UAE CORPORATE TAX: The Basics

The UAE Ministry of Finance has recently announced that they will introduce new federal corporate tax regulation on business profits. Click here to read the full text of the announcement.

Corporate Tax (also referred as “Corporate Income Tax” or “Business Profits Tax”, hereinafter CT) is a form of direct tax levied on the net income or profit of corporations and other businesses.

Until now, UAE’s corporate taxes only applied to banks and insurance companies, taxed at 20 per cent. Individual emirates have also imposed a limited corporate tax on enterprises engaged in exploration and production of oil and gas at rates up to 55 per cent.

What are the objectives of this new law?

• A competitive CT regulation will cement the UAE´s position as a global-leading hub for business and investment
• Meeting international standards for tax transparency and preventing harmful tax practices. Most countries in the world have a comprehensive CT regime, including most of the GCC Member States. Only Bahrain rests behind in the Gulf region and rumors say that it will follow soon.
• Accelerating the UAE´S development and transformation to achieve its strategic objectives.

Where and When?

 The UAE CT is a Federal tax and will apply across all the Emirates.

This new regulation will be effective for financial years starting on or after 1 June 2023.

This means that a business that has a financial year starting on 1 July 2023 and ending on 30 June 2024 will become subject to UAE CT from 1 July 2023 (which is the beginning of the first financial year that starts on or after 1 June 2023). On the other hand, a business that has a (calendar year) financial year starting on 1 January 2023 and ending on 31 December 2023 will become subject to UAE CT from 1 January 2024 (which is the beginning of the first financial year that starts on or after 1 June 2023).

How Much? What are the UAE Corporate Tax  rates?

The new Tax rates include:

• The country’s statutory tax rate will be 9% for taxable income exceeding 375,000 UAE dirhams (USD 102,000).
•  0% Tax rate will be applied for taxable income up to AED 375,000 (or USD 102,000), to support small business and startups

• A different tax rate for large multinationals corporations that meet specific criteria set with reference to ‘Pillar Two’ of the OECD Base Erosion and Profit Shifting project.

–  A “multinational corporation” is a corporation that operates in its home country, as well as in other countries through a foreign subsidiary, branch or other form of presence / registration. Merely earning income from outside its home country without a foreign presence or registration would not make a business a multinational corporation

– “Large multinationals” refers to a multinational corporation that has consolidated global revenues in excess of EUR 750m (c. AED 3.15 bn)

How will the UAE Corporate Tax be calculated?

If a business has earned taxable income of AED 400,000 in a given financial year, what will be the UAE CT amount payable?

The CT liability will be calculated 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 400,000 – AED 375,000 = AED 25,000) at 9% = AED 2,250

The UAE CT liability for the year will be AED 0 + AED 2,250 = AED 2,250

**Evidently subject to future announced deductions**

The final amount of UAE CT payable will be further reduced by any foreign taxes incurred on the relevant income (see below under ‘Tax Credits’ section)

Who will be subject to UAE Corporate Tax?

• UAE CT will apply to all UAE businesses and commercial activities alike, except for the oil and gas sector meaning the extraction of natural resources, which will remain subject to Emirate level corporate taxation. Other professional activities such as banking, real estate, construction, and brokerage activities will be subject to UAE CT.
• UAE CT will generally apply to income earned from activities carried out under a freelance license, albeit no CT will be payable unless the annual net income of the freelance professional exceeds AED 375,000.
• The tax will not be applied on foreign investors who do not carry on business in the UAE in a regular manner.
• Free zone businesses will be subject to UAE CT, but the UAE CT regime will continue to honor the CT incentives currently being offered to free zone businesses that comply with all regulatory requirements and that do not conduct business with mainland UAE. The Free zone businesses that meet all necessary requirements can continue to benefit from corporate tax incentives. The UAE has established several free trade zones which offer benefits including: (renewable) 15-50 year tax holidays.

What about exemptions

• In relation to individuals, they will still not be subject to corporate tax on income from employment, investment in real estate by individuals in their personal capacity provided that the individual is not required to obtain a commercial license or permit to carry out such activity in the UAE, investment in shares nor other personal income not related to a UAE trade or businesses.
• In relation to corporations, the Dividends and capital gains earned by a UAE business from its qualifying shareholdings will be exempt from UAE CT.
• In the same way, no corporate tax will apply on qualifying intragroup transactions and restructurings.

Would you be able to apply corporate loss carry-forward regimes?

• The UAE CT regime will allow a business to use losses incurred (as from the UAE CT effective date) to offset taxable income in subsequent financial periods.
• A loss for CT purposes (tax loss) would arise when the total deductions the businesses can claim are greater than the total income for the relevant financial period.
• Excess tax losses may be carried forward and used against taxable income in future years, provided certain conditions are met.
• Tax losses from one group company may be used to offset taxable income of another group company, provided certain conditions are met.

Which announced factors might be considered for Tax planning when considering UAE Corporate Tax?

• Corporate tax will apply on the adjusted accounting net profit of the business.
• No corporate tax will apply on capital gains and dividends received by a UAE business from its qualifying shareholdings
• No withholding tax will apply on domestic and cross border payments.
• Foreign CT paid on UAE taxable income will be allowed as a tax credit against the UAE CT liability.
• 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. A UAE tax group will only be required to file a single tax return for the entire group

Businesses will have ample time to prepare for the introduction of Corporate Tax. It shall be taken into consideration that similar to other taxes in the UAE (e.g. VAT), businesses will be subject to penalties for non-compliance with the CT regime. Accordingly, in order to avoid and prepare a proper tax planning for your company, legal advice might be necessary to implement the new measures. You can feel free to contact our law firm so we can provide you the best legal assistance for tax corporation inquiries and preparatory opinions.

You may expect a deep review of the upcoming law and regulations as soon as these are out. Please do subscribe to our newsletter to get to the update as soon as it is out.

If you are interested to know more about how to set up a company in the UAE you cannot miss our Managing Partner’s YouTube video on “Company Set up in UAE” by clicking here or reading one of our recent posts here. 

Why not so bad?

In evaluating whether or not the UAE will continue to be a suitable jurisdiction to consider we can’t stress enough the expected flexibility of the new upcoming tax legislation, the exclusion of free zones, a reasonable warm up period and the fact that a 9% stays far beyond the global 23.6% corporate tax average.

 

*The information in this page does not intend to be legal advice. This article is meant to provide an initial introduction to the proposed UAE Corporate Tax (CT) regime in advance of relevant legislation being finalized and promulgated according to the guidance provided by the UAE Ministry of Finance.