How the UAEs new corporate tax on profits will work

How the UAE’s new corporate tax on profits will work

The United Arab Emirates (“UAE”) Ministry of Finance (“MoF”) has announced proposals to introduce a new corporation tax regime, set to take effect from June 2023. This is a significant step for the Gulf state as it continues to build its status as an attractive hub for business and investments.

“Introducing a CT regime reaffirms the UAE’s commitment to meeting international standards for tax transparency and preventing harmful tax practices,” the UAE MoF has stated.

The move also shows the intent of the UAE to comply with proposals led by the Organisation for Economic Co-operation and Development (“OECD”) for the introduction of a global minimum rate of corporation tax.

Scope of the proposals

The UAE corporation tax regime will apply across all Emirates and will apply to business and commercial activities alike, with some key exceptions detailed below. The new regime will apply for financial years starting on or after 1 June 2023.

The corporation tax rate is currently expected to operate on a two-tier profits-based threshold system:

• 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

The above rates will apply to all business and commercial activities, except the extraction of natural resources, which will remain subject to Emirate-level taxation.

Many businesses will still benefit from corporate tax incentives as some multinational corporations operate inside free zones. These will remain exempt if they comply with regulatory rules and do not conduct business with the mainland.

Other key parts of the proposals include:

• Companies will be required to only file one electronic tax return annually
• The new corporation tax regime will also see the UAE introduce transfer pricing (TP) rules and documentation requirements based on OECD TP Guidelines
• To support the UAE’s position as a global financial centre, an exemption from corporation tax will be available for qualifying intra-group transactions and restructurings
• Domestic and cross border payments of dividends, interest and royalties will be exempt from UAE withholding tax and foreign tax credits can be set against corporation tax incurred by UAE businesses on income earned elsewhere
• No corporation tax will be payable on capital gains and dividends received from qualifying shareholders and foreign taxes can be credited against UAE corporate tax payable

Interaction with the OECD Proposals for a Global Minimum Rate of Corporation Tax

As many commentators have observed, the 9% corporation tax rate falls below the 15% rate proposed by the OECD/G20 as part of their proposals for a global minimum rate of corporation tax.

The OECD/G20 proposals are targeted at large multinationals with consolidated revenues >€750 million, as explained in an Apex Group summary report published in 2021. At present, 137 countries have signed-up to the OECDs proposals ahead of an implementation date in 2023.

In order to comply with the OECDs global minimum corporation tax rate proposals, the press release and FAQs issued by the UAE MoF indicates that it is expected that the UAE will subsequently introduce a third tier corporation tax rate of 15% targeted specifically at UAE resident companies which form part of a large multinational group with consolidated revenues >€750m.

For large multinationals with operations in the UAE, this will be a key development to monitor when further announcements are issued by the UAE MoF later in 2022.

What is its significance?

The introduction of the corporation tax regime is the latest in several developments from UAE policymakers, determined to meet global standards on tax transparency. It follows the 5% VAT rate and the customs duty of 5% on imports which were introduced in 2018.

The new measures attempt to strike the right balance between maintaining the UAE as an attractive destination for global businesses with a low regulatory burden, while homogenising tax rules with global counterparts, addressing transparency concerns and helping the UAE move towards digitalisation of tax records.

The 9% corporate tax rate is a starting point for a country that did not previously levy tax on business profits. The rate is still competitive in comparison with the rest of the Gulf region and the June 2023 start date gives companies time to adjust. Despite this, the UAE will need to build the tax reporting and payment infrastructure to allow companies to comply with the new regime, and thousands of companies will ultimately be paying tax for the first time in the UAE.

Further information

The UAE MoF will provide further information on how the new corporation tax regime will be implemented towards the middle of 2022 to help businesses prepare and be fully compliant.

In the meantime, if you would like to understand more about the new tax regime in the UAE, how it works, what you need to do and how it impacts your business, please contact our Corporate Solutions team here. They can also tell you more about Apex’s Business Acceleration Service (“BASE”), our new turnkey solution designed to help businesses to set up and operate in new jurisdictions and to navigate changing regulations, both locally and globally.