The UAE is a few days away from implementing a federal corporate tax on June first.
This tax aims to support the country in achieving its strategic objectives and accelerate the pace of its development and growth and reflects the aims of the government to promote economic diversification, thus diversifying sources of income to serve the community and build a sustainable future, in addition to enhancing the country’s global position and economic and financial competitiveness.
On the ninth of December 2022, the state issued the Corporate Tax Law aimed at strengthening its position as a leading hub in the fields of investments and business.
The corporate tax is set at 9 percent on taxable income exceeding 375,000 dirhams.
On the eve of the implementation of the tax, the UAE’s Ministry of Finance issued a set of “transitional provisions” that companies need to take into account when preparing for corporate taxes.
“The transitional provisions of the corporate tax provide important clarifications for businesses that need to move smoothly from the pre-implementation period of the Corporate Tax Law to post-implementation, in order to facilitate the process of determining the opening balance sheet, and to ensure a fair and transparent approach with regard to assets and liabilities held before the new system comes into effect,” said Undersecretary of the Ministry of Finance Younis Haji Al Khouri.
The Decision on Transitional Provisions for Corporate Tax provides guidance on the adjustment of the opening balance sheet of a Taxable Person in accordance with the Corporate Tax Law.
The decision applies to immovable property, intangible assets, assets and financial liabilities held by companies before the Corporate Tax Law enters into force.
Companies must make the decision when they file their first tax return, the ministry said on Friday, adding that the choice would be permanent except in special circumstances.
The Ministry’s decision also takes into account the history of ownership, including assets and liabilities owned by the company or other members of the same business group.
Flexibility for the real estate sector
The decision provides more flexibility for the real estate sector, where businesses with immovable property calculated on a historical cost basis have the option to select the basis of the relief, using either a time apportionment method or valuation method, thereby allowing groups to determine the most favorable outcome for them on immovable property on an asset-by-asset basis.
For example, if one considers a UAE company that owns a real property asset, such as a building or land, before the effective date of the corporate tax law.
Upon selling the property after the enactment of the law, the company can choose one of two methods for adjusting its taxable income. One, they can either exclude a portion of the gain based on the property’s holding period, or two, they can use a fixed formula based on the property’s value, as determined by the relevant government entities in charge of the valuation of land and real estate property in the UAE, at the start of the first tax period.
The tax rate of 9 percent puts the UAE in a competitive position when compared to other financial centers and advanced economies.
According to the Washington Tax Foundation, the average worldwide statutory corporate income tax rate, measured across 180 countries, is 23.37 percent. When weighted by GDP, the average is 25.43 percent.
Asia has the lowest regional average rate at 19.52 percent, while South America has the highest regional legal average rate at 28.38 percent. However, when weighted by GDP, Europe has the lowest regional rate at 23.59 percent and South America has the highest rate at 32.64 percent.
The average highest corporate rate among the 27 EU countries is 21.16 percent, 23.57 percent in OECD countries, and 32 percent in the Group of Seven.
Tax institution data indicated that the average statutory corporate tax rate has been steadily falling worldwide since 1980 but has stabilized in recent years.
Thus, the UAE’s 9 percent rate makes it the third country (similar to Hungary) in the world’s corporate tax rate, and one of only three OECD member countries out of the 20 countries with the lowest corporate tax rate in the world.
This indicates the UAE’s keenness to balance its duties and commitments to the OECD and its desire to continue to be an attractive investment destination.
For more on the UAE tax, click here.