The UAE has not imposed corporate taxes on profits of most corporations or other businesses historically. That said, the Government of UAE will be introducing corporate tax to be levied on businesses, effective for financial years starting on or after 1 June 2023. This new tax regime is being introduced to cement UAE's position as the leading global hub for business and investment, and would be based on international best practices.
The details of the corporate tax regime given below are based on the press release and FAQs issued by the Ministry of Finance on its website.
What does the Corporate Tax Entail?
The corporate tax will apply to all businesses and commercial activities. Activities that are undertaken by a legal entity would be treated as business activities and fall within the scope of corporate tax. At present, businesses engaged in the extraction of natural resources are outside the scope of the tax regime and such businesses will continue to be subject to Emirate level corporate taxation. Other exclusions may be issued by the Government in due course.
The tax is federal in nature and will be levied across all Emirates.
The tax will be levied on the net profit of a business, after making adjustments for certain items which will be specified in the legislation.
What is the rate of Corporate Tax?
The Ministry of Finance has issued the tax rates for corporations. The tax rate is 0% if the taxable income is up to AED 375,000. The tax rate is 9% for taxable income which is above AED 375,000. However, in this case, the corporate tax liability will be calculated on the portion of the income which exceeds AED 375,000.
The Ministry of Finance also mentions an unspecified tax rate which will be applicable for large multinationals which meet specific criteria, having reference to the Pillar Two of the OECD Base Erosion and Profit-Sharing Project. In accordance with Pillar Two, large multinational corporation is a multinational corporation that has consolidated global revenues in excess of EUR 750 M or AED 3.15 bn.
What about Individuals?
Corporate tax will not be levied on an individual's salary or other employment income, investment in real estate and dividends, capital gains or other income from shares in their personal capacity.
That said, if an individual has a business permit or license to carry out commercial, industrial or professional activity in the UAE, the business income earned under such a commercial license will fall in the scope of the tax regime.
Interest and other income earned by an individual from bank deposits or saving schemes will not be subject to the tax regime. A foreign investor's income from dividends, capital gains, interest, royalties and investment returns will generally also not be subject to tax regime.
Taxes in the Free Zones
Free zone business will be subject to the tax regime, including registering and filing returns. However, corporate tax incentives applicable to free zone business will continue to be offered to them if they comply with all regulatory requirements and do not conduct business with mainland UAE.
Withholding tax will not apply to domestic and cross border payments of any nature under this regime. Additionally, a group of companies can elect to form a tax group, who would then be required to file a single tax for the entire group.
Transfer pricing rules, which relate to transactions between related parties which are carried out on arm's length terms, will be applicable on UAE businesses.
Further, businesses would be required to be registered, file periodic returns and be subject to penalties in case of non-compliance. The Federal Tax Authority will be responsible for the administration and enforcement of the tax regime.
The new corporate tax regime aims to minimize compliance burden for UAE businesses, take advantage of the extensive double tax treaty network of UAE and focuses on meeting international standards for tax transparency and preventing harmful tax practices.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.