Corporate Tax in UAE

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.

    Proposed Rates

    The following are the proposed corporate tax rates:

    • A 0% tax rate applies to taxable income up to AED375,000 (about US$102,095)
    • A 9% tax rate applies to taxable income over AED375,000 (about US$102,095)
    • 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 Income Tax(CIT)

    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 upto 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.

    Income exempted from CIT

    • Dividends, capital gains, interest, royalties, and other investment gains earned by overseas investors.
    • Dividend income from qualified shareholdings obtained by a UAE firm (to be defined in the law)
    • Intra-group transactions and group reorganization profits
    • Revenue comes from natural resource exploitation; and
    • Profit earned by Branches of Foreign banks
    • Foreign businesses and individuals that do not engage in continuous or frequent business activity in the UAE
    • A DIFC- or ADGM-incorporated firm is liable to a zero tax rate for a period of 50 years from the moment the law in issue takes effect, according to DIFC and ADGM legislation.

    How does Corporate Tax affect Foreign Direct Investment?

    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 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 MNC’s

    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

    • Individuals will not be levied 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.
    • Foreign investors who do not conduct business in the country will not be levied corporate tax.
    • 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 also the branches of foreign banks
    • Domestic and cross border payments will not be subjected to withholding tax.
    • CT won’t be applicable for capital gains and dividends received by a UAE business from its qualifying shareholdings.
    • CT won’t be applicable for qualifying intragroup transactions & restructurings.
    • Foreign tax will be permitted to be credited against UAE corporate tax payable.
    • Generous loss transfer and utilization rules will be available to businesses.
    • Transfer pricing as per the OECD is applicable.
    • Accounting profit, as per the international accounting standards.

    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.

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    Frequently Asked Questions – Corporate TAX

    1. What is corporate tax?

      Corporate tax is a form of direct tax charged on the net income or profit of corporations and other businesses.

    2. Who will be subject to UAE Corporate Tax?

      UAE CT will be applicable to businesses and commercial activities in the country. An exception is the extraction of natural resources, which will be under Emirate level corporate taxation.

    3. What will the UAE CT rates be?

      The CT rates are:
      0% for taxable profit up to AED 375,000;
      9% for taxable profit above AED 375,000

    4. Will an individual’s salary income be subject to UAE Corporate Tax?

      UAE CT will not apply on an individual’s salary and other employment income (whether received from the public or private sector).

    5. Will an individual who has a commercial license to carry out business in the UAE be subject to UAE CT?

      Business income earned under a commercial license will be within the scope of UAE CT.

    6. Will an individual who invests in UAE real estate be subject to UAE CT?

      Real estate investments by individuals in their personal capacity will not be subject to UAE CT, provided the individual is not required to obtain a commercial license or permit to carry out that activity in the UAE.

    7. Will an individual be subject to CT on investment returns?

      Individuals does not have to pay CT on dividends, capital gains and other income earned from owning shares or other securities in their personal capacity.

    8. Will the income earned by a freelance professional be subject to UAE CT?

      UAE CT will generally apply to income earned from activities carried out under a freelance license/permit.

    9. Will income earned by an individual from bank deposits be subject to UAE CT?

      Interest and other income earned by an individual from bank deposits or saving schemes will not be subject to UAE CT.

    10. Will intra-group transactions be exempt from UAE CT?

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

    11. Will a foreign company or individual be subject to UAE CT?

      Foreign entities and individuals will be subject to UAE CT only if they carry out a trade or business in the UAE in an ongoing or regular manner.

    12. Will income earned by a foreign investor be subject to UAE CT?

      UAE CT will generally not be charged on a foreign investor’s income from dividends, capital gains, interest, royalties and other investment returns.

    13. Will a free zone business be subject to UAE CT?

      Free zone businesses will be subject to UAE CT, but the UAE CT regime will continue with the CT incentives that are being offered to free zone businesses that fulfill the regulatory requirements and that do not conduct business with mainland UAE.

    14. Will a free zone business be required to register and file a CT return?

      Yes, businesses established in a free zone will have to register and file a CT return.

    15. Will the banking sector be subject to the UAE CT regime?

      Yes, banking operations will be subject to UAE CT.

    16. Will the real estate sector be subject to the UAE CT regime?

      Businesses engaged in real estate management, construction, development, agency and brokerage activities will be subject to UAE CT.

    17. Will excess CT losses be allowed to be carried forward and used in future years?

      Excess tax losses may be carried forward and used against taxable income later, provided certain conditions are fulfilled.

    18. Will businesses be required to register for UAE Corporate Tax purposes?

      Yes, More information on the registration process and ongoing compliance obligations for businesses will be provided in due course.

    19. How often will UAE businesses need to file a UAE CT return?

      UAE businesses will have to file a CT return once in a financial year and this can be done electronically.

    20. Will businesses be required to pay tax in advance?

      No, UAE businesses need not make advance UAE CT payments.

    21. What are the consequences for non-compliance under the CT regime?

      Businesses that fail to comply with CT regime will have to pay penalty.

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