The United Arab Emirates is set to introduce a federal corporate tax on business profits at a rate of 9%, effective for financial years starting on or after 1 June 2023.
Despite this tax increase, UAE will still be one of the most attractive worldwide locations to conduct businesses for the following reasons:
- No other country has a lower rate on corporate tax with only Hungary and Montenegro sharing the same 9% corporate tax rate.
- There will be a tax exemption for the first AED 375,000 of taxable profits.
- UAE holding companies will be completely exempt from paying corporate tax on capital gains and dividends received from qualifying shareholdings.
- The UAE will continue to comply with international standards for tax transparency.
- The UAE has an extensive network of double tax treaties, with 107 in-force double tax treaties and a further 30 in various stages of signature or ratification (as of 31 January 2022).
- The UAE’s infrastructure and lifestyle make it a much more attractive proposition for start-ups and small businesses than most other low tax jurisdictions.
TIMING
Although the execution date announced by the Ministry of Finance is set to begin during the financial year of on or after 1 June 2021, it can be expected that the effective date of implementation will be further into 1 January 2024 due to the practice of most companies in the UAE with a financial calendar finishing at the end of the year.
SCOPE & RATE
All UAE businesses, corporations and entities licensed to undertake commercial activities will be subject to UAE corporate tax with an exception to those engaged in the extraction of natural resources which will continue to follow Emirate level taxation.
Businesses will then be subject to tax at a rate of 0% on their first AED 375,000 of taxable profits and a rate of 9% on their taxable profits thereafter. A corporate tax rate of 15% in line with the global minimum effective tax rate is likely to apply for large multinational groups with consolidated global revenues annually in excess of EUR 750 million (AED 3.15 billion).
TAXABLE BASE
Corporate tax will be payable on the profits of UAE businesses as reported in their financial statements prepared in accordance with internationally acceptable accounting standards, with minimal exceptions and adjustments.
A participation exemption regime will be introduced and UAE holding companies will be completely exempt from paying corporate tax on capital gains and dividends received from qualifying shareholdings (expected to be shareholdings of at least 10% and a minimum holding period). A unilateral foreign tax credit will be offset against the UAE corporate tax liability.
FREE ZONES
Free zone entities will continue to be exempt from corporate tax on their taxable profits to the extent that they are generated from business carried out with customers outside the UAE or with customers in other free zones in the UAE.
However, to the extent that such entities carry out business with customers outside the free zone and in the mainland UAE then the profits earned will be subject to corporate tax in the same way as businesses outside the free zone.
This may require changes to accounting systems for profits that are generated externally can be separately calculated.
Free zone businesses will be required to register and file a corporate tax return.
WITHHOLDING TAXES
No withholding taxes will be applicable on domestic and cross-border payments under the UAE corporate tax regime.
TRANSFER PRICING
The UAE corporate tax regime will have transfer pricing rules and documentation requirements in line with the OECD Transfer Pricing Guidelines in order to prevent profits generated in higher tax regimes being subject to tax in lower tax regimes.
TAX COMPLIANCE
UAE businesses will only need to file one corporate tax return each financial year and will not be required to make advance tax payments.
ACTIONS TO BE DONE BY BUSINESSES:
UAE businesses are strongly advised to prepare for the implementation of corporate tax. This may include the following:
- Performing an initial high level impact assessment to understand the potential tax effect of these changes on their business
- Assessing whether the existing finance/tax function is sufficient
- Training for finance and tax teams
- Identifying potential restructuring opportunities
- Review of contracting arrangements
- Implementing changes to the existing legal structure
- Changes to accounting systems
The above information should hopefully help businesses to understand the requirements and potential implications of these far-reaching tax changes in the UAE. Further information is expected to be released by July 2022.
TAKEAWAY:
There is much work and preparation that needs to be done before the implementation of Corporate Tax in Dubai, Abu Dhabi & the UAE. It is best to be equipped and plan regarding such matters in order to have a smooth transition for UAE business operations. For more information regarding how Creation can guide you detailed steps to accomplish and have an overview of the UAE Corporate Tax Implementation Guidelines, email us at [email protected] or [email protected] or call +971 4 878 6240.
