UAE To Introduce Corporate Tax Rate From 2023

UAE: Introduction of Corporate Tax

Background

On 8^th October 2021, the United Arab Emirates (‘UAE’) (amongst 137 countries) agreed to implement the Organisation of Economic Co-Operation and Development’s (OECD) Two-Pillar approach to reform its International Tax framework and to implement a minimum Corporate Tax rate starting 2023. Following this development, on 31st January 2022, Ministry of Finance of UAE announced the introduction of Federal Corporate Tax regime on business profits effective for financial years starting on or after 1^st June 2023.

This document summarises the key points of announcement and its possible implications on the businesses operating in UAE.

What | Coverage and exclusions

Corporate Tax is a form of direct tax levied on the net income or profit of corporations and other businesses. UAE’s Corporate Tax will be applicable at federal level and therefore, it will apply to all Emirates. We have summarised below coverage and exclusions of corporate tax regime as under:

   A. Coverage:

• All UAE businesses and commercial activities alike (except for the extraction of natural resources which will remain subject to Emirate level corporate taxation).

• Any businesses carried out by legal entities

• Activities carried out under a freelance license/ permit

• Individual persons who have commercial license and deriving business income

   B. Exclusions:

Businesses and commercial activities of extraction of natural resources 

• Interest and other income earned by an individual from bank deposits or saving schemes

• Salary or employment income earned by individual persons

• Dividend, Capital Gains and other income earned from owning shares or other securities in personal capacity of individual persons

• Dividends and capital gains earned by a UAE business from its qualifying shareholdings

• Qualifying intra-group transactions and reorganizations – We await further clarity on this aspect

It is imperative to note that availability of afore-mentioned exclusions shall be subject to certain conditions that will be laid down under regulation and guidance.

   C. Applicability to free zones and financial free zones

• Free zone (including financial free zones) businesses in UAE will be subject to Corporate Tax. However, it is clarified that Corporate Tax regime will continue to honour the corporate tax incentives currently being offered to free zone businesses that comply with all regulatory requirements and that do not conduct business with mainland UAE.

• Having said this, businesses established in a free zone will be required to register and file a corporate tax return.

   D. Applicability to foreign persons

• Foreign entities and foreign individuals will be subject to Corporate Tax only if they conduct a trade or business in the UAE in an ongoing or regular manner.

• Moreover, Corporate Tax will generally not be levied on a foreign investor’s income from dividends, capital gains, interest, royalties and other investment returns.

When | Effective date of applicability and compliance

   A. First Financial Year

UAE Corporate Tax regime will become effective for financial years starting on or after 1^st June 2023. We have summarised few instances having different financial year and it’s corresponding effective date for corporate tax as under:

   B. Compliance to be undertaken

• Businesses will be required to register separately for Corporate Tax purpose. We await more information on registration process from Ministry.

• Only one corporate tax return will need to be filed (electronically) per financial period. No provisional or advance corporate tax filings will be required. 

• Similarly, advance tax payments will not be required by UAE businesses.

How Much | Corporate Tax Rate

Corporate Tax Rate will be as under:

Other peculiar aspects

• Tax Group – UAE Corporate Tax Regime provides option to UAE group of companies to form a tax group as a single taxable person (subject to certain conditions) and thereby, only single tax return will be required for entire group.

• Losses – It is clarified that regime will allow businesses to use losses incurred (as from UAE Corporate Tax effective date) to offset taxable income in subsequent financial periods. Further, Tax losses from one group company may be used to offset taxable income of another group company (subject to certain conditions).

• Withholding tax – It is clarified that withholding tax will not be applicable on domestic and cross-border payments of any nature under the Corporate Tax regime.

• Foreign tax credit – It is clarified that foreign corporate tax paid on UAE taxable income will be allowed as a tax credit against the UAE corporate tax liability.

• Transfer Pricing - It is clarified that UAE businesses will need to comply with Transfer Pricing rules and documentation requirements set with reference to the OECD Transfer Pricing Guidelines.

• Non-compliance: It is clarified that non-compliance will invite stringent penalties.

• Authority: While Federal Tax Authority will be responsible for administration, collection and enforcement of corporate tax, Ministry of Finance will remain the ‘competent authority’ for purposes of bilateral/multilateral agreements and the international exchange of information for tax purposes.

Way Forward:

Undoubtedly, this is a historic tax reform in UAE’s tax regime to introduce a corporate tax for all businesses (subject to certain exceptions) in UAE. It is a welcome move by UAE ministry of finance to provide ample time to taxpayers for preparing for corporate tax regime before the effective date of applicability.

Moreover, multinational enterprises having intra-group transactions are required to re-assess their existing pricing policy to ensure it meets with the arm’s length principles. In the absence of robust transfer pricing documentations, intra-group transactions can be considered to not meet arm’s length price test and taxpayers may be subject to significant addition to their taxable income which may result in additional burden of taxes and penalties. 

While we await more guidance/clarification from tax authority, businesses operating in UAE are recommended to pro-actively commence analysing the impact of Corporate Tax and Transfer Pricing on their business.