New UAE Corporate Tax
New UAE Corporate Tax: the UAE CT (last updated on 8 February 2022)
A few days ago, the UAE Government announced in a short communication that it would implement a Corporate Tax. Here is what we already know.
Where will the UAE CT be applicable?
Across all Emirates, as it is a federal tax. As a result, the Federal Tax Authority will be responsible for the administration, collection, and enforcement of the UAE CT. The UAE Ministry of Finance will remain the “Competent Authority” for purposes of bilateral/multilateral agreements and the international exchange of information for tax purposes.
Who will be subject to the UAE CT?
The UAE CT will apply to all UAE businesses and commercial activities, except for the extraction of natural resources, which will remain subject to Emirate-level corporate taxation.
As a result:
- All activities undertaken by a legal entity will be deemed “business activities” and hence be within the scope of the UAE CT.
- Individuals having (or being required to obtain) a business license or permit to carry out the relevant commercial, industrial and/or professional activity in the UAE will also be subject to the UAE CT. This includes individuals who are freelance workers who carry out their activities with a business license or a permit.
- Foreign entities and individuals conducting a trade or business in the UAE “in an ongoing or regular manner” will be subject to the UAE CT.
- Businesses established in Free zones will be subject to the UAE CT, but the new tax regime will continue to honour the incentives currently being offered to those businesses that comply with all regulatory requirements and that do not conduct business with mainland UAE.
- Specific sectors subject to the UAE CT: businesses engaged in banking operations, real estate management, construction, development, agency, and brokerage activities.
- All legal entities and individuals in the scope of the UAE CT will be required to register for Corporate Tax purposes and file a yearly tax return.
When is the UAE CT applicable?
For financial years starting on or after 1 June 2023. For instance, if on any given year, a company’s financial year starts on 1 January and ends on 31 December, the new tax rules will be applicable to this company for the financial year starting on 1 January 2024.
Which income will be taxed?
- The taxable income will be the accounting net profit of a business, after making adjustments for certain items (conditions to be specified).
- The accounting net profit of a business is the amount reported in the financial statements prepared in accordance with internationally accepted accounting standards.
- Losses incurred (as from the UAE CT effective date) can be used to offset taxable income in subsequent financial periods. As a reminder, a loss for UAE CT purposes (called a “tax loss”) would arise when the total deductions the businesses can claim are greater than the total income for the relevant financial period.
- Tax credits: foreign corporate tax paid on UAE taxable income will be allowed as a tax credit against the UAE CT liability.
- Additionally, UAE businesses will need to comply with transfer pricing rules and documentation requirements set with reference to the OECD Transfer Pricing Guidelines.
What are the exemptions?
- For the individuals, the following income should not be subject to the UAE CT:
- Salary and other employment income (whether received from the public or private sector),
- The investment in real estate in a personal capacity provided the individual is not required to obtain a commercial license or permit to carry out such activity in the UAE,
- Dividends, capital gains, and other income earned from owning shares or other securities in a personal capacity,
- Interest and other income earned from bank deposits or saving schemes.
- For businesses, the following income should not fall under the scope of the UAE CT – the conditions for these exemptions are yet to be specified:
- Dividends and capital gains earned from its “qualifying shareholdings”,
- Qualifying intra-group transactions and reorganisations. Potentially, this means that businesses will have to use specific reporting and presentation templates for their accounts, segregating the revenue exempt from the UAE CT.
- Generally, Foreign investors’ income from dividends, capital gains, interest, royalties and other investment returns will not be subject to the UAE CT.
- UAE withholding tax will not be applicable on domestic and cross-border payments of any nature under the new UAE CT regime.
What are the tax rates?
- 0% for taxable income up to AED 375,000 (approx. USD 102,000);
- 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 BEPS rules.
What is a large multinational?
A multinational corporation is a corporation that operates in its home country, as well as in other countries through a foreign subsidiary, branch, or another form of presence (or registration). Earning income from outside its home country without a foreign presence or registration would not make a business a multinational corporation for the purpose of the application of the UAE CT.
In the context of the global minimum effective tax rate (GMETR) as proposed under Pillar Two of the OECD BEPS rules, “large” refers to a multinational corporation that has consolidated global revenues higher than EUR 750m (approx. AED 3.15 bn).
A UAE group of companies could elect to form a Tax Group and be treated as a single taxable person (conditions to be specified). As a result, a UAE tax group would only be required to file a single tax return for the entire group. Tax losses from one group company may be used to offset the taxable income of another group company (conditions to be specified).
A summary of what still needs to be clarified by the UAE Government
Many aspects remain unclear. Further guidelines are under preparation and will be issued in due course by the UAE Government. Specifically, we look forward to being provided with more details on:
- Corporate Tax (online) registration, compliance, and filing rules for both businesses and individuals (including the ones established in Free zones),
- Definition of “ongoing or regular” business activities for the application of the UAE CT to Foreign entities and individuals,
- The notion of “qualifying shareholdings” of a UAE business,
- Exemptions for foreign investors,
- Losses carry forward rules and timelines, and potential losses carryback rules, both for businesses and Tax Groups,
- Tax Group consolidation rules,
- The tax rate applicable to large multinationals,
- And more generally, any other potential tax exemptions and exclusions.
We will communicate further when the UAE Government issues the detailed Corporate Tax Law and related guidelines.
More about ADG’s Head of Tax Practice: Izzat-Begum B. Rajan combines over two decades of experience in tax-efficient legal structuring and large tax disputes management focusing primarily on Europe, the Middle East, Africa and India. She holds a master’s degree in Taxation (from Pantheon-Assas University in Paris, France) and an LL.M. in Law of International Finance (from the University of London, UK). She is also currently a Ph.D. candidate in Taxation at the University of Montpellier (France) where she is researching the Tax Framework(s) of Crypto Currencies and Assets (2021-2024).
Head of Tax Practice and Senior Counsel