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.
In introducing the corporate tax, the UAE aims to:
The Corporate Tax will cover:
The rules on exemptions from corporate income tax are set out below:-
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:-
Corporate Tax rules will apply to financial years beginning on or after 1 June 2023.
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.
The Ministry of Finance has announced that the following types of income will be exempted from personal income tax:
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.
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.
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.
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