The UAE will introduce a federal corporate tax on business profits at a rate of 9 percent. This will be effective for financial years starting on or after June 1 2023.
This will still leave the UAE with the lowest global corporate tax rate alongside Hungary and Montenegro who share a corporate tax rate of 9 percent.
The tax exemption on the first AED375,000 of taxable profits means that the UAE would remain one of the most attractive tax jurisdictions in the world while complying with international standards for tax transparency.
This corporate tax regime, together with the UAE’s extensive double tax treaty network, will mean that the UAE retains its position as a world-leading hub for business and investment.
The UAE’s infrastructure and lifestyle make it a much more attractive proposition to start-ups and small businesses than some other low tax jurisdictions, meaning that they should continue to want to establish themselves in the country.
Scope and rate
All UAE businesses, corporations and entities licensed to undertaken commercial activities will be subject to UAE corporate tax with the exception of businesses engaged in the extraction of natural resources which will continue to be subject to Emirate level taxation.
Businesses will be subject to tax at a rate of 0 percent on their first AED375,000 of taxable profits and a rate of 9 percent on their taxable profits thereafter.
A corporate tax rate of 15 percent will apply for large multinational groups with a consolidated global revenue in excess of EUR750 million (AED3.15 billion).
Taxable basis
A participation exemption regime will be introduced and UAE businesses will be exempt from paying corporate tax on capital gains and dividends received from qualifying shareholdings. A unilateral foreign tax credit will be offset against the UAE corporate tax liability.
Timing
Although the starting date announced by the Ministry of Finance is financial years starting on or after June 1 2023, in practice for the majority of companies in the UAE with a calendar financial year-end the effective date of implementation will be January 1 2024.
Free zones
Free zone entities will continue to be exempt from corporate tax on their taxable profits to the extent that they are generated from business carried out with customers outside the UAE or with customers in other free zones in the UAE.
However, to the extent that such entities carry out business with customers outside the free zone and in the mainland UAE then the profits earned will be subject to corporate tax.
This may require changes to accounting systems so that profits generated externally can be separately identified.
Withholding taxes
No withholding taxes will be applicable on domestic and cross-border payments under the UAE corporate tax regime.
Transfer pricing
The UAE corporate tax regime will have transfer pricing rules and documentation requirements in line with the OECD Transfer Pricing Guidelines.
Tax compliance
UAE businesses will only need to file one corporate tax return each financial year and will not be required to make advance tax payments.
Action needed
UAE businesses are strongly advised to prepare for the implementation of corporate tax. This may include the following:
- Performing an initial impact assessment to understand the potential tax effect of these changes on their business
- Training for finance and tax teams
- Changes to the legal structure
- Review of contracting arrangements
- Changes to accounting systems
Steven Ireland is head of tax for Creation Business Consultants.
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