Corporate Tax or Corporate Income Tax or simply CT regime is being introduced in the UAE at federal level. As announced on 31 January 2022, the United Arab Emirates (UAE) is introducing a federal Corporate Tax (CT) on business profits that would be effective for financial years starting on or after 1 June 2023. Ministry of Finance UAE has described salient features of the upcoming UAE CT regime through FAQs which are simplified and explained hereunder. These explanations are prepared based on the available information; however, these do not depict in any way tax advice or final outcome as the UAE CT law is not yet published:
- Corporate Tax is a form of direct tax levied on the net income or profit of corporations and other businesses
- Introducing a CT regime reaffirms the UAE’s commitment to meeting international standards for tax transparency and preventing harmful tax practices. The introduction of a federal CT regime will also provide a basis for the UAE to execute its support of the global minimum effective tax rate as proposed under “Pillar Two” of the OECD Base Erosion and Profit Shifting project.
- The UAE CT regime will become effective for financial years starting on or after 1 June 2023 Examples:
- A business that has a financial year starting on 1 July 2023 and ending on 30 June 2024 will become subject to UAE CT from 1 July 2023 (which is the beginning of the first financial year that starts on or after 1 June 2023)
- A business that has a (calendar year) financial year starting on 1 January 2023 and ending on 31 December 2023 will become subject to UAE CT from 1 January 2024 (which is the beginning of the first financial year that starts on or after 1 June 2023)
- The UAE CT is a Federal tax and will therefore apply across all Emirates and the Federal Tax Authority (FTA) will be responsible for the administration, collection, and enforcement of UAE CT
Scope & Rate:
- UAE CT will apply to all UAE businesses and commercial activities alike, except for the extraction of natural resources, which will remain subject to Emirate level corporate taxation. Free Zone entities/companies (Free Zone Persons-FZP) will keep enjoying their zero rate corporate tax statue (0% CT) subject to certain conditions (will be discussed separately)
- All activities undertaken by a legal entity will be deemed “business activities” and hence be within the scope of UAE CT. UAE CT will be applicable on UAE resident companies on their worldwide income, including capital gains, with certain exemptions to avoid double taxation.
- For level playing field between incorporated businesses and unincorporated businesses owned by individuals, UAE CT will also apply to natural persons engaged in a business or commercial activity in the UAE. This will include sole establishments or proprietorships and individual partners in an unincorporated partnership that conducts business in the UAE. However, passive income earned by individuals in their personal capacity in the shape of interest from bank deposits, income from real estate, dividends, capital gains and other income earned from owning shares or other securities in their personal capacity. Details will be in the UAE CT Law.
- The taxable income will be the accounting net profit of a business, after making adjustments for certain items to be specified under the UAE CT law (expected in the second half of the 2022). The accounting net profit of a business is the amount reported in the financial statements prepared in accordance with internationally acceptable accounting standards
- The CT rates are:
- 0% for taxable income up to AED 375,000;
- 9% for taxable income above AED 375,000;
- a different tax rate for large multinationals that meet specific criteria set with reference to ‘Pillar Two’ of the OECD Base Erosion and Profit Shifting project. In the context of the global minimum effective tax rate as proposed under ‘Pillar Two’ of the OECD Base Erosion and Profit Shifting project,” large” refers to a multinational corporation that has consolidated global revenues in excess of EUR 750m (c. AED 3.15 bn)
Income Exempt from CT:
- Dividends and capital gains earned by a UAE business from its qualifying shareholdings will be exempt from UAE CT. A qualifying shareholding refers to an ownership interest in a UAE or foreign company that meets certain conditions to be specified in the UAE CT law. A UAE corporate shareholder will generally be exempt from CT on dividends received, and capital gains earned from the sale of shares of a subsidiary company. The purpose of this participation exemption is to avoid double taxation of corporate profits, first when they are earned by the subsidiary company and second when the profits are distributed to, or the shares in the subsidiary company are sold by, the UAE shareholder company. The main condition to benefit from the participation exemption is that the UAE shareholder company must own at least 5% of the shares of the subsidiary company and the foreign subsidiary company resident country corporate tax or similar business tax rate is minimum 9 percent.
- Recognizing the potential complexities associated with attributing income and expenses to foreign branches, UAE companies can either (i) claim a foreign tax credit for taxes paid in the foreign branch country, or (ii) elect to claim an exemption for their foreign branch profits. An exemption for foreign branch profits may not be available where the foreign branch is not subject to a sufficient level of tax in the foreign jurisdiction in which it is located.
- Qualifying intra-group transactions and reorganizations will not be subject to UAE CT provided the necessary conditions are met
- Transfer pricing rules seek to ensure that transactions between related parties and connected persons are carried out on arm’s length terms (i.e. as if the transaction was carried out between independent parties). The UAE CT regime will have transfer pricing rules to ensure that the price of a transaction is not influenced by the relationship between the parties involved
- Where relevant, the business will be required to submit a disclosure containing information regarding their transactions with Related Parties and Connected Persons.
- In order to support start-ups and small businesses in the UAE, and to manage the compliance burden on these taxpayers, the UAE CT regime intends to provide relief for small businesses in the form of simplified financial and tax reporting obligations. The details will be available in due course of time.
UAE CT Administration:
- A business subject to CT will need to register with the FTA and obtain a Tax Registration Number within a prescribed period. The FTA can also automatically register a business for CT purposes if the person does not voluntarily do so.
- Where a business ceases to be subject to the CT (e.g., due to cessation or liquidation of the business), it will need to apply to the FTA to be deregistered for CT purposes within three (3) months from the date of cessation.
- A business will only need to prepare and file one tax return and other related supporting schedules with the FTA for each tax period. There will be no requirement for a business to file a provisional CT return and make advance payments of CT. Each tax return and related supporting schedules as well as CT liability will need to be submitted to the FTA within nine (9) months of the end of the relevant Tax Period.
Most of the entities doing business in the UAE are not fully prepared to embrace the newest change in terms of processes, IT, Human resource and business model/legal structure. Hence, it is high time to plan early and do their fit/gap analysis before CT is embarked officially in the UAE in 2023.
Given the above commentary, there is certainty around the key design principles including but not limited to timing, scope, tax base and rate. Businesses should start the thought process in terms of what the implications will be. The implications can be far-reaching and tax and finance teams should work on developing a roadmap. As a first step, businesses should gain a good understanding of the proposed changes to fully assess the implications.
Key areas of considerations and changes can be:
- The legal structure,
- Business model,
- Transfer pricing,
- Accounting and profit,
- Systems and data
- Organizational structure (e.g. tax function).
Tax and finance teams should be ready to start conversations with the different departments and stakeholders within the business around the anticipated impacts.
Our 3-Tiered Approach to Help Smooth UAE CT Transition and Compliance
Phase 1: Impact assessment – Detailed assessment, design and planning – after issuance of the CT law and regulations.
Phase 2: Implementation support – before CT effective date.
Phase 3 Post-implementation support – ongoing (Corporate tax computation, Tax Returns, ongoing support on tax optimization)
Our team of tax consultants, having tremendous experience in different CT jurisdictions, will be happy to guide you through all these critical phases in the corporate tax implementation cycle and on-going compliance.