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May 18, 2023UAE CORPORATE TAX: MOF ISSUES THREE MINISTERIAL DECISIONS CONCERNING TAX GROUP, INTEREST DEDUCTION LIMIT AND UNINCORPORATED PARTNERSHIP, FOREIGN PARTNERSHIP AND FAMILY FOUNDATION
June 1, 2023UAE CORPORATE TAX: MoF ISSUES THREE MINISTERIAL DECISION CONCERNING ACCOUNTING STANDARD, PRIVATE PENSION FUND AND PARTICIPATION INTEREST
The UAE Ministry of Finance, on 23rd May, 2023, issued three Ministerial Decisions concerning Accounting Standards to be adopted, conditions applicable for exemption of private pension funds from Corporate Tax and in respect of procedure and conditions for exemption from Corporate Tax of income derived from Participating Interest.
According to the Ministerial Decision No. 114 of 2023, a Taxable Person shall apply the International Financial Reporting Standards (“IFRS”). Further, a Taxable Person deriving Revenue that does not exceed AED 50,000,000 (fifty million United Arab Emirates dirhams) may apply International Financial Reporting Standards for small and medium-sized entities (“IFRS for SMEs”) Also a Person with Revenue upto Three million may choose to prepare financial statement using the cash basis of accounting.
Ministerial Decision No. 115 of 2023, prescribes the condition for Private Pension Fund and Private Social Security Fund for applying to the Authority for exemption from Corporate Tax. The Decision also prescribes the Income that may be generated by the Private Pension and Social Security Fund. The decision also specifies the maximum contributions per beneficiary and the yearly mandatory auditor confirmation of compliance.
In its third Ministerial Decision No. 116 of 2023 issued on 23rd May, 2023, the ministry addressed the issue of establishing requirements for claiming the participation exemption, including the criteria to be subject to tax and the minimum acquisition cost to qualify a participating interest. A participation interest, which is defined as a 5 percent or larger ownership interest in another entity’s shares, or capital held for at least a year, is provided with corporate tax exemption on dividends, profit distributions, and capital gains.
The juridical person in which the taxable person has participation interest must be located in a jurisdiction with a corporation tax rate of at least 9% or be able to show an effective tax rate on profits or income in order to qualify for the exemption.
The decision also makes it clear that the relief will apply to different categories of ownership interests, such as preferential, ordinary, and redeemable shares, as well as membership and partner interests. Further, the Decision also sets the threshold total acquisition cost of the ownership interests at Dh 4 million or more to qualify having met minimum ownership interest in terms of clause 11 of Article 23 of the Federal Decree-Law No. 47 of 2022. This establishes that businesses domiciled in the UAE with specified investments in foreign corporations that satisfy the criteria won’t pay corporate tax on income arising from those investments.
These measures are intended to increase the flexibility of the UAE’s corporate tax policy and provide a favourable business environment for all sectors.
