CORPORATE TAX in UAE

In the UAE, many firms have never had to pay income tax on their earnings. This is set to alter, with the Ministry of Finance (MOF) announcing on 31 January 2022 that CIT will be imposed in the UAE. The CIT law is set to apply for fiscal years commencing on or after June 1, 2023.

The UAE’s new accountancy rules are part of its effort to comply with global tax regulations to ease the burden on corporations and protect small enterprises and startups. The UAE, which is one of the world’s major business centers, will maintain one of the lowest rates of corporate tax in UAE, but it will diversify government revenue away from hydrocarbons.

The following are the major characteristics of the CIT system, as announced by the MOF (subject to possible modifications once the regime is implemented fully):

Applicable

The CIT rules will be in place for revenue levels beginning on or after June 1, 2023.

Purpose

The proposed CIT scheme would apply to all commercial (i.e., commercial, industrial, and professional) activities in the UAE, with the exception of natural resource extraction, which is presently subject to tax at an Emirate level.

Individuals who do not hold a business license or permit to carry out commercial, industrial, or professional activities in the UAE will be covered by the CIT framework. This includes income earned by freelance professionals for work performed under a freelancer’s credentials.

The MOF has stated that the proposed federal CIT system will also apply to UAE banking operations (although foreign bank branches are already subject to a CIT regime at an Emirate level).

In the midst of these developments, it was also announced that corporate tax incentives offered to free zone businesses will continue to be honored up to the point that the free zone business meets all necessary regulatory standards and does not conduct operations in mainland UAE. Many companies presently operating in both mainland UAE and free zones under a dual licensing system may be affected.

Businesses in a tax-free zone are nevertheless required to fulfill certain CIT requirements, such as the need to register and submit a CIT return.

Rates Of Corporate Tax in UAE

Three different tax rates are laid out in the plan:

• 0% rate on taxable income up to AED 375,000 (c. US$ 102,000);
• 9% rate on taxable income above AED 375,000; and
• There will be a sliding scale of tax rates for enterprises with global revenues over 750 million euros (c. AED 3.15 billion) according to the Pillar Two of the OECD Base Erosion and Profit Shifting (BEPS) project’s principal aim, which is to eliminate harmful tax competition practices that erode revenue integrity in developing countries.

EXEMPTED INCOME

The MOF has stated that the following sorts of earnings will be exempt from CIT tax:

• income acquired from the extraction of natural resources
• If a foreign entity owns shares in a UAE company, it may be eligible for taxes on dividends and capital gains
• The UAE CIT Law prohibits both qualifying and non-qualifying intra-group transactions and rearrangements subject to specified conditions
• Non-resident foreign individuals and organizations who do not conduct business in the UAE on a regular basis
• Dividends, capital gains, interest, royalties, and other investment income from foreign nationals

More Characteristics

Foreign Tax credits

The foreign CIT paid on UAE taxable income will be eligible to offset part of the UAE payable CIT. Note that, while the UAE has negotiated over 130 double tax treaties, this is a subject that will just continue to make the tax system work appropriately in terms of cross-border trade and ownership ties both before and after the introduction of UAE CIT.

Losses

Businesses will be able to use losses incurred under the CIR regime (as of the CIT regime’s entry into force) to reduce taxable income for future financial periods.

Tax groups

A company incorporated in the United Arab Emirates (UAE) will be able to decide to form a tax group and be treated as a single entity for tax purposes, subject to certain limitations set forth in the UAE CIT legislation. A UAE tax group will be able to submit a single tax return for the entire group.

Transfer pricing

Businesses in the UAE must also comply with transfer pricing standards and documentation requirements based on the OECD transfer pricing rules.

The actual CIT legislation has not yet been published, and it is still being developed. Although the regulation that will take effect may differ from MOF’s statement, businesses operating in the UAE should think about the potential effects of the declared policy and plan for its implementation.

Do not hesitate to reach out to us at Bestax Chartered Accountants to get more information on the UAE corporate tax.