Tax Update – The UAE announces the introduction of Federal Corporate Income Tax

On 31 January 2022 the UAE (“UAE”) Ministry of Finance (“MOF”) announced that the UAE will implement a Federal-level corporate tax (“CT”) for financial periods starting on or from 1 June 2023.

The introduction of CT in the UAE follows the proposal of a global minimum effective tax rate of 15% in 2023 under Pillar Two of the Organization for Economic Cooperation and Development’s (“OECD”) Based Erosion and Profit Shifting (BEPS) project and is in line with the UAE’s commitment to meet international standards for tax transparency and preventing harmful tax practices.

At the Emirates level, the UAE already has limited corporate taxes in place (which were not enforced in practice, except for upstream oil and gas companies) and specific taxes on branches of foreign banks.  However, the introduction of a Federal-level CT is a major development in the country’s tax landscape that will affect most UAE businesses.

Key features:

The UAE’s CT regime will incorporate best practices globally. The key features of the CT regime will be as follows:

• Scope: CT will apply to all businesses and commercial activities in the UAE, with some exceptions outlined below.

The taxable income will be the accounting net profit of the business (which is based on amounts reported in financial statements prepared under internationally acceptable accounting standards), after making certain adjustments.

• Exceptions:
  • Extraction of natural resources: CT will not apply to businesses engaged in the extraction of natural resources.
  • Free zones:  Existing tax holidays in the free zones will continue to apply, provided that the business established in the free zone complies with all regulatory requirements and does not conduct business with the UAE mainland.
  • Employees and personal investments: CT will not apply to salaries or on returns from investments generated by individuals who do not carry on a business.

• CT Rates:
  • 0% on taxable income up to AED 375,000;
  • 9% on taxable income above AED 375,000; and
  • A different tax rate for large multinational corporations that fall within the scope of Pillar Two of the OECD’s BEPS Project (i.e., consolidated global revenues in excess of EUR 750 million (approximately AED 3.15 billion)).

• Exemptions: Subject to certain conditions, no CT will apply to:
  • capital gains or dividends received from qualifying shareholdings; and
  • income arising from qualifying intragroup restructurings.
• Losses: Businesses will be allowed to utilise losses to offset taxable income in subsequent financial years. Excess tax losses may be carried forward and used against taxable income in future years, subject to certain conditions.
• Withholding tax: No withholding tax applies to any domestic or cross-border payments.
• Foreign tax credit: UAE businesses will be entitled to tax credit on foreign CT paid against their UAE CT liability – which is a feature of CT regimes that apply on a worldwide basis.
• Tax grouping: Tax grouping will be available to UAE group companies, provided certain conditions are met. A UAE tax group will only be required to file a single tax return for the entire group.
• Compliance:
  • Registration: Businesses will be required to register for CT. Further details are expected to be published soon.
  • Filing: One CT return will need to be filed electronically for each financial year. No provisional or advance CT filings will be required.
• Transfer Pricing: UAE businesses will need to comply with transfer pricing rules and documentation requirements in accordance with the OECD Transfer Pricing Guidelines.

Some Frequently Asked Questions have been published by the MOF (link here) and the Federal Tax Authority (link here). Further guidance and details are expected to be issued in the coming months.

How does it affect me?

The introduction of CT in the UAE represents a radical change to the UAE tax landscape. UAE businesses should understand the CT rules and assess its implications in order to be compliant.

We will be publishing a more detailed analysis on the CT regime shortly.

What should I do next?

Our multiple award-winning Tax team is here to help. With their expertise and significant experience of CT matters across the Middle East and all industry sectors, they are well placed to assess the impact of CT on your organisation and assist with your CT requirements in the UAE.