The United Arab Emirates plans to implement a federal corporate tax starting in June 2023.
Corporate Tax Rates:
- A 9% corporate tax rate applies to taxable income surpassing AED 3,750,000.
- A 0% tax rate is imposed on taxable income up to AED 375,000 to bolster small and medium-sized enterprises.
Application to free zones and financial free zones.
- Businesses operating in Free Zones (including financial free zones) in the UAE will now be liable for Corporate Tax. Yet, it has been specified that the Corporate Tax system will still uphold the current corporate tax benefits extended to Free Zone businesses that adhere to all regulatory standards and refrain from conducting operations in mainland UAE.
- Companies established in a Free Zone must register and submit a Corporate Tax Return.
APPLICABILITY TO FOREIGN PERSONS
- Foreign companies and individuals will be liable for Corporate Tax solely if they engage in consistent trade or business activities within the UAE.
- Additionally, Corporate Tax typically will not apply to a foreign investor’s earnings from dividends, capital gains, interest, royalties, and other investment profits.
EXEMPT INCOME
The below types of income will be exempt from Corporate Income Tax (CIT):
- Capital gains.
- Dividends received by UAE businesses from eligible shareholdings. An eligible shareholding pertains to an ownership stake in a UAE or foreign company that fulfills specific requirements outlined in the UAE CIT legislation.
- Qualifying intragroup transactions and restructurings.
- Revenue generated from natural resource extraction (pertinent to the oil and gas sector), which will continue to be subject to corporate taxation at the Emirate level.
- Businesses involved in real estate management, construction, development, agency, and brokerage operations will fall under the UAE CIT scope.
TRANSFER PRICING RULES APPLICATION
Transfer pricing regulations and document stipulations will be harmonized with the OECD Transfer Pricing Guidelines, encompassing the Master File and Local File. Documentation will mandate corporate groups to conduct benchmarking analyses to validate their pricing strategies for intra-group transactions. We anticipate additional information or clarifications concerning potential exceptions for qualified intra-group transactions and additional regulatory mandates that might be implemented.
RELEVANT AUTHORITY?
The Federal Tax Authority will oversee the management, collection, and enforcement of UAE Corporate Tax.
The Ministry of Finance will continue to act as the ‘competent authority’ for bilateral/multilateral agreements and global information exchange for taxation objectives.
Requirements and Responsibilities Regarding Corporate Tax
- Companies subject to UAE Corporate Income Tax (CIT) must electronically submit a CIT return for every financial period, typically a year.
- Enterprises situated in free zones need to register and file a CIT return.
- Non-adherence to the CIT regulations may result in penalties for businesses.
OTHER KEY FEATURES:
- Withholding taxes will not apply to domestic or international payments.
- Companies engaged in the extraction of natural resources, such as oil and gas production, will be exempt from Corporate Tax as they are already subject to taxation at the emirate level.
- Payments made for foreign taxes can be offset against any UAE Corporate Tax liabilities to prevent double taxation. The tax rules also include provisions for generous loss utilization and permit UAE groups to file taxes as a single entity or benefit from group relief for losses, intra-group transactions, and restructurings.
- Taxable income will be determined based on a business’s accounting net profit, adjusted for specific items outlined in the UAE Corporate Tax law. The accounting net profit is the figure reported in financial statements prepared in compliance with internationally recognized accounting standards.
- The Corporate Tax will be applicable for financial years commencing on or after June 1, 2023.
Businesses will have adequate time to prepare for the implementation of Corporate Tax, with detailed information on the UAE Corporate Tax system expected to be released in mid-2022 to facilitate readiness and full compliance.
(Note: The legislation is pending issuance, and specifics of the corporate tax regulations are subject to finalization).
IMPORTANT NOTICE:
The details presented on this page serve as an introductory overview of the anticipated UAE Corporate Tax (CT) system in anticipation of the forthcoming legislation. It does not aim to cover every facet of the UAE CT regime comprehensively or offer definitive solutions. Therefore, it should not form the sole basis for individual or business decision-making as it does not reflect the final legislation. Please note that this document is subject to modifications without prior notice. More information on the technical aspects and additional particulars of the UAE CT system will be released in the near future.
