Corporate Tax in UAE: An overview
The UAE Ministry of Finance has introduced Corporate Tax, a direct tax imposed on the net income of corporations and other businesses, on 9th December 2022 and this is going to be effective for financial years on or after 1st June, 2023. The Corporate Tax is also referred to as “Business Profits Tax” or “Corporate Income Tax” in other jurisdictions.
The Corporate Tax of UAE will remain the lowest tax rate in the world, and it reduces the compliance burden on businesses. The introduction of Corporate Tax will increase the revenue of the UAE which is essential to stand competitive in the global business and investment environment. This would bring more financial discipline in the corporate culture which would in turn result in the proper maintenance of record keeping. The proposal of introducing Corporate Tax stems from the UAE’s commitment to meet international standards of tax transparency while protecting start-ups and small businesses in the UAE.
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The UAE will be implementing corporate tax for financial years beginning on or after June 1, 2023.
What are the aims of the UAE on introducing taxes on corporate income?
- Increasing the country’s status as a major commercial and investment centre.
- To meet the strategic goals by speeding up the transformation and developmental programs.
- Addressing international tax transparency standards.
- To put unhealthy tax methods out of the system.
- To diversify its revenue in non-oil industry.
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Corporate Tax Rates in UAE
The following are the Corporate Tax rates:
All multinational companies covered by OECD Base Erosion and Profit-Sharing rules that fall under Pillar 2 of the BEPS 2.0 framework, i.e., have combined worldwide revenues over AED 3.15 billion, will be eligible for a range of rates.
Scope of Corporate Tax in UAE
The United Arab Emirate introduced a federal tax structure applicable to all business operation and commercial activity carrying out throughout the emirates. Let’s have a look at the scope of corporate taxation given below. CT will apply to:
- Businesses and individuals conducting business activities under a commercial licence in the UAE.
- Free zone businesses (Freezone companies shall receive the benefit of the CT incentives if they comply with all regulatory requirements and are not conducting business in the UAE’s mainland).
- Foreign companies and individuals only if their business is effectively managed and controlled in the UAE.
- Banking operations.
- Businesses that encompass construction, development, real estate management, agency, and brokerage activities.
- Automatically exempt
- Government entities.
- Government-controlled entities specified in a cabinet decision.
- Exempt if notified to Ministry of Finance (and subject to meeting certain conditions)
- Extractive business.
- Non extractive natural resource Business.
- Exempt if applied to and approved by FTA and subject to meeting certain conditions
- Qualifying public benefit entities.
- Public and private pension and social security funds.
- Qualifying investment funds.
- Wholly owned and controlled UAE subsidiaries of a Govt entity, a govt controlled entity, a qualifying investment fund or a public or private pension or social security fund.
- CT won’t apply to dividends or capital gains that a UAE business makes from its qualifying shareholdings.
- Qualifying intra-group transactions and reorganizations will not be subject to CT, provided the necessary conditions are met.
- Automatically exempt
Additionally, CT will not apply to:
- Individual earnings salary and other employment income, whether received from the public or the private sector.
- Interest and other income earned from bank deposits or saving schemes by an individual.
- Foreign investor’s income made from dividends, capital gains, interest, royalties, and other investment returns.
- Investment in real estate done by individuals in their personal capacity.
- Dividends, capital gains, and other income received by people through their own ownership of shares or other securities.
Influence of Corporate Tax on UAE Free zones
According to the rules of each Free Zone, the UAE intends to uphold its commitment to businesses registered in Free Zones that do not conduct business with the mainland and that will benefit from corporate tax benefits. All free zones are obliged to submit an annual CIT return.
The following requirements must be met by a free zone person in order to qualify as one:
- Keep the UAE’s substance up to par
- Derive ‘Qualifying Income’
- not chosen to be liable to Corporate Tax at the Standard Rates; and
- Follow the Corporation Tax Law’s transfer pricing obligations.
A Qualified Free Zone Person may be required to comply with extra requirements set forth by the Minister. The usual rates of corporate tax will apply starting with the start of the Tax Period in which the Qualified Free Zone Person fails to satisfy any of the qualifications or elects to be subject to the regular corporate tax regime.
Corporate Tax on MNCs
With the introduction of UAE Corporate tax effective from June 2023, the UAE is expected to attract international firms. The concept that taxing corporate earnings will boost investment and draw in global firms may sound contradictory. However, with the UAE’s competitive tax policy, it is expected to rise to the top of multinational corporations’ lists of “transparent and dynamic” locations.
Mergers & Acquisition sector
The corporate mergers and acquisitions market would be impacted by the introduction of corporate tax. Investors will be delighted because qualified ownership would result in tax-free dividends and capital gains. Nevertheless, increased due diligence efforts may be required to guarantee that the corporate tax responsibilities being inherited are well addressed. Also, businesses should evaluate their current structures and activities at the earliest to implement the most robust operational frameworks and strategies as the CT Law is established and will be enforced soon.
What impact does corporate tax have on Foreign Direct Investment in the UAE?
The adoption of a corporate tax is only one instance of how quickly the UAE is developing and expanding. The goal of the administration is to rebuild the country’s economy by transitioning it off of its reliance on oil and gas, and it is making efforts to position itself as a digital and technical powerhouse.
The UAE’s intent to alter its corporate structure and follow international regulations can be seen in the first massive revamp of labour law, the shift of the workweek from Sunday to Thursday to Monday to Friday, and the elimination of the requirement that a UAE national control at least 51 percent of a UAE enterprise. The UAE will keep enticing highly skilled professionals since employment income is to remain tax-free, and no tax is applied on income or profits derived from personal holdings. Yet, these changes have increased the expense of living and doing business.
Registering, Filing and Paying Corporate Tax
All Taxable Persons (including Free Zone Persons) and those exempt persons who are required to register for corporate tax must register for Corporate Tax and obtain a Corporate Tax Registration Number.
During each Tax Period, Taxable Persons are expected to submit a Corporate Tax return within nine months after the conclusion of the applicable period. The same deadline would apply for the payment of any Corporate Tax due in respect of the Tax Period for which a return is filed.
Key takeaways from the UAE Corporate Tax
- Natural persons shall not be subject to corporate tax on income derived from employment, real estate, share investments, or other personal income that is not related to UAE trade or commerce.
- Non-residents are required to pay tax on income earned in the UAE as well as taxable income from PE.
- The business’s adjusted accounting net profit will be subject to corporate tax.
- Businesses operating in free zones are still eligible for corporation tax benefits as long as they meet all criteria.
- 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).
- If certain requirements are met, capital gains and dividends are free from corporate tax.
- Companies based in the UAE may establish a tax group provided certain requirements are completed.
- If certain requirements are met, the UAE CT framework permits the transfer of tax losses from one group company to another group company having profits.
- For eligible intra-group transactions and restructuring, there is group relief.
- The UAE CT scheme permits a credit for taxes paid in another country against the UAE CT responsibility on income with a foreign source. 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., Start-ups and small businesses).
The impact of Corporate Tax on UAE businesses
The tax and compliance costs of the majority of UAE firms are anticipated to significantly change with the implementation of corporate tax in the UAE. The new tax system must be complied with by entities. This calls for a precise assessment of the tax ramifications and necessary adjustments to the corporate structure, operational model(s), finance/tax operations, reporting systems, legal agreements, and transfer pricing rules.
At HLB HAMT, our specialist tax team will offer the necessary support and respond to your inquiries regarding corporate tax. Contact us at email@example.com
Frequently Asked Questions – Corporate TAX
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.
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.
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.
Who are all the person exempt from UAE corporate tax?
o The Federal and Emirate Governments and their departments, authorities, and other public institutions
o Wholly Government-owned UAE companies that carry out a sovereign or mandated activity, that are listed in a Cabinet Decision
o Businesses engaged in the extraction and exploitation of UAE natural resources that are subject to Emirate-level taxation
o Charities and other public benefit organisations that are listed in a Cabinet Decision
o Public and regulated private social security and retirement pension funds
o Investment funds, subject to meeting the conditions
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.
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).
What is treatment for unrealised gains and losses under corporate tax regime?
Unrealised gains or losses on CAPITAL l 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.
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%.
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.
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
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
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.
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.
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.
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.”
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.
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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