On January 31, 2022, the Ministry of Finance announced that the United Arab Emirates (UAE) will introduce a Federal Corporate Tax on business profits effective from June 1, 2023. The new tax regime has been introduced with the aim to incorporate best practices globally and minimize the compliance burden on businesses.
The statement mentions that the tax will be levied on all corporations and commercial activities in the UAE with a few exceptions. The new regime implies a standard statutory tax rate of 9% for taxable income exceeding 375,000 UAE dirhams ($102,000). Furthermore, to promote the growth of small businesses and start-ups, there will be a 0% tax rate for taxable income up to 375,000 UAE dirhams ($102,107.50). Having said that, the legislation is yet to be issued and the details for the corporate tax regime are subject to finalization.
The announcement brings a significant shift for a nation that’s long attracted businesses from around the globe because of its status as a tax-free commerce hub.
IMC Group has summarised the key aspects of the announcement which are as follows:
Corporate tax will be payable on the profits of UAE businesses as reported in their financial statements prepared in accordance with international accounting standards, with minimal exceptions and adjustments. The corporate tax will be applicable to all persons including individuals and legal persons undertaking business activities under a commercial license in the UAE. It also includes entities operating in the banking sector.
Entities subject to corporate tax are allowed to carry forward excess losses and utilize them as of the effective date.
The corporate tax will be applicable to all businesses and commercial activities with the following two exceptions:
- Entities engaged in the extraction of natural resources will be exempt and will remain subject to taxation at the Emirate level.
- Entities operating in free zones without any business conduct with mainland UAE will continue to receive tax incentives on complying with all the regulatory requirements. However, they would be required to register and file a corporate tax return.
Other key elements of the announcement
Foreign investors who do not carry on business in the UAE will not be subject to corporate tax.
There are no withholding taxes on domestic and cross-border payments.
UAE businesses will be exempt from paying tax on capital gains and dividends received from their qualifying shareholdings.
Corporate tax will not apply to qualifying intra-group transactions and reorganizations.
In order to give relief from double taxation, foreign taxes will be allowed to be credited against UAE corporate tax payable.
The corporate tax regime provides generous loss utilization rules and will allow UAE groups to be taxed as a single entity provided certain conditions are met or to apply group relief in respect of losses and intragroup transactions and restructurings. Besides, businesses will not be required to make advance tax payments or prepare provisional tax returns.
Transfer pricing and documentation requirements will apply to UAE businesses with reference to the OECD Transfer Pricing Guidelines.
Key takeaways
The introduction of the new corporate tax regime is bound to help UAE achieve its strategic ambitions and incentivise businesses to establish and expand their activities in the country. The move is expected to bring UAE in line with other competitive economies around the world.
However, the potential implications can be far-reaching. But for now, the tax and finance teams need to focus on developing a roadmap to prepare for the implementation of corporate tax. For that, it is imperative to get a deeper and thorough understanding of the rule and laws pertaining to corporate tax in order to completely assess the implementation plan. This might require many structural and organizational changes such as a change in legal structure, tax function, business model, accounting, contracting and transfer pricing, etc. Our tax experts at IMC Group can help you assess the potential impact of corporate tax in the UAE and how it may affect your business. As a part of our services, we can assist you with the following:
- Access the qualitative impact and perform readiness assessment covering systems, governance and technical aspects
- Access the quantitative impact and perform modeling work
- Offer knowledge sharing and conduct training for your in-house tax and finance teams
- Offer implementation support with respect to tax, accounting and systems perspectives.
There will be further announcements from the Ministry of Finance toward the middle of the year to help businesses prepare for the introduction of corporate tax and become fully compliant.
Keep watching this space for more updates on corporate tax in the UAE.
