Corporate Tax in UAE: Rates, Exemptions and Regulations

Introduction: The introduction of Corporate Tax (CT) in the United Arab Emirates (UAE) signifies a significant shift in its tax landscape. Understanding the tax rates and regulations is crucial for businesses operating within the country to comply with the new framework effectively.

Tax Rates:

1. Zero Rate for Annual Taxable Profits up to AED 375,000: Annual taxable profits falling under AED 375,000 are subject to a zero tax rate. This aims to provide relief to small and medium-sized enterprises (SMEs) and startups.

2. 9% Rate for Annual Taxable Profits Above AED 375,000: Annual taxable profits exceeding AED 375,000 are subject to a 9% tax rate. This rate applies to most businesses operating in the UAE.

3. Special Rates for Multinational Enterprises (MNEs) under BEPS 2.0 Pillar 2: Multinational Enterprises falling under the scope of Pillar 2 of the Base Erosion and Profit Shifting (BEPS) 2.0 framework, with consolidated global revenues exceeding AED 3.15 billion, may be subject to different tax rates as per OECD guidelines.

Exemptions and Deductions:

1. Exempt Income Sources:

• Dividend income earned by UAE companies from qualifying shareholdings.
• Capital gains.
• Profits from group reorganization and intra-group transactions.

2. No Withholding Tax: There is no UAE withholding tax imposed on domestic or cross-border payments.

Free Trade Zones and Tax Holidays:

1. Tax Exemption for Free Trade Zone Businesses: Businesses operating within Free Trade Zones (FTZs) in the UAE are generally exempt from corporate taxes, provided they comply with regulatory requirements and do not conduct business with Mainland UAE.

2. Tax Holiday Period: Free Zone businesses will remain tax-exempt until the end of the tax holiday period, after which they may be subject to corporate taxes.

Transfer Pricing and Documentation:

1. Application of OECD Transfer Pricing Rules:
   • The UAE adopts OECD Transfer Pricing Rules, requiring businesses to comply with transfer pricing regulations and documentation requirements.
2. Arm’s Length Principle:
   • Intercompany transactions must be conducted at arm’s length, and appropriate documentation must support transfer pricing arrangements.

Tax Credits and Losses:

1. Offsetting Taxable Profits with Losses: Accumulated taxable losses are allowed to offset future taxable profits.

2. Tax Grouping and Group Relief Provisions: UAE Groups can file consolidated tax returns, and tax losses among group entities may be offset.

3. Foreign Tax Credits: Taxable entities can credit foreign corporate tax paid on UAE taxable income against their annual tax liability.

Corporate Tax (CT) in the UAE: The latest development in the UAE’s tax landscape is the introduction of Corporate Tax (CT), which aims to levy taxes on business profits generated within the country. This marks a significant shift in the UAE’s tax policy and represents a fundamental change in its approach to taxation. The CT law, along with detailed regulations, is expected to be issued in mid-2022, providing businesses with clarity on their tax obligations and compliance requirements.

Key Details of the Corporate Tax Regime: Under the new CT regime, businesses operating in the UAE will be subject to corporate income tax on their profits earned during a tax accounting period. The CT will be applicable for financial years commencing on or after 1 June 2023, with the first tax return filing expected towards the end of 2024 for certain fiscal year structures.

Expected Impact and Implications: The introduction of CT poses several implications for businesses operating in the UAE. From adjusting financial reporting practices to evaluating tax planning strategies, businesses need to carefully assess the impact of CT on their operations and financial performance. Additionally, compliance with CT regulations, including record-keeping requirements and filing obligations, will be crucial to avoid penalties and ensure adherence to tax laws.

1. When does the Corporate Tax law come into effect?

• The CT law and regulations are expected to be issued in mid-2022.
• The CT will be applicable for financial years starting on or after 1 June 2023.

2. How will the CT affect businesses?

• Businesses adopting fiscal years starting on 1 June 2023 will be subject to CT starting 1 June 2023.
• Companies with a calendar year starting 1 January 2023 will be subject to CT starting 1 January 2024.

3. Are there any exceptions to the federal tax system?

• Businesses in the extraction of natural resources will follow Emirate-level tax decrees.
• Individuals earning income personally (e.g., salary) are exempt, unless requiring a commercial license.
• Free Trade Zone businesses, compliant with regulations and not conducting business with Mainland UAE, are exempt.

4. What are the tax rates under the CT regime?

• Profits up to AED 375,000 are taxed at a zero rate.
• Profits above AED 375,000 are taxed at 9%.
• Multinational Enterprises (MNEs) under BEPS 2.0 Pillar 2 may have different rates.

5. Which income is exempt from taxation?

• Dividend income from qualifying shareholdings, capital gains, group reorganization, and intra-group transactions are generally exempt.
• No UAE withholding tax on domestic or cross-border payments.

6. What about businesses in Free Trade Zones?

• Businesses not conducting Mainland UAE business will be tax-exempt until the end of the holiday period.
• Free zones must file an annual CT return.

7. How will Transfer Pricing rules impact businesses?

• OECD Transfer Pricing Rules apply, requiring compliance and documentation.
• Intercompany transactions must be at arm’s length, affecting both cross-border and domestic dealings.

8. What about tax credits and losses?

• Accumulated taxable losses can offset future profits.
• Tax grouping and group relief provisions are allowed.
• Foreign corporate tax paid on UAE income can be credited against annual tax liability.

Conclusion:

The introduction of Corporate Tax in the UAE represents a significant shift in its tax policy, aiming to align with global tax standards while supporting the economic development of the country. Businesses operating in the UAE must acquaint themselves with the CT regime, leveraging exemptions and deductions to minimize their tax liabilities. As the UAE continues to refine its tax regulations, staying informed and seeking professional advice will be key for businesses to navigate the evolving tax landscape effectively.