Ministry of Finance Issues New Ministerial Decisions Relating to Corporate Tax

As part of the series of new Ministerial Decisions under Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, the UAE Ministry of Finance introduced, on 28 July 2023, the following three new Cabinet Decisions:

1- Cabinet Decision No. 74 of 2023 outlining the Executive Regulation of the Federal Decree-Law No. 28 of 2022 on Tax Procedures.

2- Cabinet Decision No. 75 of 2023 addressing the Administrative Penalties for Violations to the Application of the Federal Decree-Law No. 47 of 2022.

3- Cabinet Decision No. 81 of 2023 outlining the Conditions for Qualifying Investment Funds for the Purposes of the Federal Decree-Law No. 47 of 2022.

The first two decisions became effective on August 1, 2023, while the third awaits official publication in the official UAE Gazette.

1- Cabinet Decision No. 74 of 2023

A new tax procedural law was established under Federal Decree-Law No. 28 of 2022 on 30 September 2022, with 1 March 2023, as its enforcement date, replacing Federal Decree-Law No. 7 of 2017.

Despite the replacement, the executive regulations introduced under Federal Decree-Law No. 7 of 2017 (Cabinet Decision No. 36 of 2017) remained operative, leading to interpretational challenges, particularly concerning the Voluntary Disclosure obligation.

CD No. 74 of 2023 now serves as the executive regulations for Federal Decree-Law No. 28 of 2022, superseding Cabinet Decision No. 36 of 2017. The Federal Tax Authority (FTA) has released a Public Clarification document, TAXP006, offering the official interpretation of CD No. 74 of 2023.

The key changes brought about by this decision include:

–An expanded definition of “asset,” now covering intangible assets, potentially allowing intangibles like customer lists to be seized during FTA audits.

–A requirement for taxpayers to maintain documentation substantiating entries in accounting records, including documents supporting tax-related decisions and calculations.

–Extended documentation retention periods for real estate transactions and Voluntary Disclosure applications.

–Permission for submitting documentation to the FTA in either English or Arabic, no longer mandating Arabic as the default language.

–An obligation for taxpayers to notify the FTA of changes in email addresses, trade license activities, legal status, or partnership agreements.

–FTA’s discretion to deregister entities without requiring a taxpayer application, unlike the previous necessity for an application to commence the process.

–Mandatory Voluntary Disclosure when errors do not affect the due tax amount.

–Recognition of text messages and notifications through the FTA app as valid forms of communication.

–Revised requirements for becoming a recognized tax agent, now open to non-Arabic speakers and juridical persons.

–A minimum 10-business-day notice prior to initiating a tax audit.

–Introduction of a reconciliation process for criminal tax evasion cases, wherein reconciliation is possible if the accused pays penalties, tax liabilities, and a specified portion of evaded tax.

–Tax refund proceedings and related deadlines extended indefinitely upon notification to the taxpayer, with similar extensions for tax assessment review requests and tax objection decisions by the Tax Dispute Resolution Committee.

Notably, a significant operational change is the clarification that Voluntary Disclosure must be submitted if payable tax exceeds AED 10,000, alleviating confusion arising from the Federal Decree-Law.

The introduction of a 10-day notice before initiating a tax audit is expected to be appreciated by taxpayers, eliminating uncertainties surrounding unannounced FTA officer visits.

2- Cabinet Decision No. 75 of 2023

CD No. 75 of 2023 outlines a penalty regime for corporate tax offenses and non-compliance. The decision provides a comprehensive list of penalties and their corresponding amounts applicable to violations within the corporate tax framework. Importantly, these penalties are generally lower than those imposed for other taxes such as VAT or excise duty.

This contrast in penalty amounts suggests that the FTA anticipates initial non-compliant behavior among corporate tax taxpayers, leading to relatively lower penalties when compared to the well-established VAT or Excise Duty regimes in the UAE. It can be surmised that as the corporate tax regime matures, penalties might see an increase.

3- Cabinet Decision No. 81 of 2023

Key Conditions Set by the Corporate Tax Law

Article 4(1)(f) of Federal Decree-Law No. 47 of 2022 grants an exemption from corporate tax to entities classified as Qualifying Investment Funds. Further defined by Article 10 of the same decree, Qualifying Investment Funds are required to fulfill the following conditions:

— Be subject to regulatory oversight by a competent authority in the UAE, such as the UAE Securities and Commodities Authority, Dubai Financial Services Authority, or Financial Services Regulatory Authority.

— Have interests in the investment fund traded on a Recognized Stock Exchange (either local or foreign) or be widely marketed and accessible to investors.

— The primary purpose of the investment fund must not be to evade corporate tax.

Additional Conditions Introduced by CD No. 81 of 2023.

This decision introduced additional prerequisites that Qualifying Investment Funds must meet to avail the corporate tax exemption, as follows:

— Separation of Real Estate Investment Trusts (REITs) – REITs are subjected to distinct conditions from other Qualifying Investment Funds, with supplementary requirements for REITs to qualify for the exemption.

— Permissible Activities – Qualifying Investment Funds are permitted to engage primarily in Investment Business, as defined by Article 1 of CD No. 81 of 2023. Any other activities must be ancillary or incidental, with combined revenue from such activities not exceeding 5% of the fund’s total revenue in the same financial year.

— Ownership Limits – Neither a single investor nor its Related Parties can own:

  —- More than 30% of the ownership interest in the fund if it has 9 or fewer investors.

  —- More than 50% of the ownership interest in the fund if it has 10 or more investors.

— Management and Advisory – The Investment Manager, a Person holding a relevant license issued by UAE authorities, must conduct management and advisory services for the fund. Additionally, a minimum of three investment professionals is required. Investors should not have control over the day-to-day fund management.

Conditions for Real Estate Investment Trusts (REITs)

In the case of REITs, the following conditions apply to qualify as a 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.

The designation of Qualifying Investment Fund status is exclusively within the authority of the FTA, contingent upon the fund’s formal application and the successful fulfillment of the stipulated criteria.

Furthermore, it is essential to underscore that income generated by the Qualifying Investment Fund and subsequently acquired by a taxable individual or entity outside the QIF framework remains subject to corporate tax as per the overarching standard regulations.

For more information on the text of the above Cabinet Decisions, please visit the Ministry of Finance website: https://mof.gov.ae/tax-legislation/.