Home
Internal
published on 2 February 2022 | reading time approx. 3 minutes
On 31 January the UAE announced that in order to meet international standards in transparency and to address challenges arising from the digitalisation of the global economy, they will introduce a federal corporate income tax for businesses starting from 1 June 2023. This tax will be levied on the profits of corporations and other entities from their business.
In an international comparison, the UAE corporate tax is set relatively low a rate of 9 percent. In order to support small businesses and start-ups, no corporate tax will have to be paid for profits up to a threshold of AED 375,000, any income exceeding this amount will be taxed at the full rate. The tax rate will apply to all categories of profits and other net income reported in the financial statements, prepared in accordance with internationally acceptable accounting standards. The income tax regime may provide for certain expenses to be deducted before calculating the payable tax. This should help to minimize the financial burden on the tax payers.
As per the Federal Tax Authority a different tax rate will apply for large multinational companies that meet specific criteria set with reference to "Pillar Two" of the OECD Base Erosion and Profit Shifting project.
The new corporate tax will apply to businesses across all Emirates, with an exception for the extraction of natural resources, which will remain subject to Emirate level corporate taxation. Foreign entities and individuals will be subject to corporate tax only if they conduct a trade or business in the UAE in an ongoing or regular manner. The Federal Tax Authority announced that all activities undertaken by a legal entity will be deemed "business activities" and thus fall within the scope of the corporate tax.
Consequently, companies with a permanent establishment in the UAE will be subject to corporate tax as they would have been legally established in the UAE. Individuals on the other hand will be considered to have a "business" within the scope of the corporate tax, if the individual has (or is required to obtain) a business license or permit to carry out the relevant commercial-, industrial- and/or professional activity in the UAE.
However, much of the UAE's tax-free regime remains. Individuals' salaries and other employment income, as well as income from private real estate and other investments will not fall under the scope of the corporate tax regime, as long as the individual is carrying out these activities on a personal capacity and is not required to obtain a commercial license or permit in order to do so.
Corporate tax will also apply to free zone businesses, which will be required to register and file a corporate tax return. However, the new corporate tax regime will continue to provide tax incentives which are currently offered to these businesses and to the extent that they do not conduct business with the UAE mainland. To which exact extend free zone companies will benefit from earlier incentives may not be determinable at this stage. Legislation will provide further guidance.
The Federal Tax Authority announced that dividends and capital gains earned by UAE businesses from their qualifying shareholdings will be exempt from corporate tax. 'Qualifying' shareholding refers to an ownership interest in a UAE or foreign company that meets certain requirements which will further be specified in the upcoming UAE Corporate Tax Law. Likewise, qualifying intra-group transactions and reorganizations may not be subject to corporate tax.
Although most of the details of the new corporate tax regime are yet to be released, the Federal Tax Authority has provided some information on the functioning of the new corporate tax regime in the UAE, which will briefly be reviewed in the following. The new UAE corporate tax will become effective for financial years starting on or after 1 June 2023, meaning that a business which has a (calendar year) financial year starting on 1 January 2023, and ending on 31 December 2023, will become subject to corporate tax from 1 January 2024.
The corporate tax regime will allow businesses to use losses incurred (as from the corporate tax effective date) to offset taxable income in subsequent financials, and excess corporate tax losses may be carried forward and used against taxable income in future years under certain conditions. There will not be a withholding tax applicable in domestic and cross-border payments, and businesses will not be required to make any advance corporate tax payments. Foreign corporate tax paid on UAE taxable income will be allowed as a tax credit against the UAE corporate tax liability.
Further, there will be certain transfer pricing rules in place to govern transactions between related parties (e.g., between two subsidiaries within the same enterprise) which will be set in accordance with the OECD Transfer Pricing Guidelines. Corporate tax returns will have to be filed electronically. More information on the registration process for UAE corporate tax and compliance obligations will be released in the future. Similarly to other taxes, businesses will be subject to penalties non-compliance with the corporate tax regime, the details of which will be released in the future.
Nicola Lohrey
Managing Partner
Send inquiry
Rödl & Partner in the United Arab Emirates
