Corporate tax, a direct tax on business income, is levied on corporations and entities. In a significant shift, the UAE Ministry of Finance announced a new federal corporate tax system effective from June 1, 2023. With the lowest rate in the GCC corporate tax in uae region at 9%, the UAE aims to align with global best practices and reduce the compliance burden on businesses.
Tax Evolution in the UAE: Aligning with Global Standards
Over recent years, the UAE underwent substantial tax transformations, aiming to harmonize its system with international norms and enhance state revenue diversification. Commencing with the implementation of Value Added Tax (VAT) in 2018, followed by the introduction of economic substance rules (ESR) and Country-by-Country Reporting (CbCR) regulations in 2019, the UAE embraced a series of tax reforms. The latest addition is the Corporate Tax (CT) law, set to impose income tax on business profits, marking another stride towards global alignment and revenue diversification. Anticipated details and regulations are expected in mid-2022, prompting businesses to assess the forthcoming impact.
Implementation Timeline of Corporate Tax (CT)
The Corporate Tax (CT) will take effect for fiscal years commencing on or after 1 June 2023. Companies opting for a fiscal year from 1 June 2023 to 31 May 2024 will encounter CT starting from 1 June 2023, with the initial tax return expected by late 2024. For those following a calendar year from 1 January 2023 to 31 December 2023, CT applies from 1 January 2024, and the filing deadline is likely around mid-2025.
Scope of UAE Federal Tax System Exemptions.
The newly introduced federal tax system in the UAE covers all businesses and commercial activities across the emirates. However, there are exceptions, including businesses in natural resource extraction and individuals earning non-commercial income. Additionally, entities in Free Trade Zones are exempt, provided they adhere to regulatory mofa attestation requirements and avoid Mainland UAE transactions. Notably, the foreign Banking sector, previously under Emirate-level tax decrees, will now fall under the UAE Federal Tax Law, marking a significant change for both foreign and local banks. The impact on Emirate-level banking tax decrees will be communicated in the future.
UAE Corporate Tax Structure: An Overview
The newly introduced UAE Corporate Tax (CT) system adopts a tiered approach with three distinct rates:
● Zero Rate: Applicable to annual taxable profits up to AED 375,000.
● 9% Rate: Applicable to annual taxable profits exceeding AED 375,000.
● Special Rates for MNEs: Multinational Enterprises (MNEs) falling under Pillar 2 of the BEPS 2.0 framework, with consolidated global revenues surpassing AED 3.15 billion, will be subject to specific rates as outlined by OECD Base Erosion and Profit-Sharing rules.
Taxable profits refer to accounting profits after certain adjustments.
Income Tax Exemptions in UAE: Key Highlights
Certain income categories are generally exempt from UAE Income Tax, including:
● Dividend income from qualifying shareholdings (specific criteria to be outlined in the law).
● Capital gains.
● Profits arising from group reorganization.
● Profits from Intra-group transactions.
The UAE will not impose withholding tax on both domestic and cross-border payments. The forthcoming law may incorporate a participation exemption, akin to international norms, subject to specified conditions.
Free Trade Zones in UAE: Tax Implications
The UAE remains committed to providing favorable tax treatment for businesses within Free Trade Zones. These businesses, as long as they refrain from conducting activities with the mainland, will be either exempt or subject to a zero percent tax until the conclusion of the holiday period. All entities in free zones are required to submit an annual Corporate Tax (CT) return. Companies with a presence in both Mainland UAE and Free Trade Zones, including those under the dual license scheme, must assess the impact on their operational framework.
OECD Transfer Pricing Rules in the UAE: A Transformative Shift
The UAE has embraced the OECD Transfer Pricing Rules, necessitating compliance from all companies. These regulations, formerly overlooked in intercompany transactions within UAE groups, will now be mandatory. The impact extends beyond cross-border dealings to domestic transactions, requiring meticulous documentation. Companies must reassess current arrangements, ensuring intercompany transactions align with arm’s-length principles and are substantiated with appropriate documentation. This shift marks a significant transformation in how businesses approach and execute intercompany transactions.
BMS Auditing – Your Trusted Guide to Compliance and Optimization
The UAE’s adoption of a Corporate Tax (CT) system, effective June 1, 2023, marks a pivotal moment in the nation’s tax landscape. With a tiered structure and exemptions, the CT law introduces complexities for businesses. BMS Auditing emerges as a crucial ally, equipped to guide enterprises through compliance challenges, Free Trade Zone intricacies, and OECD Transfer Pricing Rules. Our dedicated team ensures businesses optimize their tax strategies, navigate evolving regulations, and thrive in this transformed fiscal environment. Trust BMS Auditing for expert insights, tailored solutions, and seamless adaptation to the dynamic realm of corporate taxation in the UAE.
