This article was updated on June 26th, 2023
This article was updated on June 26th, 2023
This article has been researched and written by Steven Ireland and the team at Creation Business Consultants and has not used AI in generating this article.
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.
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.
The UAE has imposed CT on the profits of mainland businesses starting 1 June 2023. 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.
One of the main reasons why the UAE has introduced 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.
|Timing||Corporate tax (“CT”) is 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.|
|Rate||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 applies 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 remain subject to the current Emirate level tax rules and is outside the scope of CT. Banking operations, including those currently taxed at the Emirate level, are 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 reorganisations subject to certain conditions being met, are exempt from CT.|
|Free zones||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 are subject to CT, but the CT regime will continue to honour 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 are required to register and file a CT return. A free zone entity is also required to provide audited financial statements if it wants to benefit from the 0% CT regime.
|Tax base||CT is 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 utilised against the taxable income of another group company, subject to certain conditions being met.
Intra-group transfer relief is 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.
|Tax grouping||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 caps 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.|
|Transfer Pricing||UAE businesses need to comply with transfer pricing rules and documentation requirements set with reference to the Organisation 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.|
|Administration||The Federal Tax Authority (FTA) shall be responsible for the administration, collection and enforcement of CT. Businesses are required to register for CT purposes and are required to electronically file one CT return per financial period. No provisional or advance CT filings or payments is required.|
Tax returns 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.
There is much work and preparation that needs to be arranged before the implementation of Corporate Tax in the UAE. It is best to be equipped and plan regarding such matters to have a smooth transition for UAE business operations. For more information regarding how Creation can guide you in detailed steps to accomplish and have an overview of the UAE Corporate Tax implementation guidelines, contact [email protected] or call UAE +971 4 878 6240 Saudi Arabia +966 54 995 2676.
Please see the link below to the recording of our recent UAE Corporate Tax webinar on our YouTube channel: