The United Arab Emirates (UAE) has announced the introduction of a federal Corporate Tax (CT) on business profits for financial year starting on or after 1 June 2023. In April 2022, The Ministry of Finance published a digital public consultation providing an overview of the CT Law on their website. The business community in the UAE and other interested parties generated their feedback regarding the CT implementation.
On 9 December 2022, the UAE released the Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses (hereinafter referred to as the ‘CT Law’) which forms the basis for the implementation of the new CT regime.
It is expected that the CT law will be supplemented with Executive Regulations, which will contain more detailed regulations pertaining to the CT regime.
Whilst the UAE had already introduced Value Added Tax (VAT) in 2018, the implementation of a Federal Corporate Tax in Dubai & the UAE marks another important milestone in the country’s gradual evolution towards a mature tax jurisdiction. Although the UAE does not currently have personal income tax, it should be noted that individuals may be subject to the new CT to the extent that they would generate business income in the UAE.
The UAE will impose CT on the profits of mainland businesses. The CT rates are 0% for taxable profits up to AED 375,000 and 9% for taxable income above AED 375,000. Taxable profits are equal to a business’s income less the cost of goods sold, wages and other employee compensation, interest, and depreciation.
WHY IS THE UAE INTRODUCING CORPORATE TAX?
One of the main reasons why the UAE wants to introduce CT is because the current federal budget is financed via revenue from its oil and gas reserves. CT would therefore further diversify the income of the federal budget with a more sustainable income source. The UAE also wants to align itself with the international tax standards which promotes transparency, healthy business and prevent harmful tax practices.
OVERVIEW OF THE UAE CORPORATE TAX SYSTEM
Corporate tax (“CT”) will be effective for financial years starting on or after 1 June 2023. Businesses with an accounting reference date of 31 December will become subject to CT from 1 January 2024.
The CT rates are 0% for taxable income up to AED 375,000 and 9% for taxable income above AED 375,000.
Scope and exemptions
CT will apply to all persons (individual and corporate) conducting business activities under a commercial business license in the UAE. Businesses engaged in the extraction of natural resources will remain subject to the current Emirate level tax rules and will be outside the scope of CT. Banking operations, including those currently taxed at the Emirate level, will also be subject to CT. Dividends and capital gains earned by a UAE business from its qualifying shareholdings, as well as qualifying intra-group transactions and reorganizations subject to certain conditions being met, will be exempt from CT.
The UAE has more than 50 free zones which offer special incentives to foreign investors from a legal, customs and tax perspective. Businesses established in free zones will be subject to CT, but the CT regime will continue to honor the CT incentives currently being offered to free zone businesses complying with all regulatory requirements and do not conduct business within mainland UAE. A free zone Person located in a designated zone for Value Added Tax (VAT) purposes can benefit from the 0% CT rate on income. This includes sale of goods to UAE mainland businesses that are the importer of record of those goods. Free zone businesses will be required to register and file a CT return. A free zone entity will need audited financial statements if it wants to benefit from the 0% CT regime.
CT will be payable on the profits of UAE businesses as reported in their financial statements prepared in accordance with accounting standards accepted in the UAE, with minimal exceptions and adjustments.
Tax losses and groups
Tax losses incurred by entities subject to CT can be carried forward indefinitely and offset against taxable profits in future years, subject to change of control provisions. Tax losses can only be offset up to a maximum of 75% of the taxable income of the relevant tax period. Tax losses may also be utilized against the taxable income of another group company, subject to certain conditions being met. Intra-group transfer relief will be available for transfers of assets and liabilities between UAE resident companies that are at least 75% commonly owned. This is provided that the assets and/or liabilities being transferred remain within the same group for a minimum of three years.
A group of companies which are resident in the UAE can elect to form a tax group and be treated as a single taxable person. This applies if the parent company holds at least 95% of the share capital and has voting rights of its subsidiaries. Tax group formation requires that neither the parent company nor any of the subsidiaries can be an exempt person or a free zone person benefiting from 0% CT rate. Additionally, all group members must use the same financial year.
Thin capitalization rules
The UAE CT regime will cap the amount of net interest expense that can be deducted to 30% of a business’ earnings before interest, tax, depreciation, and amortisation (EBITDA), as adjusted for CT purposes.
UAE businesses will need to comply with transfer pricing rules and documentation requirements set with reference to the Organization for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines. Businesses need to maintain a Master and Local file whenever the arm’s length value of their related party transactions exceeds a certain threshold in the relevant tax period. The file should be in the proper format and consistent with the requirements prescribed under OECD Base erosion and profit shifting (BEPS) Action 13.
Withholding tax (WHT)
Domestic withholding tax of 0% applicable on domestic and cross-border payments but there is no obligation to file WHT returns.
Foreign tax credits
Any foreign CT or WHT imposed on UAE taxable income shall be allowed as a tax credit against the CT liability.
The Federal Tax Authority (FTA) shall be responsible for the administration, collection and enforcement of CT. Businesses will be required to register for CT purposes and will be required to electronically file one CT return per financial period. No provisional or advance CT filings or payments will be required. Tax returns will need to be submitted to the FTA within nine (9) months before the end of the relevant tax period. CT liabilities need to be settled within nine (9) months before the end of the relevant tax period. Note: The first CT filing and payment deadlines for businesses with financial year ending 31 December 2024 will be 30 September 2025.