During the pandemic, the government made many substantial initiatives to convince the expatriates, who constitute the majority of the country’s population, to continue in the nation for the long term. The government eliminated the requirement for businesses to have Emirati shareholders, shifted to a Saturday-Sunday weekend, and most recently, launched a corporate tax, all of which point to the UAE government’s action plan to hold back investors, thereby gradually increasing foreign investments by aligning with global markets.
For the first time in the UAE, the Ministry of Finance (Ministry) announced on January 31, 2022 that it would implement a federal corporate tax structure. Executive regulations (CT Law) and a federal corporate tax statute are scheduled to be released soon.
To encourage local enterprises and startups, the United Arab Emirates will impose a federal corporate tax of 9% on revenues above 375,000 UAE dirhams ($102,000), with no tax on taxable income up to that amount. When compared to other GCC nations, this corporate tax policy from the UAE will be among the most competitive in the world. The UAE, like many of its oil-rich regional rivals, is working to expand its operations away from petroleum revenue.
Scope of Application
All UAE companies and commercial activities conducted by legal organisations or people throughout the seven emirates will be subject to the corporate tax. Natural resource exploitation will continue to be exempted as it is subject to an emirate-level corporate tax.
All operations carried out by a legal entity are considered “business activities” and are subject to the corporate tax framework. But at the other side, if an individual possesses a business license or license to conduct their necessary tasks in the UAE, that individual will be judged to have a “business” that comes within the scope of the CT Law.
The federal corporate tax will apply to companies formed in the UAE’s free zones or financial free zones. But, it seems that such businesses will benefit enormously from eligible tax cuts and subsidies in the form and for the term specified by the appropriate free zone authority’s regulatory regime.
For example, the Dubai International Finance Centre (DIFC) legislation and the Abu Dhabi Global Market (ADGM) law both state that a DIFC- or ADGM-incorporated firm pays no tax for the first 50 years after the law is enacted. As a result, firms formed in the DIFC and ADGM might consider paying no tax until 2071 and 2063, accordingly.
It’s unknown if free zone firms’ tax status will alter according as to whether they operate inside or outside the free zone.
Rates
The following are the corporate tax rates:
- A 0% tax rate applies to taxable income up to dirhams 375,000 (US $102,095).
- A 9% tax rate applies to taxable income over 375,000 dirhams (US $102,095).
- A separate tax rate for giant corporations that fulfil particular conditions based on the OECD Base Erosion and Profit Shifting project’s Global Anti-Base Erosion Model Rules (Pillar Two).
Non-Taxable Income
The following businesses will be exempt from corporate taxes:
Salary or revenue obtained via employment for an individual. If an individual’s income is obtained through operations performed under a freelancing licence or permission, however, he or she will be liable for company tax.
Individuals can invest in real estate in their personal capacity if they do not need a business licence or licence to do so in the UAE.
Dividends, capital gains, and other income derived through personal ownership of stocks and other assets.
Individuals gain interest and other revenue through bank accounts and savings plans.
Exempt Income
The following items will be excluded from corporate tax, according to the Ministry:
- Dividends and capital gains from “qualified shareholdings” obtained by a UAE corporation (i.e., ownership interest in a UAE or foreign company that meets certain conditions to be specified under the CT Law).
- Intra-group transactions and reorganisations that qualify under the CT Law if they fulfil specified circumstances and limitations.
Conclusion
The new approach, which is set to go into force next year, aims to increase the UAE’s reputation as a worldwide business and investment hub while also meeting international tax integrity criteria and preventing illicit and fraudulent practices.
This declaration allows businesses in the UAE about a year and a half to gear up for taxes, and it will be fascinating to see how companies in the UAE implement various strategies to ensure adherence to the projected new international tax rules while also making sure the UAE remains a desirable area for businesses to function.