The introduction of corporate income tax in the United Arab Emirates (UAE) was inevitable as the Emirates planned its transition from an oil-dominated economy.
A consultation document issued by the UAE government in April 2022 stresses that the new corporate tax regime, to be introduced in 2023, will be built around international best practice and is designed to reinforce the UAE’s position as a global center for business and investment.
The UAE has previously signaled its commitment to the OECD’s BEPS project, which includes an objective of a global minimum effective tax rate.
The proposed new standard rate of corporate tax (CT) in the UAE, at 9%, is one of the lowest in the world (only Barbados, Uzbekistan, and Turkmenistan have a lower rate) and well below the global average corporate tax rate of 23.5%. Even so, the introduction of the UAE’s first federal corporate income tax regime represents a profound change for companies operating in the Emirates.
Current Tax Regime in the UAE
Under the current regime, CT is set by Tax Decree issued by the government of each of the seven Emirates.
While CT is payable under a progressive rate system under these Decrees, in practice, only foreign upstream oil and gas companies and branches of foreign banks have paid corporate tax, while companies operating in more than 40 free zones across the Emirates have enjoyed significant tax benefits, including corporate tax exemptions.
In practical terms, this means that very few entities registered in the UAE have had to file a corporate tax return, or grapple with issues such as deducting expenses, double taxation, or carrying forward losses.
New Corporate Tax Regime
The new CT regime will come into effect for financial years beginning on or after 1 June 2023. Taxable income will be based on accounting net profit in the financial statements, with minimal exceptions and adjustments. Tax losses incurred from the effective date of the new regime will be able to be carried forward to future financial periods, up to a maximum of 75% of taxable income in each future period.
Proposed Rates
- 0% CT for taxable income between AED 0 and AED 375,000
- 9% CT for taxable income above AED 375,000
- For UAE entities within large multinational groups subject to BEPS pillar two, a different rate will be applied (likely 15%).
Taxable Persons
The following entities will be taxable under the new regime:
- UAE-incorporated companies (LLCs, PSCs, PJSCs)
- Foreign legal entities with permanent establishments in the UAE
- Branches of foreign and UAE companies
- Taxable natural persons operating through sole establishments or as individual partners in unincorporated partnerships
Exempt Entities
The following entities will be exempt from UAE CT:
- Entities engaged in the extraction of UAE natural resources
- Charities and other public benefit organizations
- Federal and Emirate governments
- Wholly government-owned UAE companies
- Investment funds that meet certain criteria
Free Zones
Companies in UAE’s free zones will be subject to the new tax regime but can continue to benefit from the 0% CT rate if they comply with regulatory requirements and do not conduct business with the mainland.
Exempt Income and Deductions
Significant exemptions will be granted on foreign branch income, domestic dividends, and income from leasing aircraft or ships. However, some deductions such as interest expenses will be limited to 30% of EBITDA.
Transfer Pricing
Transfer pricing rules will apply under the new regime, resembling OECD Transfer Pricing Guidelines. Domestic and cross-border related party transactions will need to comply with arm’s length standards.
Tax Groups
UAE resident companies can form a tax group, provided certain criteria are met (95% ownership threshold). Smaller groups with 75% ownership can transfer losses for tax purposes.
Intra-Group Transactions
‘Qualifying’ intra-group transactions will not attract CT if specific conditions are met, including the three-year ownership rule for transferred assets.
Registering, Filing, and Compliance
Businesses will need to register with the Federal Tax Authority (FTA) and file CT returns electronically for each tax period. Penalties for non-compliance will apply, with a simplified reporting process for small and medium businesses.
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