Corporate tax in UAE

The UAE 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 the UAE will still be one of the most attractive worldwide locations for businesses:-

• No other location has a lower corporate tax rate. Only Hungary and Montenegro share 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 at 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 starting date announced by the Ministry of Finance is financial years starting on or after 1 June 2023, in practice for the majority of companies in the UAE with a calendar financial year end,the effective date of implementation will be 1 January 2024.

Scope and rate

All UAE businesses, corporations and entities licensed to undertaken commercial activities will be subject to UAE corporate tax with the exception of businesses engaged in the extraction of natural resources which will continue to be subject to Emirate level taxation.

Businesses will 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 so that profits 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.

Action needed

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.

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Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.

You can access Law including Guidelines, Cabinet & FTA Decisions, Public Clarifications, Forms, Business Bulletins for all taxes (Vat, Excise, Customs, Corporate Tax, Transfer Pricing) for all GCC Countries in the Law Section of GCC FinTax