Understanding Corporate Tax in the United Arab Emirates (UAE)

Corporate Tax is a term used by corporations and other business entities. In various jurisdictions, it’s also known as Corporate Income Tax (CIT) or Business Profits Tax. This tax is direct. It applies to the net income or profit of these entities.

On January 31, 2022, the region’s tax landscape saw a significant shift. This happened when the UAE’s Ministry of Finance (MoF) made an announcement. They announced the implementation of a new federal corporate tax (CT) system. This system will be effective from financial years starting on or after June 1, 2023.

This move places the UAE in a unique position. Excluding Bahrain, the UAE will have the lowest corporate income tax rate in the GCC region. The rate is set at a standard 9%. The UAE CT system has a specific design. It aligns with global best practices. Its aim is to reduce the compliance burden on businesses.

A Closer Look at the Changes

In recent years, the UAE has made substantial reforms to its tax system. The goal is to align with international standards and diversify state revenue. The first step was implementing the Value Added Tax (VAT) in January 2018. The next step was introducing the Economic Substance Regulations (ESR) and Country-by-Country Reporting (CbCR) regulations. These were introduced in April 2019.

The new CT law is another step. It will impose a corporate income tax on the profits of UAE businesses. This will apply during a tax accounting period. We expect the release of the Law and the regulation details in mid-2023. This situation raises a question. Do businesses have enough information to assess the impact of this announcement?

Applicability of the Corporate Tax

The CT will start applying to financial years that begin on or after June 1, 2023. Companies that choose a fiscal year starting on June 1, 2023, and ending on May 31, 2024, will start encountering the CT from June 1, 2023. They will likely need to file their first tax return towards the end of 2024. Companies that opt for a calendar year starting January 1, 2023, and ending December 31, 2023, will start encountering the CT from January 1, 2024, and they will likely need to file towards mid-2025.

The new federal tax system will cover all businesses and commercial activities operating within the seven emirates of the UAE. However, exceptions exist. These exceptions include businesses involved in the extraction of natural resources, individuals earning income personally, and businesses registered in Free Zones that meet all regulatory requirements and do not conduct business with Mainland UAE.

Tax Rates and Exemptions

The UAE CT regime introduces a tier system. This system has three distinct rates. The first rate applies to all annual taxable profits under AED 375,000. These profits will encounter a zero rate. The second rate applies to all annual taxable profits exceeding AED 375,000. These profits will face a 9% rate. The third rate applies to Multinational Enterprises (MNEs). MNEs falling under the scope of Pillar 2 of the BEPS 2.0 framework will meet different rates. These rates are as per the OECD Base Erosion and Profit-Sharing rules.

The regime also has provisions for exemptions. Certain types of income will be exempt from income Tax. These exemptions include several types of income. The first is dividend income that a UAE company earns from its qualifying shareholdings. The second is capital gains. The third is profits from group reorganization. The fourth is profits from intra-group transactions. An important point to note is about withholding tax. The UAE will not impose any withholding tax on domestic and cross-border payments.

Impact on Free Zones and Transfer Pricing Rules

The UAE plans to honor its commitment to Free Trade Zone businesses. These businesses will face zero tax if they don’t deal with the mainland. This is valid until the holiday period ends. Each Free Zone must file an annual CT return. Businesses in both Mainland UAE and Free Trade Zones need to assess their models. This also applies to those under the dual license scheme. The UAE will now apply the OECD Transfer Pricing Rules. Every company must follow these rules. They also need to meet documentation requirements.

These rules will be mandatory. They may also apply to domestic transactions. This is a big change. Businesses must conduct inter-company transactions at arm’s length. They must support these with proper documentation.

Businesses must review their current arrangements. They need to assess the impact on all transactions. They can use taxable losses to offset future profits. The law allows tax grouping and group relief provisions. UAE Groups should get ready to file consolidated tax returns.

The law might allow offsetting tax losses among groups. Taxable entities can claim foreign corporate tax as a credit. This is for tax paid on UAE taxable income against their annual tax liability.

Conclusion (So Far)

In conclusion, the introduction of Corporate Tax in the UAE marks a significant milestone in the country’s journey towards aligning its tax system with international standards. However, it’s important to note that this is just the beginning. The Ministry of Finance is expected to release more detailed regulations and guidelines in the coming months. As such, while we can begin to understand the potential implications of this new tax regime, a concrete conclusion cannot be drawn at this stage. Businesses operating in the UAE should stay informed and prepared for further updates. As always, adapting to these changes will be key to maintaining successful operations in the UAE’s evolving business landscape.

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