[World Tax News] UAE Announces Three New Cabinet Decisions on Corporate Tax Law

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1. UAE prescribes applicable Accounting Standards and Methods for the specified businesses

The UAE Ministry of Finance has issued Ministerial Decision No. 114 of 2023, outlining specific regulations regarding accounting standards and approaches for Corporate Tax objectives. The decision provides for preparing Financial Statements on Cash Basis of Accounting, applicable Accounting Standards, and Consolidated Financial Statements.

The key highlights can be summarised as follows:

(a) Preparation of Financial Statements on Cash Basis of Accounting

The cash basis of accounting is an accounting method in which the Taxable Person recognises income and expenditure when cash payments are received and paid. The decision prescribes that a person may prepare financial statements using the cash basis of accounting in any of the following instances:

• Where the person derives revenue that does not exceed AED 3 million; or
• In exceptional circumstances and pursuant to an application submitted by the person to the authority.

(b) Applicable Accounting Standards

The decision mandates the preparation of Financial Statements using the International Financial Reporting Standards (“IFRS”). However, a Taxable Person deriving Revenue that does not exceed AED 50,000,000 (fifty million United Arab Emirates dirhams) may use International Financial Reporting Standards for small and medium-sized entities (“IFRS for SMEs”).

(c) Consolidated Financial Statements

The preparation of consolidated financial statements for a tax group must be done by aggregating the standalone financial statements of the parent company and its subsidiary companies within the group. Further, any transactions occurring between the parent company and its subsidiaries should be eliminated, as required by Article 42(1) of the Corporate Tax Law.

2. UAE announces conditions for Corporate Tax Exemption to Private Pension Funds and Private Social Security Funds

The Ministerial Decision No. 115 of 2023, published by the UAE Ministry of Finance, sets forth the requirements governing the exemption from Corporate Tax for eligible private pension funds and private social security funds. The key highlights of this decision are outlined as follows:

(a) Exemption to Private Pension Funds

A private pension fund may apply to the authority to be exempt from Corporate Tax if all of the following conditions are met:

• The fund comprises a pool of assets which have been assigned by law or contract as Pension Plan assets or the acquisition of these assets has been financed by or with the use of contributions to a Pension Plan for the exclusive purpose of financing the Pension Plan benefits;
• The fund grants Pension Plan Members or Beneficiaries a right or other contractual claim or entitlement against its assets or earnings;
• The income of the fund solely comprises qualifying income; and
• The fund must have an Auditor.

(b) Exemption to Private Social Security Funds

A private social security fund may apply to the authority to be exempt from Corporate Tax if all of the following conditions are met:

• The fund comprises a pool of assets which have been assigned by law or contract as fund assets or the acquisition of these assets has been financed by or with the use of contributions to the fund for the exclusive purpose of financing the End of Service Benefit;
• The income of the fund solely comprises qualifying income; and
• The fund must have an Auditor.

Further, a private pension fund and a private social security fund must earn their income from any of the following:

• Investments or deposits, where the investments or deposits are held for the purposes of fulfilling the obligations of the fund, and the investments do not constitute a Business operated by the fund.
• Underwriting commissions that are charged for the purposes of the fund
• Rebates of charges due or paid by the fund to Persons involved in managing part or all of the assets of the fund that are not deemed as compensation for services provided by the fund.
• Any other income derived in accordance with a defined investment policy for the benefit of Pension Plan Members or beneficiaries of the End of Service Benefit, as applicable.

Source: Ministerial Decision No. 115 of 2023

3. UAE introduces Corporate Tax Exemption on Dividends, profit distributions, and capital gains from a Participating Interest

The Ministry of Finance, UAE released Ministerial Decision No. 116 of 2023 to allow Corporate Tax exemptions in relation to dividends, profit distributions, and capital gains derived from a Participating Interest. A Participating Interest refers to an ownership stake of 5% or more in another entity’s shares or capital, which must be held for a minimum of 12 months.

To qualify for the exemption, the subsidiary must be situated in a jurisdiction with a Corporate Tax rate of at least 9% or demonstrate an effective tax rate of at least 9% on profits, income, or equity. Furthermore, the decision specifies that the relief applies to various types of ownership interests, such as preferential shares, ordinary shares, redeemable shares, membership interests, and partner interests. To be eligible for the exemption, the aggregate cost of acquisition of these ownership interests must be equal to or exceed AED 4,000,000.

This provision ensures that UAE-based companies, which have specific investments in foreign entities meeting the specified conditions, will not be subject to any UAE Corporate Tax on such investments.

Source: Ministerial Decision No. 116 of 2023