Introduction to Corporate Tax
UAE CT is applicable across all Emirates and implemented to all business and commercial activities, with the exception of natural resource extraction, which continues to be taxed at the Emirate level
UAE CT will be applicable at the following rates:
Free zone businesses are subject to UAE CT and must register to file a CT return, however they can continue to benefit from CT holidays and 0% tax rates if they meet all regulatory standards and don’t operate a business with/on mainland UAE.
According to the official statement and FAQs, there is going to be a different tax rate for multinational corporations that meet the criteria under OECD ‘Tier-II’ of the Base Erosion and Profit Shifting project (i.e. that have consolidated global revenues above EUR 750m).
CT will be paid on the net profit reported in the company’s income statements, with limited exceptions and revisions. Tax losses incurred after the CT implementation can be carried forward and used to balance taxable income in a sequential fiscal period.
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Corporate Tax Application & Exemptions
Exemption from UAE CT will be available for:
Domestic and cross-border transactions of interest, dividend payouts, royalty payments, and other transactions will be tax-free in the UAE, and foreign tax credits will be available for taxes incurred by UAE enterprises on earnings outside the UAE.
UAE CT must be filed online once per fiscal period, with no precondition for advance UAE CT payments based on preliminary tax returns.
UAE conglomerates can form a tax group and file a solitary tax return for the entire group, as well as transfer tax losses to other group members.
The UAE CT policy will have tax valuation rules and documentation in line with the OECD Transfer Pricing Guidelines.
The Federal Tax Authority will be in charge of CT management, acquisition, and compliance.
No UAE CT will apply to:
- Employment income, real estate income, savings, capital returns, and other personal revenues generated by individuals that are not due to a UAE trade or company;
- Foreign investors’ dividends, capital gains, and other investment returns.
Corporate 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 Corporate Tax
The United Arab Emirates has introduced a federal tax system that applies to all businesses and commercial ventures conducted within the seven emirates. There are, however, some exceptions:
- Companies involved in the mining of natural resources. These will continue to be subject to the tax decrees issued by the respective Emirate
- Individuals earning an income in their private setting (i.e. salary, investment gains) will remain obligated to adhere to the tax rules issued by the respective Emirate as long as the revenue-generating exercise does not require a commercial license
- Businesses registered in Free Trade Zones may continue to do business with Mainland UAE if they meet all regulatory standards
It is worth noting that the foreign banking industry, which has previously been subject to Emirate level bank tax decrees, will now become subordinate to the UAE Federal Tax Law. The impact of CT on the banking tax decree at the Emirate level will be articulated in accordance with the terms. This will be a substantial change for both foreign bank branches that must comply with the new law and local banks that, like other businesses, will now be subject to corporate tax.
Rates of Corporate Tax
The newly announced UAE CT regime includes a tier system with three rates:
- All annual taxable profits under AED 375,000 are subject to a zero rate.
- All annual taxable profits in excess of AED 375,000 are subject to a 9% tax rate.
- ALL MNEs that fall within the scope of Pillar 2 of the BEPS 2.0 framework (i.e. consolidated global revenues exceeding AED 3.15 billion) will be subject to different rates in accordance with the OECD Base Erosion and Profit-Sharing rules.
Financial profits subject to certain changes are referred to as taxable profits.
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 are now in effect in the UAE. Transfer Pricing rules and documentation requirements must be followed by all businesses. These transfer pricing rules will now be mandatory and may apply to domestic transactions as well.
While intercompany sales and financing services are frequent among UAE groups, reimbursement for these activities was previously overlooked because the transactions would most likely be excluded during fiscal consolidation.
This is a real game-changer because intercompany transactions will now be conducted at arm’s distance and backed up by proper paperwork. Businesses are also supposed to evaluate the impact of their present system on both cross-border and domestic transactions.