Application of Corporate Tax on Non-Extractive Natural Resource Business in UAE
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The UAE Corporate Tax Law (Federal Decree-Law No. 47 of 2022) introduced corporate tax in the UAE effective June 1, 2023. The UAE Corporate Tax Law introduced a flat tax rate of 9% on taxable profits of businesses in the UAE. However, certain businesses are exempt from corporate tax under the law. One such exemption is for non-extractive natural resource businesses, subject to certain conditions being met. This article examines the implications of Corporate Tax on Non-Extractive Natural Resources in detail.
What are Non-Extractive Natural Resource Businesses?
As per the UAE Corporate Tax Law, non-extractive natural resource businesses involve the separation, treatment, refining, processing, storage, transportation, marketing or distribution of the UAE's natural resources. They do not involve the actual extraction or removal of natural resources from the earth.
Some examples of non-extractive natural resource businesses include:
- Oil and gas refineries
- Petrochemical plants
- Aluminium smelters
- Steel mills
- Mines and quarries
- Power plants
- Desalination plants
- Water and wastewater treatment plants
- Waste management companies
Taxation of Non-Extractive Natural Resource Businesses
The Corporate Tax Law provides that in general, a person engaged in non-extractive natural resource business is exempt from Corporate Tax and referred to as an Exempt Person. This exemption respects the sovereignty of the Emirates over their natural resources and prevents taxation being imposed at both the Emirate and Federal level on the same type of income. However, the relevant person needs to meet the criteria in the Corporate Tax Law to qualify for the non-extractive natural resource business exemption, respectively, in order to be considered an Exempt Person.
Conditions for Corporate Tax Exemption
For a non-extractive natural resource business to qualify for the corporate tax exemption under the UAE Corporate Tax Law, it must meet the following key conditions:
1. Directly or indirectly hold an interest in a right, concession, or license issued by a local government to undertake the non-extractive natural resource business in the UAE.
2. Be effectively subject to tax under the applicable legislation of the local government.
3. Have made a notification to the Ministry of Finance in the form and manner agreed with the local government.
Additionally, for a non-extractive natural resource business, there is an additional condition to be met:
4. The person's income from its non-extractive natural resource business is derived solely from persons that undertake a business or business activity.
By fulfilling these conditions, the non-extractive natural resource business can avail of the corporate tax exemption under UAE law.
Ancillary Businesses Allowed
A non-extractive natural resource business can carry out ancillary business activities in addition to its main operations, without losing the corporate tax exemption.
Some examples of ancillary businesses permitted include:
- Maintenance, repair and operation of equipment
- Transportation and logistics services
- Research and development activities
- Administrative services
- Accommodation and catering services
As long as the income threshold of 5% of total income is not exceeded, ancillary businesses will not affect the tax exemption for the main non-extractive natural resource operation.
Corporate Tax on Non-Extractive Natural Resources
While the corporate tax exemption is valuable for eligible non-extractive natural resource businesses, they still need to comply with all relevant provisions of the UAE Corporate Tax Law.
This includes requirements such as registration with the federal tax authority, maintaining proper books of accounts, determining taxable profits correctly, filing annual tax returns, and ensuring transactions are conducted at arm's length in case of related party dealings.
Non-compliance with the law could result in penalties, fines and even loss of the tax exemption. It is therefore important for such businesses to seek expert corporate tax advice and compliance support.
Broader Implications for the UAE's Economy
The UAE government is considering implementing a corporate tax regime for non-extractive natural resource businesses due to the following reasons:
- Diversification of Revenue Sources: The UAE's economy is heavily reliant on oil revenues, which account for a significant portion of the country's GDP. Implementing a corporate tax regime for non-extractive natural resource businesses would provide a new source of revenue for the government, reducing its dependence on oil revenues.
- Alignment with International Tax Standards: Implementing a corporate tax regime for non-extractive natural resource businesses would align the UAE with international tax standards, making it a more attractive destination for foreign investment.
- Encouraging Investment in Non-Oil Sectors: Implementing a corporate tax regime for non-extractive natural resource businesses would also encourage investment in non-oil sectors, such as renewable energy and manufacturing. This would contribute to the UAE's efforts to diversify its economy and create new job opportunities.
Potential Challenges and Opportunities for Businesses
Implementing corporate tax on non-extractive natural resources businesses would present both challenges and opportunities for businesses.
The following are some of the potential challenges that non-extractive natural resource businesses may face:
- Increased costs: Corporate tax would increase the cost of doing business for non-extractive natural resource companies, potentially reducing their profitability.
- Competitiveness: The introduction of corporate tax may make the UAE less competitive compared to other countries that do not impose taxes on non-extractive natural resource businesses.
- Compliance: Non-extractive natural resource businesses would need to comply with new tax regulations, which may require significant investment in systems and processes.
The following are some of the potential opportunities that non-extractive natural resource businesses may have:
- Level playing field: Implementing a corporate tax regime would create a level playing field for all businesses operating in the UAE, regardless of the type of natural resource they rely on.
- Increased investment: The introduction of corporate tax may encourage greater investment in non-oil sectors, such as renewable energy and manufacturing, creating new opportunities for non-extractive natural resource businesses.
- Increased transparency: Corporate tax would increase transparency in the UAE's business environment, making it easier for companies to operate and attract investment.
In conclusion, while the UAE Corporate Tax Law introduced corporate income tax in the country, it provides valuable exemptions for eligible non-extractive natural resource businesses. However, strict conditions apply and ongoing compliance is necessary to retain the tax exemption. Hiring expert corporate tax UAE advisors can help such businesses efficiently navigate the regulatory requirements of Corporate Tax on Non-Extractive Natural Resources to maximize tax savings.
