Corporate Tax Implementation in UAE
Many companies in the UAE have historically had zero income tax on profits. However, this is about to change as the Ministry of Finance (MoF) announced on 31 January 2022 that a federal corporate income tax (CIT) will be introduced in the UAE. The UAE Corporate Tax Implementation regime is expected to apply to fiscal years beginning on or after 1 June 2023.
The move is justified by the UAE’s desire to comply with international tax standards, following similar measures in neighboring Gulf countries, while reducing the compliance burden for UAE companies and protecting small businesses and start-ups. The UAE, where the main business hub of Dubai is located, will continue to have one of the lowest corporate tax rates in the world, but this move will allow the country to diversify its income from hydrocarbons.
Younis Haji Al Khoori, Deputy Minister of the Ministry of Finance, said that “the certainty of a competitive and best-in-class corporate tax regime, combined with the UAE’s extensive network of double tax treaties, will strengthen the UAE’s position as a leading global business and investment hub”.
The Ministry of Finance has announced the following key features of the proposed corporate tax regime
DATE OF ENTRY INTO FORCE
The CIT regime is expected to apply to financial years beginning on or after 1 June 2023.
The proposed tax regime is expected to apply to all business (i.e. commercial, industrial, and professional) activities in the UAE, with the exception of natural resource extraction, which is already (and will continue to be) taxed at the Emirati level.
The taxation regime will also apply to natural persons to the extent that they hold (or are legally required to hold) a business license or permit to carry on commercial, industrial, and/or professional activities in the UAE. It also applies to income earned by freelancers in respect of activities carried out under a freelance license or permit.
The Ministry of Finance has announced that the proposed federal tax regime will also apply to banking operations in the UAE (although foreign bank branches are already taxed at the Emirati level).
It was also announced that the corporate tax incentives currently offered to free zone companies will be maintained, as long as the free zone company meets all applicable regulatory requirements and does not carry on business in the UAE mainland. This may affect many companies currently operating in both the UAE mainland and the free zones under the dual licensing scheme.
However, free zone companies will still have to comply with certain obligations under the UBI regime, including the requirement to register and file a UBI return.
Further details on the exemptions and exceptions to the corporate tax will be provided by the Ministry of Finance in due course.
Three different corporate tax rates are proposed:
0% rate on taxable income up to AED 375,000 (approximately USD 102,000);
9% for taxable income above AED 375 000; and
A different rate (yet to be announced) for large multinational companies with consolidated global revenues exceeding €750 million (approximately AED 3.15 billion), under the second pillar of the OECD’s Base Erosion and Profit Shifting (BEPS) project.
INCOME EXEMPT FROM EXCL.
The Ministry of Finance has announced that the following types of income will be exempted from the CIT regime:
- Income derived from the extraction of natural resources
- Dividends and capital gains derived by a UAE company from its qualifying shareholdings.
- Qualified intra-group transactions and reorganizations are subject to certain conditions to be specified in the UAE Law on CIT.
- Foreign legal and natural persons not carrying on a permanent or regular trade or business in the UAE.
- Income from dividends, capital gains, interest, royalties, and other investment income of foreign investors.
Foreign tax credits. Foreign tax paid on UAE taxable income will be allowed as a credit against UAE tax payable. In this context, it should be noted that the UAE has entered into more than 130 double tax treaties which will further facilitate the proper functioning of the tax system in relation to cross-border trade and ownership, both before and after the introduction of the UAE CIT.
Losses. The CIR regime will allow companies to use losses incurred to reduce taxable income in future financial periods.
Tax brackets. Groups of UAE companies will be able to elect to form a tax group and be treated as a single company for tax purposes, subject to certain conditions to be specified in the UAE CIT Law. A UAE tax group will be able to file a single tax return for the entire group.
Transfer Pricing. UAE companies will also have to comply with transfer pricing rules and documentation requirements based on the OECD Transfer Pricing Guidelines.
The relevant corporate income tax legislation is still under development and has not yet been published. Although the regime that will ultimately come into force may differ from the announcement by the Ministry of Finance, companies operating in the UAE should consider the potential impact of the announced regime and prepare for the forthcoming changes in the legislation.
Please do not hesitate to contact us if you require advice or guidance on the potential impact of the cash tax on your organization and operations in the UAE. Our corporate team is ready to provide any support required in relation to potential restructuring, pre-transaction preparation, and valuation considerations, as well as negotiating a robust tax exemption and agreement in the UAE transaction documents once the CIT legislation comes into full effect.