On January 31, 2022 the Ministry of Finance of the United Arab Emirates (UAE) announced the introduction of a federal Corporate Tax (“CT”) on business profits, effective from the beginning of the financial year on June 1, 2023.
The UAE CT regime will be based on international best practices, with a low / minimal compliance burden on businesses.
What is Corporate Tax?
Corporate Tax is a form of direct tax levied on the net income or profit of corporations and other businesses.
Corporate Tax is sometimes also referred to as “Corporate Income Tax” or “Business Profits Tax” in other jurisdictions.
Background
The UAE currently does not have a federal CT regime. CT is determined at an Emirate level through tax decrees. Currently, at an Emirate level, the UAE only levies corporate tax on oil and gas companies and branches of foreign banks. Furthermore, the UAE benefits from the presence of more than 40 free zones, which have their own rules and regulations. Such zones generally afford companies incorporated therein significant tax benefits, making the UAE an attractive jurisdiction from a tax perspective. Additionally, the UAE does not levy income tax on employment-based income.
Objectives of the UAE Corporate Tax
- Enhancing the nation’s standing as a major hub for trade and investment
- To accelerate the UAE’s growth and change in order to achieve its strategic goals
- Addressing standards for global tax transparency
- Preventing the system from being corrupted by unfair tax practices and to reduce reliance on oil
Key Features of the Corporate Tax Regime
Taxable Persons
Under the UAE CT regime, there is a suggested treatment for various types of persons. The 3 types of persons are:
- Natural persons
- Legal persons
- Exempt persons
1. Natural persons
There won’t be a parallel tax imposed on the income of natural persons, or individuals, under the UAE CT regime.
- Natural persons conducting business or engaging in commercial activity in the UAE will likewise be subject to UAE CT. This covers sole proprietorships, solitary establishments, and individual partners in an unincorporated partnership. Other countries use comparable strategies without imposing parallel taxes on personal income from a firm.
- In general, whether a person has a commercial license or an equivalent permit from the relevant competent authority in the UAE determines whether they are engaging in a business that is subject to UAE CT.
- The government of the United Arab Emirates (UAE) has declared that the proposed tax regime will not apply to personal income received by UAE citizens or foreigners. Employment income, dividends, and rental income from UAE real estate investments will likewise be excluded from the proposed UAE CT’s application.
2. Legal Persons
- UAE companies and other legal persons incorporated in the UAE will be treated as UAE-incorporated entities.
- Legal persons include Limited Liability Companies, Private Shareholding Companies, Public Joint Stock Companies, and other entities established under the laws of the UAE that have separate legal personalities.
- In order to apply UAE CT, legal entities that are effectively managed and controlled in the UAE will be treated as if they were UAE-incorporated firms.
- Limited and general partnerships and other unincorporated joint ventures and associations of persons will be treated as ‘transparent’ for UAE CT purposes. This means they will not be taxpayers in their own right, but their income will instead ‘flow through’ and be taxed in the hands of partners or members.
- Tax treatment of unincorporated partnerships in a cross-border context can create difficulties and unintended tax consequences, according to the United Arab Emirates (UAE) Tax Office (UTA) has outlined its plans to improve the tax treatment of partnerships between the UAE and foreign jurisdictions.
3. Exempt Persons
The following set of people will be exempt from UAE CT automatically or upon application;
- The Federal and Emirate Governments, as well as its agencies, commissions, and other public institutions
- UAE enterprises that are fully owned by the government and that are listed in a cabinet decision and perform a required or sovereign activity
- Companies that harvest and use natural resources in the UAE are taxed at the Emirate level
- Charities and other public benefit organizations that are included in a Cabinet Decision
- Public and regulated private social security and retirement pension funds
- Investment funds, provided they meet the requirements outlined in section
Applicable Rates
The planned company tax rates are as follows:
- Taxable income up to AED375,000 (about $102,095) is subject to a 0% tax rate.
- Over AED375,000 ($102,095) in taxable income is subject to a 9 percent tax rate.
- All multinational companies covered by OECD Base Erosion and Profit-Sharing rules that fall under Pillar 2 of the BEPS 2.0 framework, i.e., have combined worldwide revenues over AED 3.15 billion, will be eligible for a range of rates.
Groups
A UAE resident group of companies will be able to elect to form a tax group, capable of being treated as a single taxable person (or a fiscal unity) 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 the subsidiaries can be an exempt person or a free zone entity benefitting from the 0% CT rate, and all group members must use the same financial year. For other groups of companies which do not meet the 95% threshold, the CT regime will allow the transfer of losses between group companies, provided that they are at least 75% commonly owned.
Corporate Income Tax’s Scope (CIT)
All businesses and economic activity within the emirates is subject to the United Arab Emirates’ federal tax system. Let’s examine the below-listed corporation taxation scope.
The planned CIT regime is intended to apply to all commercial, industrial, and professional businesses in the UAE, aside from the extraction of natural resources, which is currently subject to Emirate-level taxes up to 55%, and the branches of foreign banks, to whom 20% tax is applicable.
Companies registered in free zones are required to adhere to all legal requirements and refrain from conducting business with the UAE mainland.
All UAE enterprises will be subject to corporation tax, with the exception of those engaged in the extraction of natural resources like oil and gas and overseas bank branches.
A legal entity’s actions are all regarded as “business activities” and fall under the corporate tax structure.
CIT is not applied to these forms of income:
- Earnings from Foreign Bank Branches
- Profits from intra-group trades and group reorganizations
- Earnings from dividends, capital gains, interest, royalties, and other investments by foreign investors.
- Exploiting natural resources generates income
- Non-constant or infrequently conducting business in the UAE are foreign companies and individuals.
- According to DIFC and ADGM legislation, a company that is incorporated in one of these jurisdictions is subject to a zero tax rate for a period of 50 years after the statute in question becomes effective.
Effect on the UAE Free Zones
According to the rules of each Free Zone, the UAE intends to uphold its commitment to enterprises registered in Free Zones that do not conduct business with the mainland and that will benefit from corporate tax incentives. For every free zone, a yearly CIT return must be filed.
With a portion of their revenue coming from onshore sales of goods or services, it is not uncommon for businesses to operate out of a free zone. Future implementation of excessive administrative requirements to contribute to onshore-generated revenues is likely. It’s feasible that companies with headquarters in free zones might think about establishing a presence onshore as a result of the relaxation of restrictions on foreign ownership and the expansion of real estate possibilities.
The effect of corporate tax on enterprises in the UAE
The tax and compliance costs of the majority of UAE firms are anticipated to significantly change with the implementation of corporation tax in the UAE. Entities must be in compliance with the new tax regime, which necessitates correct tax impact analysis and adjustments to the corporate structure, operational model(s), finance/tax operations, reporting systems, legal agreements, and transfers pricing policies, if necessary.
Conclusion
One of the lowest corporation tax rates in the world will continue to be in the United Arab Emirates. This plan is a result of the UAE’s desire to adhere to international tax regulations, which are consistent with initiatives made by other Gulf countries. It also aims to lighten regulatory burdens on UAE companies while safeguarding start-ups and small businesses.
With the introduction of corporation tax in the UAE, the tax and compliance needs of the vast majority of UAE companies are expected to fundamentally change. Because corporate tax is new to the UAE, firms will need the help of a consultancy with a knowledgeable tax staff. The appropriate assistance will be provided, and our knowledgeable tax staff will address your business tax-related queries.
At TaxHelp, we offer corporate tax advisory services for companies starting out on this new path.
We would be happy to help clients consider and review their current corporate structures to assess the impact of the proposed UAE CT rules, and also discuss any opportunities resulting therefrom. To get in touch with us, please fill out the contact form and one of our tax specialists will get in touch with you as soon as possible.