New Taxation Developments- United Arab Emirates (UAE)

The great United Arab Emirates, the land of exquisite luxuries and jaw dropping sky lines, and the so called tax free country is in talks to develop legislative laws taxing business incomes arising in the UAE.

So, what led to the introduction of corporate tax in the age old tax free economy?

The UAE being a member of the Organization for Economic Co-operation and Development (OECD) Inclusive framework is introducing the federal tax regime as a preliminary step towards global minimum effective tax and enhancing the overall budget revenue which is at the moment limited only to tax revenue from businesses engaged in extraction of natural resources. The proposed tax regimes assure of framing laws in line with international practices to ensure seamless integration with international framework.

In January 2022, Ministry of Finance announced that it will introduce Federal Corporate tax (CT) on the net profits of businesses, chargeability of tax will become applicable either on 1 July 2023 or on 1 January 2024. The proposed regulations are subject to finalization and further details are awaited on the same. However, based on the consultation draft issued by the Ministry of Finance seeking inputs and appraisal of responses from the public and stakeholders, the brief taxation summary with respect to the same is as below.

Application of CT:

CT will apply to:

• All businesses and individuals conducting business activities under a commercial license in the UAE.
• The UAE CT regime will continue to honour the CT incentives currently being offered to organisations set up in free zones* (i.e no CT). Any Income sourced from the mainland UAE will be taxable (other than passive income like interest, royalties, dividends and capital gains from owning shares in mainland UAE companies).
• Banking operations.
• Businesses engaged in real estate management, construction, development, agency and brokerage activities.

CT will not apply to:

• Income earned by an Individual (Except business Income).
• A foreign investor’s passive income earning dividends, capital gains, interest, royalties and other investment returns.
• Dividends and Capital gains earned by a UAE company from the sale of shares of Foreign and UAE Companies will be exempt provided certain conditions are met. The main condition being the UAE shareholder company must own at least 5% of the shares of the company.

• Business engaged in extraction of natural resources as the same are subject to current emirate level corporate taxation.

CT Rate Slab rate:

General note: Any cross-border income which is taxable in UAE would be subject to Double Taxation Avoidance Agreements (DTAA).

*UAE Free Zone

UAE has set up free zones in each emirate for increasing the economic growth, the free zones were responsible for almost 30% of the Gross Domestic Product (GDP) in the UAE.

Currently with 45 free zones spread over the UAE resulting in significant increase in the non-oil external trade growth and with the goal of attracting job opportunities and developing a vast knowledge base, specified businesses can kick start with ease of doing business, low cost of incorporation and minimalistic setup formalities

But UAE free zones can only transact within the free zones and outside of UAE, trade with the mainland UAE is strictly prohibited.

There are numerous benefits for foreign companies setting up a free zone in the UAE namely;

• 100% for foreign ownership (Companies in the mainland UAE require at least 51% ownership held by UAE nationals).
• 100% repatriation of profits.
• 100% exemption of corporate and import/export taxation.
• Access to dynamic and developed business communities.
• Sophisticated and modern infrastructure.
• Independent laws and regulations.

The UAE government is accepting inputs from the public and stakeholders at large on the consultation draft based on international framework issued for introducing federal corporate tax rate. The rate of 9% which still remains highly competitive in comparison to other jurisdictions, whilst also maintaining tax incentives for free zones once the regime attains finality business might want to reconsider their corporate structures to gain tax benefits.

Disclaimer: The above is a summary of tax provisions proposed by the UAE government, based on my desktop research and brief understanding of the same. The provisions are in the process of being finalized. Before any decision is taken it is recommended that a professional based out of the UAE jurisdiction may kindly be consulted. I take no responsibility of the accuracy of the above summary.