UAE - Corporate Income Tax Law published (9 December)

Background

On 31 January 2022, the United Arab Emirates (UAE) announced the introduction of a federal Corporate Income Tax (CIT) on business profits for financial year starting on or after 1 June 2023. Together with this announcement, the UAE Ministry of Finance (MOF) published extensive Frequently Asked Questions (FAQs), setting out the general principles and policy choices of the new CIT regime. In May 2022, the UAE MOF made available a Public Consultation Document and welcomed stakeholders to share comment on the design choices of the proposed tax regime.

On 9 December 2022, the UAE published the CIT law¹ which forms the basis for the implementation of the new tax regime. It is expected that the CIT law will be supplemented with Executive Regulations, which will contain more detailed regulations pertaining to the CIT regime.

Whilst the UAE had already introduced Value Added Tax (VAT) in 2018, the implementation of a Federal CIT marks another important milestone in the country’s gradual evolution towards a mature tax jurisdiction.

Although the UAE does not have any Personal Income Tax, it should be noted that individuals may be subject to the new Corporate Income Tax to the extent that they would generate business income in the UAE.

Summary of the CIT law

Hereafter we have summarized some of the major principles of the new CIT regime:

• Tax base: resident taxpayers will be taxed on their worldwide income (i.e., income derived inside or outside of the UAE).
• Permanent Establishment (PE) for non-residents: the PE concept under the new CIT regime is designed on the basis of the OECD Model Tax Convention (fixed PE, agent PE). Given that the UAE’s extensive tax treaty network is mostly based on the OECD Model, this alignment is welcome for multinational businesses operating in the UAE.
• Tax rate: Businesses will be subject to a headline CIT rate of 9%.
• Tax free bracket: a nil bracket will apply for taxable income not exceeding AED 375,000 (around USD 100,000).
• Free Zones: The UAE has more than 40 Free Zones which offer special incentives to foreign investors from a legal, customs and tax perspective. Although Free Zone entities will be in scope of the new CIT regime businesses established therein can benefit from 0% tax rate on qualifying income. The application of the 0% tax treatment will be subject to several conditions, such as maintaining adequate substance.
• Global Minimum Tax: whilst the initial announcements around the new CIT regime suggested another tax rate would be introduced as part of the OECD’s Pillar Two initiative, surprisingly, the CIT Law is silent on this point.
• Participation exemption: both capital gains derived from and dividend income received from qualifying participations will be exempt, subject to meeting certain conditions.
• Thin capitalisation rules: the UAE will implement interest limitation rules. In line with the OECD’s BEPS Action 4 interest expenditure will be deductible up to 30% of the taxable person’s accounting earnings before the deduction of interest, tax, depreciation and amortisation (EBITDA).
• Transfer Pricing: alongside the new CIT regime, the UAE will also implement Transfer Pricing (TP) rules in line with the OECD TP Guidelines as well as periodic TP reporting obligations.
• Tax losses: tax losses can be carried forward indefinitely, subject to change of control provisions. Tax losses can only be offset up to a maximum of 75% of the taxable income of the relevant tax period.
• Tax grouping: companies that meet the relevant criteria can apply to form a Tax Group for CIT purposes.
• Withholding tax: a domestic withholding tax of 0% will be introduced under the new CIT regime that will apply on UAE sourced income.
• Exemptions: various sectors can benefit from an exemption and amongst others, qualifying investment funds will be exempt from CIT.
• Administration: taxpayers will have to file tax returns and settle the tax within nine (9) months following the end of their financial year.

Next steps

UAE businesses with a calendar year as financial year will be subject to the new CIT regime starting on 1 January 2024. This means that taxpayers have little over a year to prepare for the implementation and to structure their UAE operations to optimize the CIT impact. UAE businesses with a financial year starting between 1 June and 31 December 2023 however will have even less time and are therefore recommended getting their organization and business operations ready for the new tax.

Feel free to reach out to your local DLA Piper contacts, should you have any questions with respect to the introduction of CIT in the UAE.