership interest in the fund.
- If the investment fund has 10 or more investors – more than 50% of the ownership interest in the fund.
Furthermore, the management and advisory to the fund should be carried out by the Investment Manager (a Person with the relevant license issued by the UAE authorities) plus a minimum of three investment professionals. Also, the investors should not have control over the day-to-day management of the fund.
Conditions for Real Estate Investment Trusts
In addition, REITs need to meet the following conditions to be considered the Qualifying Investment Fund:
-
- Value of the real estate portfolio (excluding land) under the management or ownership of the REIT should exceed AED 100M.
- Minimum 20% of the REIT capital is floated on the Recognized Stock Exchange or is directly wholly owned by two or more institutional investors (e.g. governmental entities, banks, insurance providers, etc.) that are not Related Parties.
- The income generated from renting land or real estate should be an average of 70% of the total income for REIT during the calendar year.
It needs to be mentioned that the Qualifying Investment Fund status can be granted by the FTA only upon the application of the fund, after meeting the above criteria.
As regards the income generated by the QIF and received by a taxable person other than the QIF, please note that such income is subject to corporate tax under the general rules.
Should you wish to discuss any of the abovementioned developments in more detail, please feel free to contact us at tax@amereller.com or pk@amereller.com.
-
PARTNER
DUBAI | AMERELLER | One by Omniyat, 14th Floor | Business Bay | P.O. Box 97706 | Dubai, United Arab Emirates | T +971 4 432 3671
RAS AL KHAIMAH | AMERELLER TAX Consultancy FZ-LLC | Ras Al Khaimah Economic Zone | P.O. Box 16462 | Ras Al Khaimah, United Arab Emirates | T +971 7 204 6255
This client alert is a public document for informational purposes only and should not be construed as legal advice. Readers should not act upon the information provided here without consulting with professional legal counsel. This material may be considered advertising under certain rules of professional conduct. Copyright © 2023
