Introduction of UAE Corporate Tax: What Businesses Need to Know
On 31 January 2022, the UAE Ministry of Finance announced the introduction of a new Federal Corporate Tax regime (CT) applicable to businesses and corporations from financial years beginning on or after 1 June 2023.
This means that many businesses will now need to pay corporate tax on business net revenue, presenting new challenges and calling on the need for companies to fully evaluate and understand the implications on revenue streams in the UAE mainland, freezones and internationally and to employ appropriate measures to reduce the tax burden on the company.
This article gives an overview of the new UAE Corporate Tax regime, the key policy drivers, and what your business needs to know to help you minimise any negative impacts.
What is the UAE Corporate Tax?
On 31 January 2022, the United Arab Emirates announced Federal Decree-Law No. 47 of 2022 on taxation of corporations and businesses. The regime is set to come into effect for years beginning on or after 1 June 2023. Prior to the passing of this new corporate tax law, the UAE did not have a federal CT regime. Instead, CT was determined at the Emirate level through applicable tax decrees. The new CT regime will levy 9% tax on any taxable company income that exceeds AED 375,000. Any income below the AED 375,000 threshold will not be subject to any corporate tax.
What are the Key Policy Drivers?
The UAE is a member of the Organisation for Economic Co-operation and Development (OECD) inclusive framework, a global collaboration to reform international taxation rules and ensure that multinational enterprises pay a fair share of tax irrespective of where they operate. The UAE’s Federal Corporate Tax regime is a first step towards honouring their commitment to the global minimum effective tax rate that was proposed by Pillar II of the OECD Base Erosion and Profit Shifting Project, known as OECD BEPS.
The introduction of the Corporate Tax regime also serves as a stepping stone towards diversifying the government’s income and moving away from sole revenue generation by the hydrocarbon industry.
What Does Your Business Need to Know?
Who is subject to the new corporate tax?
The corporate tax breaks down taxpayers into a few different categories:
- Resident Person – Taxes are assessed on income from both foreign and domestic sources. A resident person is a business that is incorporated under UAE law on the mainland or within a free zone. Foreign businesses that are managed and controlled in the UAE are also considered resident persons.
- Non-Resident Person – Taxes are assessed only on income that is generated within the UAE. A non-resident person does not qualify as a resident person and does not have a permanent establishment or state-sourced income.
- Permanent Establishment – Taxes are assessed if the business has established a sufficient presence in the UAE and is generally based on international laws and treaties.
There are certain industries that are exempt from corporate tax:
- 1. Government Entities (automatic)
- 2. Extractive Businesses and Non-Extractive Natural Resource businesses (must notify Ministry of Finance for exemption)
- 3. Qualifying Public Benefit Entities (cabinet decision determines exemption)
- 4. Private Pension and Social Security Funds, Qualifying Investment Funds, Subsidiaries of Government Entities (Federal Tax Authority must approve exemption)
What income is taxable?
Like many other corporate tax policies, businesses are able to deduct qualifying business expenses to reduce taxable income.
Taxable income is computed based on the book income with additional adjustments for non-taxable or taxable items.
Dividends and capital gains from domestic and foreign companies are generally exempt from the corporate tax to avoid double taxation. In addition, tax treaties are also honoured.
Implications for free zone registered entities
Companies and branches registered within free zones also fall within the scope of the CT regime and as such will be required to file tax returns. However, many free zones have arrangements whereby they offer 15 to 50 year ‘tax holidays’ to their registered companies. In order to honour these existing arrangements, the UAE government will ensure that they are subject to a 0% tax rate as long as they maintain adequate substance and comply with all relevant regulatory requirements.
To not be subject to CT it is important that any free zone businesses that trade in the UAE mainland set up a separate mainland branch office and separate free zone and mainland revenue so that the free zone entity can continue to benefit from 0% CT. If this is not done, then all profit will be taxed at 9%.
Properly leveraging free zones can help your company maintain a tax-free shelter to reduce your corporate tax liability. Although mainland profits will be subject to the 9% rate, setting up a branch office can help you avoid reporting all income as taxable.
Businesses that generate income in the UAE need to understand the ramifications of the new Corporate Tax imposed by the UAE.
Many businesses have an opportunity to lower their tax burden by creating separate branch offices; however, specific guidelines are required to be followed.
Working through the specifics of leveraging a free zone and reducing taxable income can be overwhelming, especially as the Corporate Tax has yet to be closely examined and guidelines remain unclear. This is when working with a professional can be beneficial.
How can PRO Partner Group help?
PRO Partner Group and their locally based tax and audit specialists can advise you on the implications of the new corporate tax on your business and how you can best plan to ensure that your company has the right structure and systems in place to manage your tax obligations going forward and not be subject to unnecessary tax burden.
If you need assistance with any issues pertaining to the introduction of corporate tax in the UAE, or for any other related company setup, restructuring, local partner or PRO support matter in Abu Dhabi, Dubai, the wider UAE, Oman, Qatar or KSA, then please do get in touch with us on +971 (0)4 456 1761 for Dubai or +971 (0)2 448 5120 for Abu Dhabi, email us at email@example.com or complete the contact form below and we will be delighted to assist you.