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On 31st January 2022, the UAE Ministry of Finance (MoF) made an announcement stating that the federal Corporate Tax (CT) in the UAE shall be effective for the financial years beginning on or after June 1, 2023. It is anticipated that the UAE Corporate Tax law will follow the best international taxation practices and is expected to have a low compliance implication for businesses.
The decision of introducing the Corporate Tax by the UAE is a step taken in response to the shift in the global tax outlook, especially in relation to the Pillar One and Pillar Two reforms that the Organization for Economic Co-operation and Development (OECD) is seeking to introduce under the Base Erosion and Profit Shifting project (BEPS). The Ministry of Finance has been guided by a set of internationally accepted principles to ensure efficiency, fairness, transparency, and predictability in the design and execution of the proposed UAE CT regime.
With the introduction of CT, the UAE government aims to accomplish the following:
The UAE Corporate Tax applies to the following persons:
Natural Persons: Natural persons include those who are engaged in the business or commercial activity by obtaining a commercial license or permit, unincorporated partnerships, and sole establishments or proprietorships.
Legal Persons: Legal persons include UAE companies & other legal entities that are incorporated in the UAE, foreign legal entities that have a permanent establishment in the UAE or are effectively managed and controlled in the UAE, foreign legal entities that have UAE-sourced income, limited liability companies, private shareholding companies, and public joint-stock companies limited liability. It will apply to all UAE businesses and commercial activities alike, except for the extraction of natural resources, which will remain subject to Emirate-level corporate taxation.
Free zones: Free zone companies will be subject to corporate tax at 0% on the income generated from transactions with businesses located outside of UAE or with companies located in other free zones. The branch of the free zone company located on the mainland will be subject to tax at regular CT rates. Any passive income generated by Freezone companies from Mainland will be eligible for an exemption like royalties, dividend income, etc.
Exempt Persons: Exempt persons include Federal and Emirate governments and other public institutions that conduct non-commercial activities, wholly Government-owned UAE entities that carry out a sovereign or mandated activity to the extent of the income generated from this activity only, entities engaged in the activity of extraction and exploitation of natural resources, charities and other public benefit organizations, retirement & social security pension funds and investment funds that meet certain criteria which have been prescribed in the Public Consultation Document (PCD).
1. The UAE CT regime proposes to use the accounting net profit (or loss) as stated in the financial statements of a business as the starting point for determining their taxable income.
2. For the business which does not have a financial accounting period, then the default tax period will be the Gregorian calendar year.
3. The UAE CT will have specific rules to determine whether an unrealized gain or loss should be taken into account when calculating taxable income.
1. UAE corporate shareholders will generally be exempt from CT on dividends received, and capital gains earned from the sale of shares of a subsidiary company.
2. Domestic dividends earned from UAE companies, including the Free Zone companies will be exempt.
3. UAE companies can either (i) claim a foreign tax credit for taxes paid in the foreign branch country, or (ii) elect to claim an exemption for their foreign branch profits.
1. The UAE CT regime will disallow or restrict the deduction of certain specific expenses to ensure that only the expenditure which are incurred for generating the taxable income can be claimed as deduction.
2. Interest or any other form of financing costs will be restricted to a maximum of 30% of the adjusted EBITDA.
3. Entertainment expenses will be allowed to a maximum of 50% of the actual expense incurred.
4. No deduction will be allowed for penalties, recoverable VAT and donations paid to charitable organizations which is not approved.
1. The businesses will be able to offset loss incurred in one period against the taxable income of future periods, up to a maximum of 75% of the taxable income in each of those future periods.
2. Tax losses can be carried forward indefinitely provided the same shareholder(s) hold at least 50% of the share capital from the start of the period or a loss is incurred to the end of the period in which a loss is offset against taxable income or the new owners should be carrying on the same or similar business.
Small Business Relief is intended to support start-ups and other small or micro business by reducing their CT burden and compliance cost.
1. Any UAE resident juridical person or individual.
2. The revenues (i.e. gross income before deduction) of the taxable person for the relevant tax period and previous tax period below the threshold AED 3 million.
3. This revenue threshold will apply to tax periods starting on or after 1st June 2023 and only will continue to apply to subsequent tax period that ends before or on 31-12-2026.
4. Small Business Relief will not be available to Qualifying Free Zone persons MNE groups.
1. A UAE resident group of companies can elect to form a tax group and be treated as a single taxable person if the parent company holds at least 95% of the share capital and voting rights of its subsidiaries. To form a tax group neither the parent company nor any of its subsidiaries be an exempt person or a free zone person that benefits from the 0% CT rate and all the group members must follow the same financial year.
2. The UAE CT regime will allow full consolidation for tax purposes for a wholly-owned group of companies, and the transfer of losses between group companies that are 75% or more commonly owned.
1. Transfer pricing rules seek to ensure that transactions between related parties are carried out on arm’s length terms (i.e., as if the transaction was carried out between independent parties).
2. Payments or benefits to ‘Connected Persons’ (which includes the related parties) will be deductible only if the business can demonstrate that the payment of benefits corresponds with the market value of the service provided and is incurred wholly and exclusively for the taxpayer’s business.
1. Withholding tax is a tax collected at the source by the payer on behalf of the recipient of the income. Withholding taxes exist in many tax systems and are typically used in respect of dividends, interest, royalties, and similar payments.
2. Withholding tax of 0% will be applicable on the domestic and cross-border payments made by UAE businesses.
1. The UAE corporate tax will be levied on the annual taxable income of businesses in the following manner:
2. 0%, for taxable income not exceeding AED 375,000, and,
3. 9% for taxable income exceeding AED 375,000
4. A different tax rate will be used for large multinationals that meet specific criteria set concerning ‘Pillar Two’ of the OECD Base Erosion and Profit Shifting project.
5. The UAE corporate tax rate is lower than most other countries in the Middle East and is therefore considered as one of the most competitive rates in the whole of the Middle East.
1. A business subject to CT will need to register with the FTA and obtain a Tax Registration Number within the prescribed period.
2. The Tax return and the CT payment must be made within nine (9) months from the end of the relevant Tax Period.
Having a team of highly qualified Accountants and Tax professionals, we can help businesses prepare themselves for implementing the CT regime by providing tax assessment, advisory, and other tax-related services effectively.
If you are looking for Corporate Tax professionals in the UAE to understand how you should prepare your business for the upcoming Federal Corporate Tax law, please get in touch with us today.
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