UAE introduces federal corporate income tax from June 2023
The United Arab Emirates (UAE) has long been known as a zero corporate tax jurisdiction. This is set to change with the Ministry of Finance’s (MOF) announcement on January 31, 2022 that the UAE will introduce a federal corporate income tax (CIT) effective for financial years starting on or after June 1, 2023.
Because the UAE is an Inclusive Framework member of the Organisation for Economic Cooperation and Development’s (OECD) anti-Base Erosion and Profit Shifting initiatives, it has been expected that it would introduce legislation to implement the multinational-focused Global Minimum Corporate Tax (GMCT) of 15 percent. With MOF’s recent announcement, more details have come out on the contours of the UAE’s CIT regime.
While the formal CIT legislation has not yet been published, MOF’s announcement states that CIT will be payable on the profits of UAE businesses as reported in their financial statements prepared in accordance with internationally acceptable accounting standards.
CIT will apply to all businesses and commercial activities alike, except for the extraction of natural resources, which will remain subject to Emirate-level corporate taxation.
The standard statutory CIT rate will be 9 percent, whereas a 0 percent rate will apply for taxable profits up to AED375,000 to support small businesses and startups. Multinationals earning more than €750 million in global revenues will be subject to a 15 percent CIT rate, which constitutes the UAE’s implementation of the GMCT.
We understand a participation exemption regime will be introduced, as MOF states that UAE businesses will be exempt from paying CIT on capital gains and dividends received from qualifying shareholdings. Foreign corporate tax paid on UAE taxable income will be allowed as a tax credit against the UAE CIT liability.
Furthermore, MOF stated there will be generous loss utilization rules and UAE groups can be taxed as a single entity or can apply group relief in respect of losses and intragroup transactions and restructurings. Transfer pricing and documentation requirements will apply to UAE businesses with reference to the OECD Transfer Pricing Guidelines.
According to MOF’s announcement, the UAE CIT regime will ensure the compliance burden is kept to a minimum for businesses that prepare and maintain adequate financial statements. It is anticipated that UAE businesses will only need to file one CIT return each financial year and will not be required to make advance tax payments or prepare provisional tax returns. The UAE Federal Tax Authority will be responsible for the administration, collection, and enforcement of UAE CIT.
The Emirates of Abu Dhabi and Dubai contain many free zones, where international groups have been allowed to establish 100 percent owned subsidiaries without the need for a local shareholder. Most free zones provide tax incentives to companies and branches established therein, which are typically valid for a number of years. According to the MOF, free zone businesses will be subject to the new CIT; however, the CIT regime will continue to honor the tax incentives offered to free zone businesses that comply with all regulatory requirements and that do not conduct business with mainland UAE (ie, with parties outside of the Free Zone).
Many UAE companies and branches have for years enjoyed a 0 percent tax treatment for profits generated in the UAE, both in the free zones and on mainland UAE. The current announcements are set to change this significantly. While the relevant legislation has not yet been published, international groups with businesses in the UAE are advised to consider the potential impact of these changes.
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