On 31 January 2022 the Ministry of Finance (MOF) announced that federal corporate income tax (CIT) will be introduced in the UAE. The CIT regime is expected to apply for fiscal years starting on or after 1 June 2023.
The proposed CIT regime is expected to apply to:
All business (commercial, industrial and professional) activities in the UAE, except for the extraction of natural resources, which is already subject to taxation at an Emirate-level.
Individuals to the extent they hold (or are legally required to hold) a business license or permit to carry out commercial, industrial and/or professional activities in the UAE. This includes income earned by freelance professionals for activities carried out under a freelance license or permit.
Banking operations in the UAE (although branches of foreign banks are already subject to a CIT regime at an Emirate-level).
It was also announced that corporate tax incentives currently offered to free zone businesses will continue to be honored, to the extent the free zone business complies with all applicable regulatory requirements and does not conduct business in mainland UAE. This may affect many businesses currently operating in both mainland UAE and in free zones under a dual licensing scheme.
Free zone businesses will nevertheless have to comply with certain obligations under the CIT regime, including the requirement to register and file a CIT return.
Three different rates of corporate income tax are proposed to apply, as follows:
0% rate on taxable income up to AED 375,000 (c. US$ 102,000);
9% rate on taxable income above AED 375,000; and
a different rate (not announced yet) for large multinationals that generate consolidated global revenues above EUR 750m (c. AED 3.15 bn)
Photo by Markus Winkler
The MOF has announced that the following types of income will be exempted from the CIT regime:
Income derived from the extraction of natural resources (see above);
Dividends and capital gains earned by a UAE business from its qualifying shareholdings (ie, an ownership interest in a UAE or foreign company that meets certain conditions to be specified in the UAE CIT law;
Qualifying intra-group transactions and reorganizations subject to certain conditions to be specified in the UAE CIT law;
Foreign entities and individuals who do not conduct a trade or business in the UAE on an ongoing or regular basis; and
Foreign investors' income from dividends, capital gains, interest, royalties and other investment returns.
Foreign CIT paid on UAE taxable income will be allowed to be credited against UAE payable CIT. Please note that UAE has entered into over 130 double tax treaties.
The CIT regime will allow businesses to use losses incurred (as from the entry into force of the CIT regime) to reduce taxable income for subsequent financial periods.
UAE group of companies will be able to elect to form a tax group and be treated as a single entity for taxation purposes, subject to certain conditions to be specified in the UAE CIT law. A UAE tax group will be able to file a single tax return for the entire group.
UAE businesses will also have to comply with transfer pricing rules and documentation requirements based on the OECD transfer pricing guidelines.
The relevant CIT legislation is still being finalized and has not been published yet. Although the regime that will come into force may ultimately diverge from MOF's announcement, businesses operating in the UAE should consider the potential impact of the announced regime and prepare for the upcoming change in the law.
Should you need any help or have questions, My Best CFO Team is always happy to help.
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