The UAE Ministry of Finance (‘MoF’), on 31st January 2022, announced the introduction of Corporate Tax (‘CT’), which will be effective for financial years starting on or after 1st June 2023.
Corporate Tax (CT)is a form of direct tax levied on the net income or profit ofcorporations and other businesses.
Corporate Tax is sometimes also referred to as “Corporate Income Tax” or “Business Profits Tax” in other jurisdictions
The UAE CT regime will become effective for financial years starting on or after 1 June 2023
Examples:
●A business that has a financial year starting on 1 July 2023 and ending on 30 June 2024 will become subject to UAE CT from 1 July 2023 (which is the beginning of the first financial year that starts on or after 1 June 2023)
●A business that has a (calendar year) financial year starting on 1 January 2023 and ending on 31 December 2023 will become subject to UAE CT from 1 January 2024 (which is the beginning of the first financial year that starts on or after 1 June 2023)
EXECUTING AUTHORITIES AND JURISDICSTION
The Federal Tax Authority will be responsible for the administration, collection, and enforcement of UAE CT
The Ministry of Finance will remain the ‘competent authority’ for purposes of bilateral/multilateral agreements and the international exchange of information for tax purposes
UAE CT will apply to all UAE businesses and commercial activities alike, except for the extraction of natural resources, which will remain subject to Emirate level corporate taxation
Will foreign entities and individuals be subject to UAE CT?
Foreign entities and individuals will be subject to UAE CT only if they conduct a trade or business in the UAE in an ongoing or regular manner
How do you determine whether a legal entity has a “business” that will be within the scope of UAE CT?
All activities undertaken by a legal entity will be deemed “business activities” and hence be within the scope of UAE CT
How do you determine whether an individual has a “business” that will be within the scope of UAE CT?
This would generally be done by reference to the individual having (or being required to obtain) a business licence or permit to carry out the relevant commercial, industrial and/or professional activity in the UAE
How do you determine the business profit / income that will be subject to UAE CT?
The taxable income will be the accounting net profit / income of a business, after making adjustments for certain items to be specified under the UAE CT law
The accounting net profit / income of a business is the amount reported in the financial statements prepared in accordance with internationally acceptable accounting standards
UAE CT rates
TheCT rates are:
●0% for taxable income up to AED 375,000;
●9% for taxable income above AED 375,000; and
●a different tax rate for large multinationals that meet specific criteria set with reference to ‘Pillar Two’ of the OECD Base Erosion and Profit Shifting project
Large” multinationals
A multinational corporation is a corporation that operates in its home country, as well as in other countries through a foreign subsidiary, branch or other form of presence / registration. Merely earning income from outside its home country without a foreign presence or registration would not make a business a multinational corporation
In the context of the global minimum effective tax rate as proposed under ‘Pillar Two’ of the OECD Base Erosion and Profit Shifting project, ”large” refers to a multinational corporation that has consolidated global revenues in excess of EUR 750m (c. AED 3.15 bn)
Salary income not subject to UAE CT
UAE CT will not apply on an individual’s salary and other employment income (whether received from the public or private sector)
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
No CT on Income from investments in UAE real estate by an individual .
The investment in real estate by individuals in their personal capacity should not be subject to UAE CT provided the individual is not required to obtain a commercial license or permit to carry out such activity in the UAE
Investment returns earned by an individual is not subject to CT .
Individuals will not be subject to UAE CT on dividends, capital gains and other income earned from owning shares or other securities in their personal capacity
No CT in income earned by a freelance professional .
UAE CT will generally apply to income earned from activities carried out under a freelance license / permit, albeit no CT will be payable unless the annual net income of the freelance professional exceeds AED 375,000 (see below)
Income earned by an individual from bank .
Interest and other income earned by an individual from bank deposits or saving schemes will not be subject to UAE CT
TAX computed on a taxable income of AED 400,000 in a given financial year.
The CT liability will be calculated as follows:
●Taxable income of AED 0 – AED 375,000 at 0% = AED 0
●Portion of taxable income exceeding AED 375,000 (i.e. AED 400,000 – AED 375,000 = AED 25,000) at 9% = AED 2,250
The UAE CT liability for the year will be AED 0 + AED 2,250 = AED 2,250
The final amount of UAE CT payable will be reduced by any foreign taxes incurred on the relevant income (see below further questions on this topic)
Exemptions from UAE CT.
Businesses engaged in the extraction of natural resources will remain subject to Emirate level corporate taxation and be outside the scope of UAE CT
Information on other UAE CT exemptions and exclusions will be provided in due course.Dividends and capital gains earned by a UAE business from its qualifying shareholdings will be exempt from UAE CT
What is a ‘qualifying’ shareholding?
A qualifying shareholding refers to an ownership interest in a UAE or foreign company that meets certain conditions to be specified in the UAE CT law
Intra-group transactions .
Qualifying intra-group transactions and reorganizations will not be subject to UAE CT provided the necessary conditions are met
Relevance to foreign company or individual .
If a foreign company or individual is engaged in a business in the UAE in an ongoing or regular manner, they will be subject to UAE CT.
UAE CT will generally not be levied on a foreign investor’s income from dividends, capital gains, interest, royalties and other investment returns
Income from Free Zone business.
Free zone businesses will be subject to UAE CT, but the UAE CT regime will continue to honour the CT incentives currently being offered to free zone businesses that comply with all regulatory requirements and that do not conduct business with mainland UAE
Free zone business is required to register and file a CT return.
A company established in a free zone will be required to register and file a CT return
Further details on the compliance obligations of free zone businesses will be provided in due course
Will the UAE CT treatment be different for a free zone business established in a financial free zone?
The UAE CT treatment that will apply to businesses in free zones will be the same across all free zones
Will the oil and gas sector and other extractive industries be subject to the UAE CT regime?
Businesses engaged in the extraction of natural resources will remain subject to Emirate level corporate taxation and be outside the scope of the UAE CT
Banking sector is subject to the UAE CT regime.
Banking operations will be subject to UAE CT
Further details on the current Emirate level corporate taxation will be provided in due course
UAE CT is applicable to real estate sector.
Businesses engaged in real estate management, construction, development, agency and brokerage activities will be subject to UAE CT
Will the UAE CT regime allow prior year losses to reduce future taxable income?
The UAE CT regime will allow a business to use losses incurred (as from the UAE CT effective date) to offset taxable income in subsequent financial periods
A loss for CT purposes (tax loss) would arise when the total deductions the businesses can claim are greater than the total taxable income for the relevant financial period
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 in future years, provided certain conditions are met
Further information on the UAE CT loss carry-forward rules will be provided in due course
Will a group be able to utilise the tax losses of one group company against the taxable income of another group company?
Tax losses from one group company may be used to offset taxable income of another group company, provided certain conditions are met
Further information on the group loss utilisation rules will be provided in due course
Will a group of UAE companies be able to form a “fiscal unity” for UAE CT purposes?
A UAE group of companies can elect to form a tax group and be treated as a single taxable person, provided certain conditions are met
A UAE tax group will only be required to file a single tax return for the entire group
What is withholding tax?
Withholding tax is tax collected at source by the payer on behalf of the recipient of the income
Withholding taxes exist in many tax systems and are typically used in respect of dividends, interest, royalties and similar payments
What is the withholding tax rate under the UAE CT regime?
UAE withholding tax will not be applicable on domestic and cross-border payments of any nature under the UAE CT regime
Will foreign CT paid on UAE taxable income be recognised under the UAE CT regime?
Foreign CT paid on UAE taxable income will be allowed as a tax credit against the UAE CT liability
Transfer pricing rules.
Transfer pricing rules seek to ensure that transactions between related parties are carried out on arm’s length terms (i.e. as if the transaction was carried out between independent parties)
Transfer pricing rules be applicable to UAE businesses.
UAE businesses will need to comply with transfer pricing rules and documentation requirements set with reference to the OECD Transfer Pricing Guidelines
Will businesses be required to register for UAE CT purposes?
More information on the registration process and ongoing compliance obligations for businesses will be provided in due course
Frequency to file a UAE CT return.
Only one CT return will need to be filed per financial period
No provisional or advance CT filings will be required
A financial period is generally a year
Mode of filing CT return .
The CT return will need to be filed electronically.
Further guidance will be issued in this regard in due course
No advance TAX.
UAE businesses will not be required to make advance UAE CT payments
non-compliance under the CT regime is subject to fines/penalties.
Similar to other taxes in the UAE (e.g. VAT), businesses will be subject to penalties for non-compliance with the CT regime.
Further information on the UAE CT compliance obligations and applicable penalties will be released in due course