Impact of Transfer Pricing and Withholding Tax in Corporate Tax as per Public Consultation Document

September 23, 2022Dated:  | |

The UAE Ministry of Finance recently issued a public consultation document containing information about the proposed UAE corporate tax regime. The document is released to obtain input from the interested parties. It was a public consultation document covering the different aspects of the proposed law.

Key Takeaways on the Impact of Public Consultation Document

Impact on Taxable Persons

1. In UAE CT,  will be applied to the UAE companies and other legal persons who are incorporated in the UAE or working as a legal entity to retain a Permanent Establishment in UAE.

2. The UAE CT will not be applied to individuals unless they are engaged in any kind of business or commercial activity in the UAE. This requires him to obtain a commercial license or equivalent permit from the relevant competent authority in the UAE.

3. The following persons are exempted from UAE Corporate Tax

●  The federal and emirate government and its authorities and other public institutions.

●  The fully owned or government-owned companies that carry out the sovereign or mandated activity are mentioned in the cabinet decision.

●  The exploitation and extraction of the UAE’s natural resources by the business are in the Emirate Level Taxation.

●  The charities and other public benefit organizations were included in the cabinet decisions.

●  The investment funds should meet certain conditions.

Impact on Free Zones

●  The companies and branches registered in the freezone have the scope of UAE CT and are liable to file tax returns. They are liable for paying a 0% CT rate if it maintains adequate substance and complies with the regulatory requirements.

●  The freezone entity with a branch in mainland UAE can be taxed at a regular CT rate on their mainland source income and can continue to retain benefits from the other income earned by the freezone person.

●  The freezone entity shouldn’t have a branch in mainland UAE and can retain income from the mainland. The 0% CT would only be applied to passive income earned from the interest, royalties, dividends, and capital gains on the shares of the mainland UAE company.

●  The freezone entity earning any income than the above-mentioned one from the mainland can easily lose the benefits and are liable to be taxed at CT rates on the entire income.

●  The freezone entity has the right to opt for the regular Corporate Tax regime.

Transfer Pricing Regulations

●  According to the public consultation document, the transfer pricing regulations are applicable for all transactions between domestic as well as foreign related parties.

●  The transfer pricing regulations should be in sync with the  OECD Transfer Pricing Guidelines.

●  The Transfer Pricing Documentation Requirement shall include

1. The full disclosure contains the information related to the transactions with related parties and other connected persons.

2. They should master the local files with the specified format and content under the OECD base Erosion and Profit sharing.

Flying Colour at your services

According to the proposed Corporate Tax regime, the investors or freezone entities are liable for paying the CT. The process of corporate tax and maintenance of records is quite challenging for business owners. FlyingColour Tax has years of experience in tax, consulting, and financial services for all kinds of organizations and businesses in the UAE.