CORPORATE TAX IN THE UAE
CORPORATE TAX IN THE UAE
Once again, on January 31, 2022, there was a significant change in the tax environment in the region as the Ministry of Finance (MoF) in the United Arab Emirates (UAE) announced the introduction of a new federal corporate tax (CT) system. This system will come into effect for financial years beginning on or after June 1, 2023. Except for Bahrain, the UAE now boasts the lowest corporate income tax rate among GCC countries, set at a standard rate of 9%. The UAE’s CT framework aims to integrate global best practices while reducing the administrative burden on businesses.
Any company opting for a fiscal year spanning from June 1, 2023, to May 31, 2024, will incur corporate tax (CT) obligations commencing on June 1, 2023. The initial tax return filing for such companies is anticipated to be required by late 2024. Conversely, companies selecting a calendar year from January 1, 2023, to December 31, 2023, will face CT liabilities starting on January 1, 2024, with filings expected around mid-2025.
The newly introduced UAE CT regime implements a tiered structure comprising three rates:
– Annual taxable profits up to AED 375,000 will be taxed at a zero rate.
– Annual taxable profits exceeding AED 375,000 will be taxed at a rate of 9%.
– Multinational Enterprises (MNEs) falling under the scope of Pillar 2 of the BEPS 2.0 framework (i.e., with consolidated global revenues surpassing AED 3.15 billion) will be subject to varying rates in accordance with OECD Base Erosion and Profit-Sharing rules.
Taxable profits refer to accounting profits adjusted for specific considerations.
The UAE is committed to upholding its pledge to businesses operating within Free Trade Zones. During the holiday period, such businesses will enjoy a zero percent tax rate or exemption, provided they refrain from conducting business with the mainland. It is mandatory for all free zones to submit an annual CT return. Entities with operations in both mainland UAE and Free Trade Zones, including those under the dual license scheme, should assess how this policy may affect their operational strategies.
The UAE has implemented a federal tax system applicable to all businesses and commercial activities across its seven emirates, with some notable exceptions:
– Businesses engaged in natural resource extraction will remain subject to tax decrees issued by their respective emirates.
– Individuals earning personal income (e.g., salaries, investment returns) are exempt, provided their income-generating activities don’t necessitate a commercial license.
– Businesses registered in Free Trade Zones, if they adhere to regulatory requirements and refrain from engaging in mainland UAE commerce, are also exempt.
A noteworthy change involves the foreign banking sector, previously taxed at the emirate level, now falling under UAE Federal Tax Law. The implications for existing emirate-level banking tax decrees will be communicated later. This transition represents a significant change for both foreign bank branches, necessitating compliance with the new law, and local banks, which, like other businesses, will now be subject to corporate tax.
Generally, the income listed below will be exempt from income tax:
– Dividend income received by a UAE company from qualifying shareholdings (to be specified in the law)
– Capital gains
– Profits from group reorganization
– Profits from intra-group transactions
There will be no UAE withholding tax on payments made domestically or across borders. Given this exemption scheme, it is expected that the law will incorporate a participation exemption or similar principles often observed in global markets. Businesses will need to assess if they meet any specified conditions to benefit from the exempt income scheme.
Future taxable profits may be offset by accumulated taxable losses.