UAE Federal Corporate Tax
The Ministry of Finance on 31 January 2022 announced the introduction of Corporate Tax (CT) in the UAE on Business profits with effect from Financial Year starting on or after 1 June 2023.
Corporate Tax (CT) is a form of direct tax levied on the income generated from the businesses. The businesses operated within the jurisdiction of UAE will impact with this regulation and need to comply with all requirements announced time by time from the Ministry of Finance and other regulatory authorities.
High level details on the proposed CT regime are set out in the Press Release and the Frequently Asked Questions (FAQs) published on the website of the Ministry of Finance (MoF) and the Federal Tax Authority.
As part of the UAE’s commitment as a member of the OECD Inclusive Framework, and in response to an assessment of the UAE’s tax framework by the European Union Code of Conduct Group on Business Taxation, the UAE issued Economic Substance Regulations (Cabinet of Ministers Resolution No. 31 of 2019), (the “Regulations”) on 30 April 2019.
UAE CT will be applicable at the following rates::
- For taxable income equal to or less than AED 375,000, the applicable rate is 0%.
- For taxable income exceeding AED 375,000 will be subject to a tax rate of 9%.
Free zone businesses will be within the scope of UAE CT and required to register and file a CT return, but will continue to benefit from CT holidays / 0% taxation if they comply with all regulatory requirements and do not conduct business in mainland UAE.
All Multi National Entities (MNEs) that fall under the scope of Pillar 2 of the Base Erosion and Profit Shifting (BEPS) 2.0 framework (i.e. consolidated global revenues in excess of Euro 750m) shall be subject to different tax rates as per OECD Base Erosion and Profit-Sharing rules.
CT will be payable on the accounting net profit reported in the financial statements of the business, with minimal exceptions and adjustments. Tax losses incurred from the CT effective date can be carried forward to offset taxable income in future financial periods.
Effective Date of Corporate Tax:
The CT will be applicable for financial years starting on or after 1 June 2023.
All businesses starting their financial year from 1 June 2023 will comply from 1 June 2023. The first return for these will be filed most likely by the end of 2024.
Those businesses that adapt the calendar year starting from 1 January 2023 will be subject to CT starting from 1 January 2024, and will file their first CT return most likely mid of 2025.
Exceptions to the CT:
The businesses operating within the seven emirates of UAE are subject to the regulations of the CT introduced by the UAE authorities with below exceptions:
Businesses involved in the extraction of natural resources. These will continue to operate with the decree issued by the respective Emirates.
Individuals earning income in their personal capacity as long as the income generating activity does not require to register a commercial license (salary, investment income).
Businesses registered in the Free Trade Zones and they do not conduct business on the main land. All the regulatory requirements need to be complied.
Foreign Banking sector operating under the Emirate level, Bank tax decree will now be subject to the UAE Federal Tax Law. The impact of CT on the Emirate level banking tax decree will be communicated in due course. This will be a significant shift for both branches of foreign Banks, that will need to switch to the new Law and for local banks who similar to other businesses will now be subject to corporate tax.
Transfer Pricing
Transfer Pricing Rules shall now be applicable in the UAE. All businesses have to follow the Transfer Pricing rules and legal requirements. These transfer pricing rules will now become mandatory and may also be applicable to domestic transactions.
Intercompany sales and financing services are common practice amongst UAE groups, previously remuneration for these activities has not been on the forefront given the transactions would likely be eliminated upon financial consolidation.
This is a game changer as intercompany transactions would need to be undertaken at arm’s length and generally should be supported by appropriate documentation. Businesses would need to evaluate their current arrangements and assess the impact on both cross-border as well as domestic transactions.
How Compliance 360 can help you?
A. Advisory services:
- Impact assessment of Corporate Tax on business and applicability thereto.
- Analysis of the impact of Corporate Tax on Free Zone (including Financial Free Zone) entities
- Advise on whether any exemption can be availed
- Advise on Group Corporate Tax and how to minimize potential risks
- Advise on potential Corporate Tax risk areas and challenges faced by taxpayers
- Assist in restructuring the business/operational model from the Corporate Tax perspective
- Advise on availing Foreign Tax Credit paid by taxpayers in other countries
- Advise on withholding taxes.
B. Compliance Services:
- Assist in registration for Corporate Tax with relevant authorities
- Computation of taxable income and corresponding Corporate Tax in UAE
- Preparation and filing of tax returns.
C. Representation Services
- Preparing the written submissions to be furnished before tax authorities
- Assisting in filing the response against the notices received from tax authorities
- Filing of written appeal against the adverse tax adjustments made or penalty imposed by the tax authorities
- Representing the taxpayers before tax authorities.
