Corporate tax to be introduced in the UAE
The UAE Ministry of Finance announced on 31 January 2022 that a 9% federal corporate tax will be introduced for the first time for financial years starting on or after 1 June 2023. The announcement was accompanied by an FAQ prepared by the UAE Ministry of Finance (MoF), with more guidance expected during 2022 to help businesses prepare for the new regime and be fully compliant.
Main features of the corporate tax system
Businesses and commercial activities will be subject to corporate tax, except for entities engaged in the extraction of natural resources, which falls under the jurisdiction of individual Emirates. Businesses incorporated in a UAE free zone also will be subject to corporate tax, although the company will be able to continue to enjoy corporate tax incentives offered to the free zone business provided it complies with regulatory requirements and does not conduct business with mainland UAE.
In general, corporate tax will be due on the profits of UAE-based businesses as reported in the financial statements prepared according to internationally accepted accounting standards, with minimal adjustments.
The corporate tax rates will be 0% for taxable profits up to AED 375,000 and 9% for taxable profits exceeding AED 375,000. A different rate will be set for large multinationals that meet specific criteria with reference to Pillar Two of the OECD base erosion and profit shifting project (large multinationals for these purposes are those with consolidated global revenue exceeding EUR 750 million).
Tax losses will be able to be carried forward and offset against taxable income in subsequent financial periods (although the FAQs do not provide any additional guidance on the utilisation of losses).
Businesses in the UAE will be able to form a tax group and be treated as a single taxable person, so that a single tax return can be filed on behalf of the entire group and losses can be offset among members, which would be beneficial in certain circumstances.
Other features of the new regime
- UAE businesses will be exempt from corporate tax on dividends and capital gains from qualifying shareholdings.
- Salary and income from non-business activities will not be subject to corporate tax.
- A unilateral foreign tax credit will be available to set off domestic corporate tax liability against foreign income.
- Intragroup transactions and reorganisations will not be subject to corporate tax if certain requirements are met.
- Compliance obligations will be minimal, with only one corporate tax return required to be filed and there will not be any requirement to make an advance or provisional payment of corporate tax.
- No withholding tax at the domestic or international level will be levied.
- Transfer pricing rules and documentation requirements will apply as per the OECD transfer pricing guidelines.
- The MoF will issue guidance on the treatment of banking activities, which is currently governed at the Emirate level.
- The Federal Tax Authority (FTA) will be responsible for the administration, collection and enforcement of UAE corporate tax.
By introducing a corporate tax regime, the UAE has indicated that it intends to address the challenges arising from the digitalisation of the global economy and ensure the implementation of a global minimum tax.
The UAE corporate tax will be one of the most competitive in the world, with 9% as the statutory tax rate combined with exemptions and relief to small businesses. Businesses will have ample time to prepare for the introduction of the corporate tax.
While the fine print provided in law and regulations is awaited, businesses should consider the following:
- Since corporate tax liability will be based on the accounting profit (after making certain adjustments), having audited financial statements could be a prerequisite for filing the corporate tax return.
- Foreign businesses that are registered for VAT purposes in the UAE will need to consider whether the introduction of corporate tax could result in the creation of a permanent establishment (PE) and thus create corporate tax liability in the UAE. Applicable income tax treaties will need to be consulted in such cases.
- Carefully review guidance issued by the FTA on deductible expenses, because there may be special provisions relating to the deductibility of items such as bad debts, charitable contributions, innovation spends, salaries/compensation paid to shareholders/members, corporate social responsibilities, etc. If the business is involved in granting or obtaining loans, deductions attributable to interest expenses may be restricted. Also, as dividends and capital gains from certain shareholdings will be exempt from corporate tax, deductions relating to those expenses may be restricted.
- Evaluating whether the thin capitalization rule is applicable.
- Transactions with related parties within and outside of the UAE should be examined to ensure they are in line with the transfer pricing rules, and a transfer pricing policy may be required for such intragroup transactions.
- The requirements under the Economic Substance Regulations and the country-by-country reporting rules may need to be revised in light of the new corporate tax and the transfer pricing rules.