UAE Corporate Tax Introduction
The UAE Ministry of Finance (MoF) announced on January 31, 2022, that fiscal years beginning on or after June 1, 2023, shall be subject to the proposed federal corporate tax (CT) regime. The corporate tax regime will be modelled in line with global best practices, with minimum regulatory burden for resident and foreign businesses. Except for the extraction of natural resources, which will continue to be subject to taxation at the Emirate level, the UAE CT will apply across all business, economic and commercial activities.
Proposed Tax Rate
The tax rate is 0% on earnings between AED 0 and AED 375,000, and 9% on earnings above AED 375,000. Since the UAE government is adhering to OECD’s Base Erosion and Profit Shifting guidelines, large multinationals that meet certain criteria under “Pillar Two” will be subject to the new tax rate.
Applicability on Free Zone Entities
Businesses operating in free zones will be subject to UAE Corporate tax and must register and file a corporate tax return. However, they will still benefit from tax holidays and 0% taxation if they follow all applicable regulations and do not engage in business with the corporate entities based in the UAE mainland.
Salient Features of the Proposed UAE Corporate Tax regime
A. International Accounting Standards
Businesses in the United Arab Emirates (UAE) are subject to tax on their profits as reported in their financial statements. They are to be prepared following generally accepted international accounting principles with limited exceptions and adjustments.
B. Single and Consolidated Annual Tax Return
With the introduction of a single annual electronic tax return filing for UAE CT, the need for provisional tax returns and advanced UAE CT payments will be eliminated. Also, affiliated businesses can band together to file a consolidated tax return and allocate tax losses across the group.
C. Carry Forward of Tax Losses
Furthermore, there is a provision for carry forward of tax losses for future accounting periods which reduces future taxable income.
D. Exemption from Proposed Corporation Tax
- Employment income
- Real estate income
- Savings income
- Investment returns
- Other income earned by individuals in their capacities and not attributable to a trade or business in the UAE are exempt from UAE CT
- Gains from overseas investors in the form of dividends, capital gains, and other forms of investment income
- Dividends and capital gains from eligible shareholdings
- Restructuring and deals within the same group that meet specific criteria
- Interest, dividends, royalties, and other payments made within or outside the UAE.
E. Provision for Tax Credit
Businesses in the UAE can claim foreign tax credits for any taxes paid on income earned outside the country.
F. Applicability of TP Rulings
Transfer pricing (TP) rules and documentation requirements in the UAE CT regime will apply under the proposed corporate tax regime and mirror the OECD TP Guidelines.
G. Administration
Managing, collecting, and enforcing CT will fall under the purview of the Federal Tax Authority.
Conclusion
The proposed corporate tax regime is all set to get launched on June 2023. With all eyes turned towards this landmark event, corporate entities with business in the UAE are trying to understand the consequences of this new law. Although the details are yet to be sketched out, the Public Consultation Document has given a fair idea of what to expect. With imminent global impact on international taxation, it is essential to stay abreast.
Get to know more about the Proposed UAE Corporate Tax rate regime.