keeping in line with the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (IF), the UAE joins the Gulf Co-operation Council (GCC) in the implementation of the corporate tax (‘CT’) regime. With the Implementation of CT in the UAE, the Kingdom of Bahrain is the only exception that is yet to implement CT on business entities other than companies engaged in the exploration, production, or refining of hydrocarbons.
Corporate Tax (‘CT’) is a form of direct tax levied on the net income or profit of corporations and other businesses. “Corporate Income Tax” or “Business Profits Tax” are terms used in other jurisdictions.
Scope and chargeability
The UAE CT has in very unambiguous terms defined the applicability of CT. In essence, CT will apply to all UAE businesses and commercial activities. Any activity requiring a business license /commercial license/freelance license or permit to carry out relevant commercial, industrial or professional activity would be within the scope of CT.
This means the business constitution does not matter. If a license/permit is required to carry on trade or commercial activity, then companies and individuals alike would be under the realm of CT. The only exceptions are businesses engaged in the extraction of natural resources which will continue to remain subject to Emirate-level corporate taxation and outside the scope of UAE CT. Foreign entities and individuals will be subject to UAE CT only if they conduct a trade or business in the UAE in an ongoing or regular manner. Information on other UAE CT exemptions and exclusions will be provided in due course by the Ministry of Finance (‘MoF)’.
Computation of income
Under the CT, the taxable income will be calculated from the net profit of a business. The existing business entities would be required to record their financial statements which enable the accounting of the net profit of a business in accordance with the internationally accepted accounting standards, which are International Financial Reporting Standards (IFRS) or US GAAP (Generally Accepted Accounting Principles). Dividends and capital gains earned by a UAE business from its qualifying shareholdings will be exempt. However, what conditions are pre-requisites for being eligible as a qualifying shareholding are yet to be specified in the UAE CT law.
Free zone businesses will be subject to UAE CT. However, the UAE CT regime will continue to honor the CT incentives currently being offered to free zone businesses that comply with all regulatory requirements and that do not conduct business with mainland UAE. What would require some context would be to see if there would be a sunset clause with respect to Free Zones as part of the CT regime.
Group structuring
In an era of global conglomerates, corporate tax regimes must be accommodative to complex ownership structures which may involve related party transactions and group profit/loss. UAE CT has catered to this by allowing tax losses from one group company to offset taxable income of another group company and be treated as a single taxable person provided certain conditions are met. These conditions which are yet to be specified would determine the effectiveness with which a conducive business environment is sought to be created. UAE businesses will need to comply with transfer pricing rules and documentation requirements set with reference to the OECD Transfer Pricing Guidelines, on par with global requirements.
Rate of tax
The CT rates are:
0% for taxable income up to AED 375,000;
9% for taxable income above AED 375,000;
A different tax for large multinationals having consolidated global revenues in excess of EUR 750m (AED 3.15 bn) is yet to be decided. However, it can be safe to assume that a minimum of 15% CT will be levied in line with specific criteria set with reference to ‘Pillar Two’ of the OECD Base Erosion and Profit Shifting project. Earning income from outside its home country without a foreign presence or registration would not make a business a multinational corporation.
In tune with its image of being an investor’s paradise, the UAE is trying to have a system that is investor-friendly by maintaining the lowest CT rate of 9% within the GCC region. The roll-out CT is non-retrospective, flexible, and will be effective for financial years starting on or after 1 June 2023. This means that irrespective of how businesses account for their financial year the regime will come into effect from the financial year that starts on or after 1 June 2023.
For instance, if a business follows the calendar year system of the financial year from 1 Jan 2023 to 31 December 2023, the regime will come to effect from 1 Jan 2024. Alternatively, if a business has a financial year from July 1, 2023, to June 2024, then the regime will be applicable from 1 July 2023. However, the filing of returns, procedures, and timelines is yet to be provided by the MoF.
Although the CT regime has tried to make it business-friendly, the complete impact would only be known when the law in its entirety will be rolled out. For now, provisions allowing one CT return to be filed per financial period, non-requirement of provisional or advance CT filings, or making advance CT payments are welcome steps in the right direction.
