Introduction of Corporate Tax in the United Arab Emirates
The United Arab Emirates (UAE) Ministry of Finance (MoF) announced on 31 January 2022 that a federal corporate tax regime is being introduced for the first time in the UAE. A federal corporate tax law is expected to be issued soon along with executive regulations (CT Law).
In the past few years, UAE has introduced many taxes related regulations/reforms in the country, enactment of VAT and Excise Tax laws in 2018, issued economic substance regulations in April 2019, the implementation of the Common Reporting Standards and also country-by-country reports in January 2019. In line with the above tax reforms, UAE has introduced corporate tax which is a form of direct tax levied on the net income or profit of corporations and other entities from their business. Some of the GCC countries i.e., Saudi Arabia, Qatar, Oman, Kuwait have already imposed corporate tax in their countries. UAE being a signatory to Organization for Economic Cooperation and Development (OECD) has introduced CT Law in order to meet the international tax standards in the global community.
The following information is based on currently available guidance from the MoF and the Federal Tax Authority [FTA], and remains subject to the provisions of the CT Law and its executive regulations once issued.
Scope of Corporate Tax in UAE
The UAE being a federation of the seven emirates that constitute it, and the corporate tax being a federal tax will apply to all businesses and commercial activities undertaken by legal entities or individuals across the seven emirates. Free zone or financial free zones businesses are also subject to CT Law. However, the UAE CT regime will continue to honor the CT incentives for the duration set out under the legal framework of the relevant free zone authority provided that such businesses licensed in the free zones do not conduct business activities in the UAE’s mainland.
The corporate tax will not apply to businesses involved in the extraction of natural resources, an individual’s earnings, salary and other employment income, interest and other income earned by an individual from bank deposits or saving schemes, and other investment returns investment in real estate by individuals in their personal capacity. Dividends, capital gains and other income earned by individuals from owning shares or other securities in their personal capacity are also not subject to CT Law. However, if the individual is required to obtain a commercial license or permit to carry out any such activity in the UAE, he/she could be subject to the CT regime. Income earned from activities carried out under a freelance license/permit could attract corporate tax in case the annual net income of the freelance professional exceeds AED 375,000.
Exemptions set under CT Law
- Dividends and capital gains earned from “qualifying shareholdings” by a UAE business.
- Qualifying intra-group transactions and reorganizations and qualifying shareholding in foreign provided certain conditions and requirements are met under the CT Law.
- 0% for taxable income up to AED 375,000
- 9% for taxable income above AED 375,000 and
- a different tax rate for “large” multinationals that meet specific criteria in the context of the global minimum effective tax rate set with reference to ‘Pillar two’ of the OECD Base Erosion and Profit Shifting Project. Such criteria in so far as “large” multinational corporations are concerned currently refers to those that has consolidated global revenues in excess of EUR 750millon (c. AED 3.15 billion)
If a business has earned taxable income of AED 500,000 in a given financial year, the CT liability is likely to be assessed, unless otherwise provided in the CT Law, as follows:
Taxable income of AED 0 – AED 375,000 at 0% = AED 0
Portion of taxable income exceeding AED 375,000 (i.e. AED 500,000 – AED 375,000 = AED 125,000) at 9% = AED 11,250
UAE CT liability of the business for the year will be AED 0 + AED 11,250 = AED 11,250
Other key guide lines:
- Effective financial year: CT Law will apply from the financial year 1st June 2023.
- Tax credit: Foreign CT paid on UAE taxable income will be allowed as a tax credit against the UAE CT liability.
- Tax Compliance: All the business entities need to register under CT. Further, CT return will need to be filed at the end of each financial year electronically within the timeline and in the manner that will be provided for in the CT Law.
- UAE withholding tax (tax collected at source) will not be applicable on domestic and cross-border payments of any nature to the extent as may be provided for under the UAE CT regime.
- Carry forward of losses: business losses incurred are allowed to offset (as from the UAE CT effective date) in subsequent financial periods.
- Grouping of entities: A UAE group of companies can elect to form a tax group and be treated as a single taxable person, provided certain conditions are met.
- Transfer Pricing: UAE businesses will need to comply with Transfer Pricing rules and documentation requirements set with reference to the OECD Transfer Pricing guidelines.
The CT Law/regime will be administered by the Federal Tax Authority [FTA] that presently administers the other tax regimes such as VAT and Excise, and non-compliance of the provisions of CT Law/regime could attract fines/penalties as may be provided for in the CT legislation, subject to statutory remedies available to the taxable persons.
The aim/reason for introduction of the corporate taxation laws is majorly to meet with the international tax standard and to maintain transparency in the tax regulations, thereby to cope up with the international markets, attracting more multinationals into UAE. UAE predicts that to uphold its place as a business hub in future, international regulations and transparency need to be achieved, in way to that UAE has signed bilateral treaties and enforces new tax regimes. Furthermore, UAE’s aim is to diversify its revenue that the Middle East and North Africa (MENA) region has been generating over the years from their traditional source of fossil fuel alone. UAE could still attract multinationals and maintain its soil as business hub among the nations, given the lowest corporate tax rate that is being implemented. UAE being a tax friendly jurisdiction for many foreign investments can still continue to be the same pursuant to the introduction of corporate taxation.