Corporate Tax in UAE

The tax and compliance requirements of the majority of UAE firms are anticipated to completely alter with the adoption of corporate tax in the UAE. At HLB HAMT, our dedicated tax team will offer the necessary support and solve your questions regarding corporate tax.

The UAE has decided to introduce Corporate Income Tax (CIT) on business profits in the country. It will be effective for financial years starting on or after June 2023.

The UAE is new to corporate tax and, as such, businesses will require the assistance of a consultancy that has an expert tax team. HLB HAMT, a FTA approved tax agent, has a tax team of 50+ professional staff members, who have served more than 800 clients for tax services in the UAE. Being a member firm of HLB International, the company has global exposure and is in a position to help companies comply with CT once it becomes effective.

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    Corporate Tax in UAE: An overview

    The United Arab Emirates, which is abode to the significant corporate gateway of Dubai, will continue to have one of the lowest corporate tax rates in the world. This proposal stems from the UAE’s intention to comply with international tax rules, reflecting similar efforts in other Gulf nations, while reducing regulatory burdens for UAE firms and protecting small businesses and start-ups.

    Effective Date

    The UAE has decided to implement corporate tax, which will enter into force for financial years beginning on or after June 1, 2023.

    Timeline

    A virtual Event on Latest Updates on Corporate Tax in UAE

    Corporate Tax Rates in UAE

    The following are the proposed corporate tax rates:

    • A 0% tax rate applies to taxable income up to AED375,000
    • A 9% tax rate applies to taxable income over AED375,000
    • All multinational corporations subject to OECD Base Erosion and Profit-Sharing laws that belong within Pillar 2 of the BEPS 2.0 framework, i.e. combined worldwide revenues in excess of AED 3.15 billion will be entitled to varying rates

    Why is the UAE introducing taxes on corporate income?

    • Increasing the country’s status as a major commercial and investment centre
    • To accelerate the UAE’s development and transformation in order to meet its strategic goals
    • Addressing international tax transparency standards
    • Keeping harmful tax methods out of the system
    • To lessen its dependency on oil revenue

    Scope of Corporate Tax in UAE

    The United Arab Emirates has implemented a federal tax structure that applies to all enterprises and commercial activity throughout the emirates. Let’s look at the scope of corporate taxation given below.

    • Besides the extraction of natural resources, which is presently liable to Emirate-level taxes up to 55% and the branches of foreign banks to whom 20% tax is applicable, the planned CIT regime is designed to be applicable to all commercial, industrial, and professional businesses in the UAE.
    • Businesses that are incorporated in Free zones must meet all regulatory standards and do not operate a business with the UAE mainland.
    • Apart from businesses involved in the production of natural resources such as oil and gas and branches of foreign banks, all UAE businesses will be liable for corporate tax.
    • All operations carried out by a legal body are considered “business activities” and are subject to the corporate tax framework.

    Exempt Income

    • Domestic dividends earned from UAE companies.
    • Dividends paid by foreign companies, and capital gains from the sale of shares in both UAE and foreign companies will also be exempt from CT, provided certain conditions are met.
    • Capital gains on the disposal of shares in a Free Zone Person will be exempt from CT where the Free Zone Person is a holding company and substantially all its income is derived from shareholdings in subsidiary companies that meet the participation exemption.
    • UAE companies having foreign subsidiaries can claim foreign branch profit exemption by two ways:
      • Claim a foreign tax credit for taxes paid in the foreign branch country, or
      • Elect to claim an exemption for their foreign branch profits
    • Income earned by a non-resident from operating or leasing aircraft or ships (and associated equipment) used in international transportation provided certain conditions are met.

    How does Corporate Tax affect Foreign Direct Investment in UAE?

    The implementation of a corporate tax is only one example of how the UAE is evolving and expanding rapidly. The government’s objective is to restructure the nation’s economy by shifting away from oil and gas dependency, and it is working to establish itself as a digital and technological powerhouse.

    The UAE’s intent to alter its corporate structure and stick to international regulations can be seen in the first massive revamp of labor law, the removal of the necessity for a UAE national to own at least 51 percent of a UAE company, and the change of the working week from Sunday to Thursday to Monday to Friday. The UAE will keep enticing highly skilled professionals since employment income will remain tax-free, and no tax will be applied on income or profits derived from personal holdings. Yet, as a result of these developments, the cost of living and conducting business has risen.

    Impact of Corporate Tax on UAE Free zones

    The UAE plans to keep its promise to businesses registered in Free Zones that do not operate a business with the mainland that they will be getting the benefit of corporate tax incentives depending on the respective Free Zone regulations. An yearly CIT return is required to be submitted for all free zones.

    It’s reasonably common for companies to function out of a free zone, with a percentage of their revenue coming from onshore sales of goods or services. Excessive administrative necessities to contribute for onshore-generated revenues are likely to be implemented in the future. With the loosening of foreign ownership limitations and more real estate options, it’s possible that enterprises headquartered in free zones would consider establishing an onshore foothold.

    Corporate Tax on MNCs

    When the UAE introduces one of the world’s lowest corporate tax rates in June 2023, the UAE is expected to attract international firms. It may seem contradictory that taxing corporate profits will encourage investment and attract international corporations. However, if a country implements a competitive tax policy, it may become a desirable location for multinational companies seeking “transparent and dynamic” countries.

    Mergers & Acquisition sector

    The implementation of corporate tax will have an impact on the corporate mergers and acquisition sector. The fact that dividends and capital gains from a qualified ownership would be tax-free will be welcomed by investors. Nevertheless, more due diligence efforts are likely to be incurred in order to guarantee that the corporate tax responsibilities being inherited are well addressed.  Also, businesses should evaluate their current structures and activities in order to implement the most robust operational frameworks and strategies once the CT Law is established and in force.

    Key takeaways from the UAE Corporate Tax

    • Natural person will not be levied a corporate tax on income generated from employment, real estate, investment in shares or other personal income that is not associated with UAE trade or business.
    • Non-residents are subject to tax on UAE sourced income and taxable income form PE in the UAE.
    • Corporate tax will apply to the adjusted accounting net profit of the business.
    • Free zone businesses can still benefit from corporate tax incentives, provided they fulfil all the necessary requirements.
    • The extraction of natural resources will be excluded from corporate tax, as it will remain subject to emirate level corporate taxation and the branches of foreign banks
    • Domestic, cross-border payments and specified transactions are subject 0% withholding tax (WHT).
    • Capital gains and dividends are exempt from corporate tax, provided certain conditions are met.
    • UAE resident companies can form a tax group provided certain conditions are met.
    • The UAE CT regime allows transfer of tax losses from one group company to another group company with profits, provided certain conditions are met.
    • Group relief for the qualifying intra-group transactions and restructuring.
    • The UAE CT regime will allow a credit for the tax paid in a foreign jurisdiction against the UAE CT liability on the foreign-sourced income.
    • Generous loss transfer and utilization rules will be available to businesses.
    • Transfer pricing as per the OECD guidelines is applicable.
    • Accounting profit, as per the international accounting standards. But relaxation for certain taxpayers.
    • An alternative mechanism for determining taxable income simplified financial and tax reporting obligations for certain taxpayers (e.g., Startups and small businesses).

    The impact of Corporate Tax on UAE businesses

    With the introduction of corporate tax in the UAE, a major change is expected in the tax and compliance costs of most UAE businesses. Entities must be compliant with the new tax regime and this requires an accurate identification of tax implications and alterations to corporate structure, operating model(s), finance/tax operations, reporting systems, legal agreements and transfer pricing policies if required.

    Our designated tax team at HLB HAMT will provide the required assistance and clear your queries on corporate tax.

    Contact us at tax@hlbhamt.com

    Frequently Asked Questions – Corporate TAX

    1. Will individuals be subject to UAE Corporate Tax?

      Individuals are subject to corporate tax on business income or commercial activity in UAE. An Individual who is engaged in a business is subject to UAE CT would generally depend on whether the activity requires such individual to obtain a commercial licence or equivalent permit from the relevant competent authority.

    2. What are all the income not subject to Corporate Tax for individuals?

      Employment and other personal income earned by UAE and foreign individuals such as dividends, rental receipts from UAE real estate investments, and other investment income will not fall within the scope of the proposed UAE CT regime.

    3. What will be the tax treatment for income from limited and general partnerships under Corporate Tax regime?

      Limited /general partnerships and other unincorporated joint ventures and associations of persons are treated as ‘transparent’ for UAE CT purposes. This means that they will not be taxpayers in their own right, but their income will instead ‘flow through’ and be taxed in the hands of the partners or members only.

    4. Who are all the person exempt from UAE Corporate Tax?

      • The Federal and Emirate Governments and their departments, authorities, and other public institutions
      • Wholly Government-owned UAE companies that carry out a sovereign or mandated activity, that are listed in a Cabinet Decision
      • Businesses engaged in the extraction and exploitation of UAE natural resources that are subject to Emirate-level taxation
      • Charities and other public benefit organisations that are listed in a Cabinet Decision
      • Public and regulated private social security and retirement pension funds
      • Investment funds, subject to meeting the conditions
    5. What are the conditions for availing tax incentives for freezones?

      The UAE CT regime will honour the tax incentives currently being offered to Free Zone Persons that:

      • Maintain adequate substance
      • Comply with all regulatory requirements applicable as per relevant Freezone authorities.
    6. Is there any alternative mechanism for determining taxable income for start-ups and small business?

      A consideration is being given allowing alternative financial reporting standards and mechanisms for determining taxable income to accommodate and reduce the compliance costs for certain taxpayers (e.g., start-ups and small businesses).

    7. What is treatment for unrealised gains and losses under Corporate Tax regime?

      Unrealised gains or losses on CAPITAL items are not considered when calculating taxable income whereas unrealised gains or losses on REVENUE items will need to be taken into account when calculating taxable income.

    8. What are the conditions for claiming exemption for foreign dividends and capital gains under CT regime?

      • UAE shareholder company must own at least 5% of the shares of the subsidiary company
      • The participation exemption will only be available if the foreign subsidiary is subject to CT (or an equivalent tax) at a rate of at least 9%.
    9. How can UAE business claim foreign branch profit exemption?

      UAE companies can either:

      • Claim a foreign tax credit for taxes paid in the foreign branch country, or
      • Elect to claim an exemption for their foreign branch profits.
    10. Which are all the non-deductible expense for calculating taxable income?

      • Related party payments made to a Free Zone Person that is taxed at 0% on receipt of the income
      • 50% of expenditure incurred to entertain customers, shareholders, suppliers, and other business partners
      • Administrative penalties, recoverable VAT, and donations paid to an organisation that is not an approved charity or public benefit organisation
    11. Will excess CT losses be allowed to be carried forward and used in future years?

      Tax losses can be carried forward indefinitely provided

      • The same shareholder(s) hold at least 50% of the share capital from the start of the period a loss is incurred to the end of the period in which a loss is offset against taxable income.
      • If there is a change in ownership of more than 50%, tax losses may still be carried forward provided the same or similar business is carried on by the new owners.

      The continuity of shareholder or business requirements do not apply to businesses that are listed on a recognised stock exchange.

    12. Whether the audit of financial statements is mandatory under Corporate Tax regime?

      The audit of financial statements by an accredited audit firm is and will continue to be determined by applicable company Laws and Regulations. However, the UAE CT regime will require a Free Zone Person to have the audited financial statements if it wants to benefit from the 0% CT regime.

    13. What are the documentation requirements?

      A business will be required to maintain financial and other records that explain the information contained within the CT return and other documents submitted to the FTA. Certain exempted persons will also be required to maintain records to allow the FTA to ascertain the person’s exempt status.

    14. What is the due date for filing corporate tax returns?

      Each tax return and related supporting schedules will need to be submitted to the FTA within 9 months of the end of the relevant Tax Period.

    15. What is tax credit?

      To avoid double taxation, the UAE CT regime will allow a credit for the tax paid in a foreign jurisdiction against the UAE CT liability on the foreign-sourced income that has not been otherwise exempted. This is known as “Foreign Tax Credit.”

    16. What is the maximum foreign tax credit available to UAE companies?

      The maximum Foreign Tax Credit available will be the LOWER of:

      • The amount of tax that paid in the foreign jurisdiction; or
      • The UAE CT payable on the foreign-sourced income.
    17. Whether business can carry forward the unutilised foreign tax credit?

      No, any unutilised Foreign Tax Credit will not be able to be carried forward or back to other tax periods. There is no refund mechanism for any unutilised Foreign Tax Credit as well.

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