garding the introduction of federal Navigate, Save, Succeed: Your Expert Guide to UAE Corporate Tax Strategies
What is Corporate Tax?
It is a type of direct tax which is levied on net profit or income of businesses and corporations. It is also referred to as Business Profits Tax or Corporate Income Tax.
Importance of Implementing Corporate Tax in the UAE
Introduction of a CT regime displays UAE’s commitment and efforts towards meeting international standards for tax transparency and preventing illegal tax practices.
The implementation of CT regime will cement UAE’s position as a leading global hub for investment and businesses and accelerate the UAE’s transformation and development to achieve its goals and objectives.
Scope and the Rate of Corporate Tax in UAE
The CT will apply to all the businesses operating in different emirates of the UAE at the standard rate of 9 per cent except for the extraction of natural resources. Any activity undertaken by a registered entity in the UAE will be considered within the scope of CT regime apart from the aforementioned exception.
The taxable income under the CT regime will be the net profit/ income presented by an entity in its financial statements after adjusting it for specific items that will be specified under the CT rules and regulations.
The CT rates as per the latest information provided by the ministry are as follows:
- 0 per cent for a business having net income of AED 375,000 or less;
- 9 per cent for a business having net income of more than AED 375,000; and
- A different CT rate for large multinationals that fulfill a criteria set with reference to Two Pillar Solution.
The CT is not applicable on salary or any other employment income. However, any business income earned by an individual under a commercial license will fall under the scope of CT regime.
Any investment made by an individual in their personal capacity in real estate will not be subject to CT only if that individual is not required to obtain a permit or license to carry any such activity within the UAE. Further, any interest and other income earned by an individual from saving schemes or bank deposits will not be subject to CT.
CT regime will not be applicable on capital gains, dividends and other income earned by individuals from holding shares or other securities in their personal capacity.
Foreign Persons
Foreign individuals and entities will be subject to the CT regime only if they carry out business operations in a regular manner.
Any income earned by a foreign investor in the form of capital gains, dividends, royalties, interest and other investment returns.
Branches of foreign companies will be considered taxpayers for CT purposes and will thus be subject to CT (unless the free zone tax incentives or other exemptions apply). The treatment of all the branches of foreign entities operating in the UAE needs to be determined based on the laws and regulations applicable in the jurisdiction in which the head office exists. In order to prevent businesses from double taxation, profits earned by a foreign branch will either exempt or foreign taxes paid by the branch on its profits may be credited against tax liability of the head office.
It is important to mention here that specific jurisdictions such as the United Kingdom provide a tax exemption to all the branches of an entity that are located in foreign countries. In such a scenario, there wouldn’t be any CT credits available for all the UAE branches of an entity having its head office in the UK and therefore all the UAE branches would only be subject to tax in the UAE.
Exemptions
Businesses involved in the extraction of natural resources will be outside the scope of CT regime instead they will fall under the scope of emirate level corporate taxation.
Capital gains and dividends earned by an entity from its qualifying shareholdings will be exempt from the CT regime. A qualifying shareholding refers to stake in a UAE or foreign entity that meets specific conditions mentioned in the UAE CT rules and regulations.
Intra-group transactions will also not be subject to CT regime provided that specific conditions are fulfilled.
Corporate Tax Period
As per the information published by the MoF, the corporate tax will be applicable for financial periods beginning on or after June 1, 2023. An entity’s CT period will be determined based on its financial year-end. For example, an entity whose financial year-end is September 30 then the entity will be eligible to file its first CT return for the fiscal year ending September 30, 2024.
Free Zones
The CT will be applicable on businesses operating in the free zone but the corporate tax regime will continue to respect and honour the incentives that are being offered to businesses operating in the free zones that comply with the laws and regulations prevalent in the UAE and that don’t conduct any business operations in the mainland UAE.
Any business operating in a free zone will be subject registration under the CT regime as well as be required to file a corporate tax return. More information on compliance requirements and obligations will be provided by the ministry in due time. The CT treatment that will be applicable on businesses in a specific free zone will be the same across all of the free zones.
While businesses operating in the free zones may not be subject to requirements of the CT regime, free zone businesses that are part of a large multinational group may be subject to Global Minimum Tax (GMT) of 15% under Pillar Two. In essence, multinational groups whose ETR in the UAE is less than 15% (as calculated under Pillar Two) may have a top-up tax payable outside of the UAE.
Pillar Two
As background, the Organization for Economic Cooperation and Development (OECD) proposed a Two-Pillar solution to address the tax challenges resulting from the digitalization of the economy, namely: Pillar One and Pillar Two. Under Pillar Two, large multinational groups (e.g., those with consolidated revenues of more than AED 3.15 billion or EUR 750 million) must pay at least 15 per cent of tax in each jurisdiction they operate regardless of where they are headquartered. Where the ETR of an entity in a jurisdiction is less than 15 per cent, a top-up tax is calculated and paid to ensure the 15 per cent tax rate is satisfied. The Pillar Two rules are expected to apply in 2023.
Tax Group
A group of companies operating in the UAE can decide to form a CT group and be considered as a single person for CT purposes. All the companies in the group will not be required to separate tax returns instead a tax group will be required to file a single return on behalf of all the members of the tax group.
Losses
The CT regime will allow entities to use its losses incurred after (as from the CT effective date) to adjust the taxable net income in subsequent fiscal periods. A loss for CT purposes (tax loss) would arrive when an entity’s total income is less than the total deductions that entity can claim for a relevant fiscal period. Tax losses may either be carried forward or used for adjusting taxable profit in future periods.
Further information regarding the loss carry-forward rules and regulations will be provided by the ministry in due time. Tax losses from one company part of a tax group may be used for offsetting another group company’s taxable income provided specific conditions are satisfied. Further details or information on the rules relating to the utilization of group loss will be provided by the ministry in due time.
Tax Credits and Withholding Tax
Tax Credit: Foreign CT paid on taxable income earned in the UAE will be considered as a tax credit when calculating the UAE CT liability.
Withholding Tax: It is a tax which is collected at source by the payer on behalf of the recipient of the income.
Transfer Pricing
Affected UAE businesses will be required to comply with all the Transfer Pricing rules and documentation requirements in accordance to the OECD Transfer Pricing guidelines, which are underpinned by the Arm’s Length Principle’, and seek to replicate pricing among related parties, as if these were unrelated.
The Transfer Pricing rules in the UAE will be applicable on intra-group transactions for entities that are subject to UAE CT. Multinational groups having entities or operations in the form of branches in the UAE that are yet to update their policies in relation to Transfer Pricing are recommended to do so at the earliest and certainly before CT regime becomes effective in the UAE.
Administration
At this point in time, it is expected that corporate tax returns will be filed electronically through an online portal similar to the ESR and VAT filings. It is important to mention here that currently no information has been provided regarding the supporting documents to be filed. Based on the practices in other jurisdictions, the following documents may be required:
- Entity’s financial statements
- Calculation of taxable income after adjusting it for certain items
- Tax depreciation schedules and worksheets
- Details of related party transactions
- Transfer pricing documentation
- Movement of provisions
Businesses will be required to file a single return per financial period. No advance or provisional CT filings will be required. Further, businesses will not be required to make advance CT payments.
More information on the compliance obligations and the registration process for businesses will be provided by the ministry in due time.
Fines and Penalties
Similar to other taxes applicable in the UAE, businesses will be have to pay fines and penalties for non-compliance with the CT laws and regulations. Further information on the applicable penalties and the CT compliance obligations will be released in due time. The impact of corporate tax can be managed with proper tax planning and appointment of qualified tax accountants or consultants. Companies must take into account the potential fines and penalties if CT regulations are not followed in their true spirit.
