CORPORATE TAX IN THE UAE
On 31 January 2022, the tax landscape of the region shifted yet again with the United Arab Emirates (UAE), Ministry of Finance (MoF) making the breakthrough announcement that a new federal corporate tax (CT) system will be implemented in the UAE, effective financial years commencing on or after 1 June 2023. Barring Bahrain, the UAE has introduced the lowest corporate income tax rate within the GCC region at a standard rate of 9%. The UAE CT regime has been designed to incorporate best practices globally and minimize the compliance burden on businesses.
- Effective Date
Any company that adopts a fiscal year starting on 1 June 2023 and ending 31 May 2024 will be subject to CT starting 1 June 2023. The first tax return filing is likely to be due towards the end of 2024. Any company that adopts a calendar year starting 1 January 2023 and ending 31 December 2023 will be subject to CT starting 1 January 2024 and filing is likely to be due towards mid-2025.
The announced UAE CT regime introduces a tier system with 3 rates:
• All annual taxable profits that fall under AED 375,000 shall be subject to zero rate.
• All annual taxable profits above AED 375,000 shall be subject to 9% rate.
• ALL MNEs that fall under the scope of Pillar 2 of the BEPS 2.0 framework (i.e. consolidated global revenues in excess of AED 3.15 billion) shall be subject to different rates as per OECD Base Erosion and Profit-Sharing rules.
Taxable profits are the accounting profits subject to certain adjustments.
- Free Trade Zones
The UAE intends to honor its commitment to businesses registered in Free Trade Zones to the extent that such businesses do not conduct business with mainland shall be subject to zero percent tax (or be exempt as the case may be) until the end of the holiday period. All free zones have to file an annual CT return. Businesses with presence in both Mainland UAE and Free Trade Zones as well as those operating under the dual license scheme should consider the impact on their operating model.
- Scope of Corporate Tax
The UAE has introduced a federal tax system that is applicable to all businesses and commercial activities operating within the seven emirates. However, there are certain exceptions:
• Businesses operating in the extraction of natural resources. These will continue to be subject to the tax decrees issued by the respective Emirate.
• Individuals earning income in their personal capacity (i.e. salary, investment income) as long as the income generating activity does not require a commercial license
• Businesses registered in Free Trade Zones, provided they comply with all the regulatory requirements, and that do not conduct business with Mainland UAE.
It is interesting to note that the foreign Banking sector, which has been operating under the Emirate level Bank tax decree will now be subject to the UAE Federal Tax Law. The impact of CT on the Emirate level banking tax decree will be communicated in due course. This will be a significant shift for both branches of foreign Banks, that will need to switch to the new Law and for local banks who similar to other businesses will now be subject to corporate tax
- Exempt Income
The following income shall be in general exempt from income Tax:
• Dividend income earned by UAE company from its qualifying shareholdings (to be defined in the law)
• Capital gains
• Profits from group reorganization
• Profits from Intra-group transactions
There will be no UAE withholding tax on domestic and cross-border payments. Considering the exempt income scheme it can be anticipated that the Law shall include a participation exemption or similar principles commonly seen in international markets and businesses would need to evaluate if they will be able to meet the prescribed conditions (if any) to avail the exempt income scheme.
Accumulated taxable losses shall be allowed to offset future taxable profits.