UAE to embrace Corporate Tax Regime

Introduction

In January 2022, Ministry of Finance announced that there will be an introduction to Federal Corporate Tax in UAE on the net profits of businesses. Corporate tax is a form of direct tax levied on the net income or profit of corporations and other businesses. It is also referred to as “Corporate Income Tax” or “Business Profits Tax” in some tax regimes. The corporate tax will be levied on the businesses from 1^st June 2023. UAE is following the Gulf Cooperation Council countries in adopting the corporate tax regime, with five out of six GCC countries now operating the levy.

The reason behind the low rate of levy in the UAE is to maintain its reputation as a low tax country and continue to progress, diversifying its revenue away from oil. Introduction of such a tax regime reaffirms the UAE’s commitment to meeting international standards for tax transparency and preventing harmful tax practices.

Applicability and Exemption for Corporate Tax

The corporate tax will apply to all business and individuals conducting business activities with a commercial license in UAE.
Any foreign entity or individual conducting any trade or business in the UAE.
business engaging in real estate management, construction, development, or any brokerage activities.

Exemptions

Any dividend income earned by UAE company from its qualifying shareholding and capital gains.
Profit from group re-organization and Intra-Group transactions.
No Tax on UAE withholding tax on domestic and cross border payments.
The federal government and Emirates Governments and their department, authorities, and other public institution.
Wholly government owned UAE companies carrying out a sovereign or mandated activity and listed in a cabinet decision.
Business engaged in the extraction and exploitation of UAE natural resources that are subjected to emirate-level taxation (E.g., upstream oil and gas companies).
Charities and other public benefit organisations.

Free Zones

The UAE Corporate Tax regime will continue to honour the tax incentives currently being offered to free zone businesses that comply with all regulatory requirements and that do not conduct business setup in the UAE’s mainland.

A free zone entity or individual having a branch in the mainland of UA will be a taxpayer at a regular CT rate on the incomes sourced from mainland branch with a continuation of 0% CT rate on its “other income”.

However, if a free zone person transacts with mainland UAE and does not hold any branch in the mainland, then the free zone can continue to enjoy a benefit of 0% CT rate on the income which is “passive” in nature which means earned through royalties, dividends, capital gains, etc.

Rates on which the CT is levied

0% for businesses with taxable income not exceeding AED 375,000 or if treated as an eligible free zone person.
9% for businesses with taxable income exceeding AED 375,000.
- Example: If there is a set income of 400,000; then the amount over and above AED 375,000 will be charged with 9% CT which is (400,000 – 375,000 = 25,000) @ 9% = AED 2,250

So, the UAE CT liability for the year will be AED 0 + AED 2,250 = AED 2,250

A different rate (likely 15%)¹ for the members of multinational groups that meet specific criteria set with reference to ‘Pillar Two’ of the OECD Base Erosion and Profit Shifting Project.

Residency

A legal person that is incorporated in the UAE will automatically be considered a ‘resident’ person for UAE CT purposes.
Any individual who is involved in any commercial or business activities in UAE in their own name or in partnership, will be considered as a resident for any purposes of CT regime.
Any foreign company which is managed or controlled in UAE will also be a resident person.

All the above-mentioned legal person as per CT regime will be taxed in the UAE on their worldwide income and natural person will be taxed on their earning from their business activities carried out in UAE.

Non-Resident

Non-residents will only be charged with tax in two cases:

When the income is sourced out of a permanent establishment in UAE. Permanent establishment can be defined by reference to whether there is a “fixed place of business”, or a dependent agent exercising the authority to conclude contracts on behalf of, non-resident person in UAE.
Any income which is sourced in UAE

Losses

In terms of business, it will be able to set off a loss incurred in a time span of one year against taxable income of future period, up to a maximum of 75% of the taxable income in each of those future periods. The tax losses can be carry forwarded to the shareholders holding at least 50% of the share capital from the date loss incurred to the end when the loss was set off.

Related post: Ten Convincing Cases for Business Lawyers

Conclusion

Implementation of Corporate Taxation in UAE logically follows the role as a member of OECD inclusive framework, in pursuance to global minimum tax offered by Pillar II. The proposal of tax rate of 9% is comparatively higher to that of other jurisdiction but the CT regime is a well-recognised and based on practical international standards, making the cost and process of implementing the law relatively Pillar II effective when compared to another jurisdiction. the idea behind the policy helps in maintaining most distinct tax benefits which will open door for different businesses who want to consider their corporate structures to avail themselves of the available tax benefits.

Such policies will help the UAE in transforming as a country’s regulatory landscape, now the companies will be fully aware to comply the new form of taxations. Such introduction of tax involves the role of a corporate tax advisor who can help companies to prepare for corporate tax by offering tax assessment and tax advisory services which will also ensure tax compliance.

Call us to know how Lawgical Group, one of the best business advisory companies in Dubai, can help you stay compliant with the newly introduced corporate tax law in UAE.

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