What is corporation tax (CIT)?
Corporation tax is a form of direct tax levied on the net income or profits of companies and other enterprises arising from their business activities.
Objectives of the Corporate Tax
In introducing the corporate tax, the UAE aims to:
- Strengthen its position as a leading global center for business and investment
- Accelerate its development and transformation to achieve its strategic objectives
- Reaffirm its commitment to international standards of tax transparency and to the elimination of harmful tax practices.
Scope
The Corporate Tax will cover:
- All companies and individuals doing business under a commercial license in the UAE.
- Free Zone Companies (the UAE tax regime will continue to respect the tax incentives currently offered to Free Zone companies that meet all regulatory requirements and do not carry on business in the UAE mainland).
- Foreign legal and natural persons only if they are permanently or regularly trading or doing business in the UAE.
- Banking operations
- Companies engaged in real estate management, construction, development, agency, and brokerage activities.
Exemptions from Corporate Tax
The rules on exemptions from corporate income tax are set out below:-
- Companies engaged in the extraction of natural resources are exempt from corporate income tax as these companies will continue to be subject to the current Emirates-level corporate tax.
- Dividends and capital gains earned by a UAE company on its qualifying shares are exempt from tax.
- Qualifying intra-group transactions and reorganizations will not be subject to Corporate Tax, provided that the necessary conditions are met.
In addition, the Corporate Tax will not apply:
- Salary and other employment income of an individual, whether received from the public or private sector
- Interest and other income derived by a natural person from bank deposits or savings schemes
- Income of a foreign investor derived from dividends, capital gains, interest, royalties, and other investment income
- Investments in immovable property made by individuals in their individual capacity
- Dividends, capital gains, and other income derived by natural persons from the holding of shares or other securities in their personal capacity.
In the UAE, many companies have never had to pay income tax on their earnings. This change was announced by the Ministry of Finance (MoF) about the corporate income tax in the UAE on 31 January 2022. The Corporate Tax Law will apply to financial years beginning on or after 1 June 2023.
The UAE’s new accounting rules are part of efforts to comply with global tax rules to ease the burden on companies and protect small businesses and start-ups. The UAE, one of the world’s largest business hubs, will maintain one of the lowest corporate tax rates in the UAE, but this will diversify the country’s revenues away from hydrocarbons.
The main features of the corporate tax system as announced by the Ministry of Finance are set out below:-
Applicable
Corporate Tax rules will apply to financial years beginning on or after 1 June 2023.
Purpose
The proposed Corporate Tax scheme will apply to all commercial (i.e. commercial, industrial, and professional) activities in the UAE, with the exception of natural resource extraction, which is currently taxed at the Emirati level.
In the context of these developments, it was also announced that the corporate tax incentives offered to free zone companies will be maintained until such time as the free zone company meets all the necessary regulatory standards 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 system.
Companies operating in the free zone area, however, are required to comply with certain corporate tax requirements, such as registering and filing an income tax return.
Corporate tax rates in the UAE
- The Plan provides for three different tax rates:
- 0% rate for taxable income up to AED 375 000 (approximately USD 102 000);
- 9% rate for taxable income above AED 375,000; and
- For companies with global revenues exceeding €750 million (approximately AED 3.15 billion), a sliding scale of tax rates will apply in line with the main objective of the second pillar of the OECD’s Base Erosion and Profit Shifting (BEPS) project, namely to prevent harmful tax competition practices that undermine the integrity of revenues in developing countries.
EXEMPT INCOME
The Ministry of Finance has announced that the following types of income will be exempted from personal income tax:
- Income derived from the extraction of natural resources
- Where a foreign company owns shares in a UAE company, it may be entitled to tax on dividends and capital gains.
- The UAE Corporate Tax Law prohibits both qualifying and non-qualifying intra-group transactions and restructurings, subject to certain conditions.
- Foreign non-resident individuals and entities that do not regularly carry on business in the UAE.
- Dividends, capital gains, interest, royalties, and other investment income of foreign nationals
More characteristics
Foreign tax credits
Foreign corporate tax paid abroad on UAE taxable income will be offset against a portion of the UAE corporate tax payable. Note that although the UAE has entered into over 130 double tax treaties, this is an issue that will only continue to play out properly in the tax system in terms of cross-border trade and ownership linkages both before and after the introduction of the UAE’s Corporate Tax.
Losses
Companies will be able to use losses incurred under the Collective Investment Rules regime (from the date of entry into force of the Corporate Tax regime) to reduce taxable income in future financial periods.
Tax Groups
A company incorporated in the United Arab Emirates (UAE) may decide to form a tax group and be treated as a single company for tax purposes, subject to certain limitations set out in the UAE Corporate Tax legislation. The UAE tax group will be able to file a single tax return for the entire group.
Transfer Pricing
UAE companies must also comply with transfer pricing standards and documentation requirements based on the OECD transfer pricing rules.
The actual legislation on corporate income tax has not yet been published and is still under development. Although the regulations that will come into force may differ from the announcement of the Ministry of Finance, companies operating in the UAE should think about the potential impact of the announced policy and plan for its implementation.
Do not hesitate to contact us at Bestax Chartered Accountants for more information on UAE corporate tax