Corporate Tax Advisory

UAE-based businesses have historically benefited from no income tax. However, it is expected to change as the Ministry of Finance (MOF) announced on 31 January 2022 that a federal corporate income tax (CT) would be implemented in the UAE. In fiscal years beginning or after 1 June 2023, the CT regime is expected to take effect. UAE's move is driven by the desire to meet international tax standards, similar to those already implemented in neighbouring Gulf states, keeping compliance burdens to a minimum for companies while protecting small businesses and startups. Despite having one of the world's lowest corporate tax rates, Dubai, home to one of the world's largest business hubs, will diversify its state income away from hydrocarbons in the coming years.

Effective Date

Initially, the CT regime will apply to fiscal years starting or after 1 June 2023.

Scope

The proposed CT regime is expected to apply to all UAE commercial, industrial, and professional activities, except for extracting natural resources, which are already subject to taxation at the Emirate level.

Furthermore, the CT regime applies to individuals who hold (or are legally required to hold) a business license or permit for carrying out commercial, industrial, and/or professional activities in the UAE.

Additionally, it was announced that existing corporate tax incentives for free zone businesses would be maintained, provided that the business complies with all relevant regulatory requirements and does not conduct business in the mainland UAE.

The MOF will provide further details on CT exemptions and exclusions.

Proposed Rates

According to the proposed corporate income tax rates, there will be three different rates:

• A flat rate of 0% for taxable income up to AED 375,000 (US$ 102,000);
• A 9% rate on taxable income over AED 375,000; and
• Large multinational corporations with consolidated global revenues over EUR 750m (approximately AED 3.15 billion) will pay a different rate in accordance with Pillar Two of the OECD's Base Erosion and Profit Shifting (BEPS) project.

Income Exempted from CT

It has been announced that a variety of income types will be exempt from the CT regime:

• Profits derived from the extraction of natural resources;
• UAE businesses earning dividends and capital gains on their qualifying shareholdings (i.e., an ownership interest in a UAE or foreign company that meets certain conditions stipulated in the UAE CT law);
• The UAE CT law specifies certain conditions that must be met for intragroup transactions and reorganizations to qualify under the law;
• A foreign company or individual that does not trade or conduct a business regularly in the UAE; and
• In a global economy, foreign investors receive dividends, capital gains, interest, royalties, and other investment returns.

Free Trade Zone

At present, the UAE government plans to provide exemplary tax benefits to companies registered in Free Trade Zones that meet the conditions. Additionally, each free zone must submit an annual Corporate Tax return.

The corporate tax will apply to additional businesses headquartered in a free zone with operations on the mainland.

Other Features

• Foreign Tax credits

  Credit will be permitted for foreign CT paid on UAE taxable income.

• Losses

  Businesses can use losses incurred under the CT regime to reduce their taxable income for subsequent financial periods.

• Tax groups

  If certain conditions specified in the UAE CT law are met, UAE group companies can elect to form a tax group and be taxed as a single entity.

• Transfer pricing

  Businesses in the United Arab Emirates must comply with transfer pricing rules and documentation requirements.

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