CORPORATE TAX IN THE UAE
The Ministry of Finance (MoF) defines corporate tax as a type of direct tax levied on the net profit of corporations or other entities from their business. A competitive corporate tax regime based on international best practices is likely to consolidate the UAE’s position as a leading global hub for business and investment. By introducing corporate tax in the UAE, the government aims to meet international standards for tax transparency and prevent harmful tax practices.
EFFECTIVE DATE OF UAE CORPORATE TAX REGIME
The CT will be applicable for financial years starting on or after 1 June 2023.
Any company that adopts a fiscal year starting on 1 June 2023 and ending 31 May 2024 will be subject to CT starting 1 June 2023. The first tax return filing is likely to be due towards the end of 2024.
Any company that adopts a calendar year starting 1 January 2023 and ending 31 December 2023 will be subject to CT starting 1 January 2024 and filing is likely to be due towards mid-2025.
TAX AUTHORITY AND ADMINISTRATION
The Federal Tax Authority (‘FTA’) will be the authority responsible for administration, collection, and enforcement of CT in the UAE.
The MoF will be the ‘Competent Authority’ for international tax matters and international exchange of information for tax purposes.
UAE CT returns will be filed on an annual basis electronically. The CT regime does not require any provisional or advance CT filings.
Further details on the electronic filing, CT compliance requirements and penalties for non-compliance will be prescribed in the UAE CT law.
SCOPE OF APPLICATION
- CT applicable to all UAE businesses and commercial activities.
- CT effective for financial years starting on or after 1 June 2023.
- CT will apply across all emirates.
- Free zone businesses subject to UAE CT – CT regime will honour the CT incentives currently offered to free zone businesses that comply with all regulatory requirements and that do not conduct business with mainland UAE.
The corporate tax rates will be as follows:
- 0% for taxable income up to AED 375,000 (approx. USD 102,100);
- 9% for taxable income above AED 375,000; and
- A different tax rate for large multinationals that meet specific criteria set with reference to ‘Pillar Two’ of the OECD Base Erosion and Profit Shifting (BEPS) project.
Corporate tax will not apply to:
- An individual’s salary or income earned through employment. However, an individual will be subject to corporate tax if his or her income is earned from activities undertaken under a freelance license or permit.
- Investment in real estate by individuals in their personal capacity, provided the individual is not required to obtain a commercial license or permit to carry out such activity in the UAE.
- Dividends, capital gains, and other income earned from owning shares or other securities in a personal capacity.
- Interest and other income earned by an individual from bank deposits or saving schemes.
Following will be exempt from corporate tax:
- Dividends and capital gains earned by a UAE business from “qualifying shareholdings” (i.e., ownership interest in a UAE or foreign company that meets certain conditions to be specified under the CT Law).
- Qualifying intra-group transactions and reorganizations that meet certain conditions and requirements to be set out under the CT Law.
TAXABLE INCOME CALCULATION
The starting basis of determining taxable income will be the accounting net profit (in line with internationally acceptable accounting standards). The specific CT adjustments that can be made will be announced in due course although the expectation is that ordinary and necessary business expenses incurred in the production of taxable income should be deductible.
Income from (i) dividends (ii) capital gains and (iii) qualifying intra-group transactions and reorganizations will not be included within taxable income, subject to satisfaction of certain conditions (which are likely to include an ownership threshold and a minimum holding period).
AUDITED FINANCIAL STATEMENTS FOR CORPORATE TAX COMPLIANCE
As per the initial information made available by the Ministry of Finance, corporate tax is payable on the accounting net profit reported in the financial statements of the business under obligation. Businesses are advised to present audited financial statements, which will provide the authorities more clarity on the entity’s compliance status with the corporate tax in the UAE.
CONSEQUENCES OF NON-COMPLIANCE UNDER THE CORPORATE TAX
Non-compliance will be met with penalties and other forms of punishments. Further information on the UAE corporate tax penalties will be released by the government in due course.
WAY FORWARD FOR COMPANIES
Once the law is announced, businesses will require to consider the following aspects:
- Assess the current position of the company and carry out an impact assessment.
- Re-structure/re-organization existing corporate structure to make it tax-efficient.
- Align tax and transfer pricing policies for an intra-group transaction to align with OECD guidelines.
- Review existing Accounting, booking keeping system and gear up for audits which may be required for CT purposes.
Alia Noor (FCMA, CIMA, MBA, GCC VAT Comp Dip, Oxford fintech programme, COSO Framework)
Ahmad Alagbari Chartered Accountants