Introduction of Corporate Tax in the UAE

On January 31st, 2022, the Ministry of Finance of the UAE announced the introduction of Corporate tax (“CT”). Corporate tax is a form of direct tax levied on net profits of corporations and other businesses. Corporate tax is also referred to as “Corporate Income tax” or “Business Profits tax” in some countries.

Background

Historically, the UAE has not imposed taxes on the profits of corporations except in industries such as oil and gas and foreign banks. The UAE first introduced a VAT @5% in 2018, it is an indirect tax levy levied on goods and services, with a few exemptions. With reducing potential from fossil fuels, and a fast-growing economy, it was a good opportunity for the government to tax revenues on businesses to accelerate the development and transformation to achieve the strategic growth objectives. Another reason to introduce corporate tax is to bring the nation in line with international norms, and to tackle to tax avoidance. It will also help disincentives foreign businesses from trying to use the country as a base to avoid tax in their home countries.

When will the UAE CT regime become effective?

The UAE CT regime will become effective for financial years starting on or after 1 June 2023

Examples:

• 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)
• 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)

Scope and Rate

CT will apply to all UAE businesses and commercial activities, except for the extraction of natural resources, which will remain subject to Emirate level corporate taxation.

CT will not apply to:

• an individual earnings salary and other employment income, whether received from the public or the private sector
• interest and other income earned by an individual from bank deposits or saving schemes
• a foreign investor’s income earned from dividends, capital gains, interest, royalties 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.

Applicable rates

• 0% for taxable income up to AED 375,000
• 9% for taxable income exceeding AED 375,000
• 15% for firms with profits more than Euro 750 MM, this is in line with the Global Minimum Corporate tax rate agreement.

Impact on Free Zone Entities

Companies and branches registered in free zones will also fall within the scope of CT regime and will be subject to tax filing requirements, however such entities would be subject to a 0% CT provided they maintain adequate substance and comply with regulatory requirements. A free zone entity with a branch in mainland UAE will be taxed at a regular CT rate on mainland source income while continuing to benefit from the 0% CT rate on its “other income”. Where a free zone person transacts with mainland UAE but does not have a mainland branch, the free zone person can continue to benefit from the 0% CT rate if its income from mainland UAE is limited to ‘passive’ income (meaning interest and royalties, and dividends and capital gains from owning shares in mainland UAE companies). The 0% CT rate will also apply to any transactions between free zone entities and their group companies in mainland UAE. However, payments made to free zone entities by a mainland group company will not be tax deductible.

Conclusion

The introduction of CT in the UAE follows from the UAE’s role as a member of the OECD inclusive framework, particularly considering discussions on the global minimum tax proposed by Pillar II. The proposed tax rate of 9% remains highly competitive in comparison to other jurisdictions and global financial centers. Once the regime takes effect, different businesses might want to reconsider their corporate structures to avail themselves of the available tax benefits.

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 discuss any opportunities resulting therefrom.

Important notice

The information in this page is meant to provide an initial introduction to the proposed UAE Corporate Tax (CT) regime in advance of relevant legislation being finalised and promulgated. It is not intended to comprehensively address all possible aspects of the UAE CT regime or to provide definitive answers and should not be used for individual or business decisions as it does not represent the final legislation.

Source: Corporate Tax. Corporate tax. (n.d.). Retrieved May 13, 2022, from https://www.mof.gov.ae/en/resourcesAndBudget/Pages/faq.aspx