Corporate Tax
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:
- Annual taxable profits up to AED 375,000 will be subject to a zero-tax rate.
- Annual taxable profits exceeding AED 375,000 will be subject to a 9% tax rate.
- Multinational enterprises falling under the scope of Pillar 2 of the BEPS 2.0 framework (i.e., consolidated global revenues exceeding AED 3.15 billion) will be subject to different rates as per OECD Base Erosion and Profit-Sharing rules.
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.
Taxable Person
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:
- Businesses involved in the extraction of natural resources will continue to be subject to tax decrees issued by their respective emirates.
- Individuals are free from CT if their source of income is a personal source of income, such as a salary or investment income, and it does not qualify for a commercial license.
- Businesses registered in Free Trade Zones are exempt from CT provided they comply with regulatory requirements and do not conduct business with mainland UAE.
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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.
Exempt Income
The following income is generally exempt from income tax:
- Dividend income earned by UAE companies from qualifying shareholdings (as defined in the law).
- Capital gains.
- Profits from group reorganizations.
- Profits from intra-group transactions.
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
- With only minor adjustments for disallowed costs, book profit will be observed to decrease the difficulty of tax calculations.
- The entity's use of IFRS or any other accounting standards is allowed.
- On a few limited transactions, withholding taxes are stated to be zero percent.
- Foreign tax will be allowed to be credited against UAE corporate tax payable
Grouping
- Tax Grouping can be elected if certain conditions are met
- No corporate tax will apply on qualifying intra group transactions and restructurings
Audited Financial Statements
- Audited Financial Statements are required if a free zone person wishes to avail 0% tax rate
Key points for Consideration
- Separate financial statements must be kept up to date for each entity.
- Locating and incorporating the appropriate tax codes into the accounting system.
- 0% tax rate for free zone firms with mandatory audit criteria.
- The fundamentals of efficient management and control.
- Preparing for a transaction involving enterprises from the free zone and mainland.
- Keeping separate records for transfer price and associated.
- Reorganising ownership patterns to take advantage of tax grouping and transfer of losses.
Corporate Tax in UAE
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Navigating the corporate tax landscape in the UAE requires a comprehensive understanding of the new CT law and its implications. With Buchprufer as your trusted partner, you can navigate the complexities of corporate tax in the UAE with confidence. Our tailored solutions and expert guidance ensure that your business remains compliant, optimized, and well-prepared for the evolving tax landscape.
Contact us today to discuss your corporate tax needs and discover how we can assist you in achieving your tax objectives.