Tax Update – Introduction Of Corporate Tax In UAE

The United Arab Emirates (UAE) has reasserted that the country is evolving as a leading global hub for business and investment. In pursuit of this, the country is embarking on a mission to make transformative changes that will cement its place as the world’s most sought after investment market.

The UAE is focused on creating new revenue streams for a secure and better future for the country. This ensures that the economy is self-sustaining, which is essential for prospective investors to consider. The introduction of Corporate taxes paves the way for this future envisioned by founders, and a competitive Corporate tax regime based on international best practices reaffirms the UAE’s commitment to meeting international standards for tax transparency and preventing harmful tax practices

The new tax regime will pave the way for the UAE to address the challenges arising from the digitalisation of the global economy and the other remaining BEPS [Base Erosion and Profit Shifting] concerns and execute its support for the introduction of a global minimum tax rate by applying a different corporate tax rate to large multinationals that meet specific criteria set with reference to the above initiative.

Implementation of Corporate Tax in the UAE

The Ministry of Finance, UAE, has announced that Corporate Tax (CT) will be introduced in the country effective for financial years starting on or after June 01, 2023. Here are some of the basic information about the new proposed CT set to be in place by mid of next year:

General Information

1. CT will be applicable for all financial years starting on or after June 01, 2023. Examples:
   1. The business that has a financial year beginning July 01, 2023, and ending on June 30, 2024, will be subject to CT from July 01, 2023
   2. The business that has a calendar year, i.e. January 01, 2023, to December 31, 2023, as the financial year will only be subject to CT from January 01, 2024.
2. The CT will be a Federal tax and will apply across all Emirates to all the businesses and other commercial business activities except for the extraction of natural resources.
3. The applicable rate of tax will be as follows:
   1. 0% tax for taxable income up to AED 375,000/-;
   2. 9% tax for taxable income exceeding AED 375,000/-; and
   3. 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
4. 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.
5. The accounting net profit of a business is the amount reported in the financial statements prepared in accordance with internationally accepted accounting standards.
6. Dividends and capital gains earned by a UAE business from its qualifying shareholdings will be exempt from UAE CT
7. UAE withholding tax will not be applicable on domestic and cross-border payments of any nature under the UAE CT regime.

8. Qualifying intra-group transactions and reorganizations will not be subject to UAE CT provided the necessary conditions are met

Implications for Legal Entities  

• All activities undertaken by a legal entity will be deemed business activities within CT’s scope.
• The companies established in the Free Zones can continue to avail tax exemption benefits as long as they comply with all regulatory requirements and do not conduct business with mainland UAE.
• A UAE group of companies can elect to form a tax group and be treated as a single taxable person, provided certain conditions are met.

Implications for Individuals

• UAE CT will not apply to an individual’s salary and other employment income (whether received from the public or private sector).
• Individuals’ investment in real estate in their personal capacity should not be subject to UAE CT provided the individual is not required to obtain a commercial license or permit to carry out such activity in the UAE.
• The income earned by the individuals, such as the salaries, Interest on bank Deposits etc., will not come under the scope of CT.
• Only individuals having (or being required to obtain) a business licence or permit to carry out the relevant commercial, industrial and/or professional activity in the UAE shall be considered as carrying on business for the purpose of CT.

More information such as the Decree-Law and related guidance is awaited to be published by the Ministry. Until then, businesses need to evaluate their accounting practices to ensure that the books are in order and prepared according to generally accepted accounting standards. This is an essential step towards readying your readers towards the requirements of CT, and more importance should be given by the businesses on accurate bookkeeping.

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