Corporations and other entities are subject to corporate tax (CT), which is a direct tax levied on their profits and net income. There are some jurisdictions that refer to corporate tax as corporate income tax (CIT) or business profit tax (BPT).
It was announced on 31 January 2022 by the Ministry of Finance of the United Arab Emirates (UAE) that the UAE would implement a new federal corporate tax (CT) system effective from 1 June 2023, transforming the region’s tax landscape yet again. Within the GCC region, the UAE has implemented the lowest corporate income tax rate at 9%.
Designed to minimize businesses’ compliance burdens, the UAE CT regime incorporates best practices from around the world.
A minimum corporate tax rate would be implemented in 2023 by the United Arab Emirates (among 137 countries) if it implements the OECD’s Two-Pillar approach to reforming its International Tax Framework.
This led the UAE Ministry of Finance to announce on 31 January 2022 that the Federal Corporate Tax regime would be effective on or after 1 June 2023 for Financial Years starting on or after that date.
Direct taxation on corporations’ or other businesses’ net income or profits is known as corporate tax in UAE. In the future, licensees operating in the UAE will need to evaluate how the upcoming regulations will impact their business and comply with them accordingly. A crippling penalty will be imposed for noncompliance, according to UAE Tax Authorities.
In the table below, you will find a list of corporate tax rates:
|SR.NO.||Taxable Income/ Category||Corporate Tax Rate (%)|
|1.||“Taxable income up to AED 375,000”||0%|
|2.||“Taxable income over and above AED 375,000”||9%|
|3.||Large multinationals (having consolidated global
revenue exceeding EURO 750 million – equivalent
to AED 3.15 billion) that meet specific criteria set
with reference to “Pillar Two” of the OECD
Base Erosion and Profit Shifting Project
|Different tax rate|
Objectives of CT
As a result of introducing the CT, the UAE hopes to achieve the following:
- As a global business and investment hub, it will be able to cement its position as a premium destination
- Aiming to achieve its strategic objectives by accelerating the organization’s development and transformation
- There is an ongoing commitment by the government to meet international standards for tax transparency in order to prevent harmful tax practices from occurring.
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The CT will be applied to the following:
- Business activities conducted under a commercial license in the UAE shall be regulated by the UAE Commercial Licensing Authority
- Businesses in free zones (The UAE CT regime will continue to honor the current CT incentives that are currently being offered to businesses located in free zones that have complied with all regulatory requirements, do not conduct business on the UAE’s mainland, and do not conduct business in the UAE’s offshore areas).
- Individuals and companies from outside the UAE can only get residency in the UAE if they carry out regular or ongoing trade or business with the UAE
- Operational activities of a bank
- Real estate companies that are engaged in the business of managing, developing, building, developing, and selling properties.
There are some exemptions from CT that apply
- It is important to note that the rules regarding corporate tax exemptions are set out below.
- The first requirement is that businesses that extract natural resources will be exempt from CT due to the fact that they will remain subject to the existing rates of corporate taxation at the Emirate level.
- UAE businesses that own qualifying shareholdings in UAE companies will have dividends and capital gains that are exempt from CT tax.
- Providing the necessary conditions are met, CT will not be imposed on transactions and reorganizations that are qualified intra-group transactions and reorganizations.
The CT will also not be applicable to the following:
- An individual who earns a salary as well as any other employment income, regardless of whether it is derived from the public or private sector
- It also includes interest earned by an individual by putting money into a bank deposit or by participating in a savings scheme
- The income earned by a foreign investor through dividends, capital gains, interest, royalties, and other investment returns can range from thousands of dollars to millions
- It is possible for individuals to invest in real estate in their personal capacities by investing in real estate
- It is important to note that a person’s dividend income, capital gains, and other types of income may be earned through the ownership of shares or other securities in their individual capacity.
According to the Ministry of Finance, the CT rates are as follows:
- The rate of tax is zero percent up to a maximum of AED 375,000 for taxable income
- If your taxable income exceeds AED 375,000, you will be subject to a 9 percent tax
- For large multinationals that are subject to the OECD Base Erosion and Profit Shifting Project, there will be a different tax rate (which has not yet been specified) for those multinationals that meet certain criteria in reference to ‘Pillar two’ of the project.
- Administrating, collecting, and enforcing the CT will fall under the responsibility of the Federal Tax Authority (FTA). We will soon be providing more reference materials and guides about corporate taxes and information about how to file them.
Zones that are financial free zones and free zones that are free zones:
- UAE corporate tax will apply to businesses operating in free zones (including financial free zones). However, businesses operating in free zones that meet all regulatory requirements and do not conduct business on the mainland of UAE will continue to benefit from the corporate tax incentives currently available.
- A Corporate Tax Return must be filed by businesses operating in a free zone.
The following rules apply to foreigners:
- Corporate Tax is applicable to foreign entities and individuals only if they conduct regular or ongoing trade or business in the UAE.
- Additionally, dividends, capital gains, interest, royalties, and other investment returns derived by foreign investors are generally exempt from corporate tax in UAE.
The following rules apply to transfer pricing:
OECD Transfer Pricing Guidelines, which include Master Files and Local Files, will now govern Transfer Pricing rules and documentation requirements. To justify their pricing policies for inter-company transactions, groups of companies will be required to conduct benchmarking searches. It may be necessary to introduce additional compliance requirements or provide further details/clarifications about potential exemptions for qualified intra-group transactions.
There is no federal CIT regime in the United Arab Emirates. Each Emirate (which in total makes up the United Arab Emirates) issues its own Tax Decrees that determine CIT on a territorial basis. In addition to the General Banking Tax Decrees, some of the Emirates have also issued specific Banking Tax Decrees imposing CIT on foreign bank branches there.
It is payable on a progressive rate basis under the Tax Decrees, with a maximum rate of 55%. A flat 20% CIT rate applies to foreign bank branches.
Despite these facts, foreign oil companies engaged in downstream petroleum activities and foreign banks are in effect only subject to CIT.
Additionally, free zones are governed by their own rules and regulations across the various Emirates, and they typically offer businesses that set up within those free zones a ‘tax holiday’ or a tax exemption (usually with regard to CIT) for up to 50 years (generally renewable).
Accordingly, most entities registered in the United Arab Emirates, regardless of where their businesses are located, do not need to file corporate tax returns there.
From a domestic CIT perspective, most businesses operating in the United Arab Emirates have limited practical relevance to matters such as expense deduction, the possibility of double taxation of dividends and gains, and carrying forward tax losses given the current tax environment.