In order to streamline its tax system in accordance with global best practices and diversify its state revenue, the United Arab Emirates (UAE) has undertaken considerable tax reforms in recent years. With the objective to levy taxes on the commercial earnings of UAE firms throughout a specified tax accounting period, the new Corporate Tax (CT) law has been enacted.
Effective Dates and Applicability
For financial years beginning on or after June 1, 2023, the corporate tax will be in effect.
Companies that adopt a fiscal year that begins on June 1 and ends on May 31, 2024, will be subject to CT as of June 1 of that year. Businesses adopting a calendar year that begins on January 1 and ends on December 31 of the same year will be subject to CT beginning on January 1 of the following year.
Rates and Taxable Profits
The recently announced UAE CT law has a three-tiered scheme with rates:
Taxable profits refer to accounting profits with certain adjustments. Accumulated taxable losses can be offset against future taxable profits.
Taxable entities can claim a credit for foreign corporate tax paid on UAE taxable income against their annual tax liability.
Scope and Exceptions
The United Arab Emirates has put in place a federal tax system that is applicable to all companies and commercial operations taking place inside its seven emirates. However, there are a few exceptions:
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Impact on the Banking Industry
Notably, the international banking industry, which was formerly governed by the Emirate-level Bank Tax Decree, will now be governed by the UAE Federal Tax Law. Both local banks, who will now be required to pay corporate taxes like other firms, and international bank branches, which must conform to the new law, will be greatly impacted by this change.
Consolidated Tax Income and Group Relief
UAE groups can file consolidated tax returns because of the tax grouping and group relief provisions that are allowed. It could also be possible to allow groups to deduct their tax losses.
The following income is generally exempt from income tax:
Furthermore, there will be no UAE withholding tax imposed on domestic and cross-border payments. Businesses should assess their eligibility and satisfy applicable requirements to benefit from the exempt income program.
Supporting Free-trade zones
By offering them a 0% tax rate or exemption until the end of the holiday period, as long as they don’t do business with the mainland, the UAE aims to keep its commitment to supporting companies established in free trade zones. An annual CT return must be filed by all free zones.
Businesses who operate under the dual licence programme and have operations in both the mainland UAE and Free Trade Zones should think about the impact on their operating model.
Transfer Pricing Rules
In line with the implementation of the OECD Transfer Pricing Rules, all businesses in the UAE must adhere to these regulations and provide necessary documentation. The required transfer price regulations may also be used in domestic transactions.
Although UAE organizations frequently engage in intercompany sales and finance services, compensation for these activities has not historically been a major concern because the transactions would probably be removed through financial unity.
Intercompany transactions must now follow the arm’s length principle and be supported by the necessary paperwork as a result of this change. Businesses must evaluate the impact on both local and international transactions and revise their current arrangements as necessary.
Transfer Pricing - Documentation Requirement
Supporting Free-trade zones
CT Liability Assessment
Audited Financial Statements
Key points for Consideration
Corporate Tax in UAE
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