CORPORATE TAX IN THE UAE

What Is UAE Corporate Tax?

Corporate Tax in UAE is a form of direct tax levied on the net income or profit of corporations and other businesses. Going forward, licensees operating in UAE will be required to assess the impact of the upcoming regulations to their business and undertake the necessary compliance. On this note, the UAE Tax Authorities have already stated that non-compliance will attract high rates of penalties.

Corporate Tax vs UAE VAT

In general, corporate tax is a more direct tax on businesses, while VAT is a more indirect tax on consumers.

• Corporate tax is a tax on the profits of businesses, while VAT is a tax on the value of goods and services consumed by individuals and businesses.

• Corporate tax is paid by businesses to the government, while VAT is collected by businesses from consumers and then remitted to the government.

• Corporate tax is calculated on the net profits of a business, after deducting expenses, while VAT is calculated on the total value of goods and services sold, before deducting any expenses.

• The corporate tax rate in the UAE is 9%, while the VAT rate is 5%.

Registration

All businesses are required to register for corporate tax.

• All companies need to do accounting and bookkeeping to comply with the new requirements and to prove they are exempted from tax, if applicable.

• All businesses must file a tax return, including companies that are eligible for tax exemption.

• The new tax law applies to all companies, including those registered in free zones.

• Social media influencers and freelancers could be subject to tax.

Effective date

The CT will be applicable for financial years starting on or after 1 June 2023.

Any company that adopts a fiscal year starting on 1 June 2023 and ending 31 May 2024 will be subject to CT starting 1 June 2023. The first tax return filing is likely to be due towards the end of 2024.

Any company that adopts a calendar year starting 1 January 2023 and ending 31 December 2023 will be subject to CT starting 1 January 2024 and filing is likely to be due towards mid-2025.

Scope of the CT

The UAE has introduced a federal tax system that is applicable to all businesses and commercial activities operating within the seven emirates. However, there are certain exceptions:

• Businesses operating in the extraction of natural resources. These will continue to be subject to the tax decrees issued by the respective Emirate

• Individuals earning income in their personal capacity (i.e. salary, investment income) as long as the income generating activity does not require a commercial license

Businesses registered in Free Trade Zones, provided they comply with all the regulatory requirements, and that do not conduct business with Mainland UAE

It is interesting to note that the foreign Banking sector, which has been operating under the Emirate level Bank tax decree will now be subject to the UAE Federal Tax Law. The impact of CT on the Emirate level banking tax decree will be communicated in due course. This will be a significant shift for both branches of foreign Banks, that will need to switch to the new Law and for local banks who similar to other businesses will now be subject to corporate tax.

Rates

The announced UAE CT regime introduces a tier system with 3 rates:

• All annual taxable profits that fall under AED 375,000 shall be subject to zero rate.

• All annual taxable profits above AED 375,000 shall be subject to 9% rate.

• ALL MNEs that fall under the scope of Pillar 2 of the BEPS 2.0 framework (i.e. consolidated global revenues in excess of AED 3.15 billion) shall be subject to different rates as per OECD Base Erosion and Profit-Sharing rules.

Taxable profits are the accounting profits subject to certain adjustments.

Exempt Income

The following income shall be in general exempt from income Tax:

• Dividend income earned by UAE company from its qualifying shareholdings (to be defined in the law)

• Capital gains

• Profits from group reorganization

• Profits from Intra-group transactions

• There will be no UAE withholding tax on domestic and cross-border payments.

Considering the exempt income scheme it can be anticipated that the Law shall include a participation exemption or similar principles commonly seen in international markets and businesses would need to evaluate if they will be able to meet the prescribed conditions (if any) to avail the exempt income scheme.

Free Trade Zones

The UAE intends to honor its commitment to businesses registered in Free Trade Zones to the extent that such businesses do not conduct business with mainland shall be subject to zero percent tax (or be exempt as the case may be) until the end of the holiday period. All free zones have to file an annual CT return.

Businesses with presence in both Mainland UAE and Free Trade Zones as well as those operating under the dual license scheme should consider the impact on their operating model.

Transfer Pricing rules

The OECD Transfer Pricing Rules shall now be applicable in the UAE. All companies have to comply with the Transfer Pricing rules and documentation requirements. These transfer pricing rules will now become mandatory and may also be applicable to domestic transactions.

While inter company sales and financing services are common practice amongst UAE groups, previously remuneration for these activities has not been on the forefront given the transactions would likely be eliminated upon financial consolidation.

This is a game changer as inter company transactions would need to be undertaken at arm’s length and generally should be supported by appropriate documentation. Businesses would need to evaluate their current arrangements and assess the impact on both cross-border as well as domestic transactions.

Losses

Accumulated taxable losses shall be allowed to offset future taxable profits.

Groups

Tax grouping and group relief provisions are allowed. UAE Groups should be able to file consolidated tax returns. Offsetting tax losses among groups might be allowed.

Foreign Tax Credits

Taxable entities will be allowed to take as a credit against its annual tax liability the foreign corporate tax paid on UAE taxable income.