The UAE is a popular destination for businesses all over the globe because it is a tax haven. To our surprise, the UAE government introduced VAT (Value Added Tax) in 2018 to reduce its dependence on oil and hydrocarbons for its revenue. Not too long ago, the Corporate Income tax in UAE only applied to oil companies and foreign banks.
However, things are about to change next year. As per the UAE’s Ministry of Finance announcement on 31st January 2022, business profits will be subject to federal Corporate Income tax from 1st June 2023 onwards. What is the motive for introducing the Federal Corporate Income tax?
The main objective of the federal Corporate Tax in the UAE is to meet global standards for tax transparency and prevent fraudulent tax practices. Many other Gulf countries have taken similar steps in their countries.
Even after the corporate is introduced, the UAE will enjoy one of the lowest corporate taxes in the world. Still, it will be another revenue source, reducing oil dependence.
Additionally, experts have speculated that the 9% Corporate Income tax will not apply to oil extraction companies. As per the Financial Times undersecretary, UAE’s finance ministry Younis Haji Al Khoori had to say this about the Corporate Income tax – The certainty of a competitive and world-class competitive Corporate Income tax regime coupled with UAE’s comprehensive double tax treaty network will affirm UAE’s position as an excellent hub for business and investment.
The Extent of the Corporate Income Tax in UAE:
The corporate income tax will be effective from 1st June 2023 and apply to all businesses in the UAE. The only companies exempt from corporate income tax will be those engaged in extracting natural resources. (These companies have always been subject to income tax from the start)
Depending on the type of license or permit to conduct commercial, industrial, or professional activities in the UAE, individuals will also be subject to corporate income tax. Even freelance professionals with a legitimate freelance permit or license.
As per the Ministry of Finance, corporate income tax will also cover UAE’s banking operations. As of now, foreign bank branches already pay corporate income tax.
Businesses that operate within the free zone will continue to enjoy tax privileges. Nevertheless, they must comply with the relevant laws and regulations and should not conduct business within mainland UAE. Free zone businesses will still have to comply with some requirements of the Corporate tax law, like registering for CIT and filing a return.
What’s in Store for Businesses – Key Features of Corporate Income Tax in the UAE
Criteria for Application of Corporate Income Tax in UAE:
There are various slabs for Corporate Income Tax. Let us understand more about it.
- 0% on taxable income up to AED 375,000
- 9% on taxable income over AED 375,000
- A different tax rate (not yet specified) for large multinationals that meet specific criteria set with reference to ‘Pillar two’ of the OECD Base Erosion and Profit Shifting Project
Who is Exempt from Corporate Income Tax?
The following kinds of income will receive an exemption from Corporate Income Tax in UAE:
- Income that has been generated through the extraction of natural resources.
- Dividends and earnings earned by a UAE business through its qualifying businesses will receive an exemption from Corporate Income tax.
- Qualifying intragroup transactions and reorganizations are subject to conditions that are yet to be specified in UAE’s Corporate Income tax law.
- Overseas companies and individuals that do not conduct business in the UAE regularly.
- Foreign investors who have generated income through dividends, capital gains, interest, royalties, and other investment returns.
Other Notable Features:
- Corporate income tax paid overseas can be credited against payable CIT in the UAE. To efficiently operate the tax system while maintaining cross-border & ownership relations before and after the implementation of CIT, the UAE has involved itself in over 130 double-tax treaties.
- Businesses can show operational losses to obtain a reduction in CIT payments (From the date of CIT implementation) for the next financial year.
- Companies in the UAE can form a tax group and register as a single entity for taxation purposes, provided they meet the relevant conditions specified in the corporate income tax law. A single tax group can file taxes on behalf of all its members.
- Every business in the UAE will have to comply with the transfer pricing rules and documentation requirements specified in the OECD (Organization of Economic Corporation and Development) pricing guidelines.
Understand that UAE’s Ministry of Finance has not prepared a final draft of the CIT legislation. The final draft may be different from what has been proposed. Still, companies conducting businesses in the UAE must be ready to comply with these new requirements.