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February 2, 2022
2022-5133

UAE to introduce corporate tax for financial years starting as of 1 June 2023

Executive summary

On 31 January 2022, the Ministry of Finance (MOF) of the United Arab Emirates (UAE) confirmed that the UAE will introduce federal corporate tax (CT) for financial years starting on or after 1 June 2023. This announcement follows confirmation by the MOF in July 2021 that the UAE would support the global minimum effective tax rate under the Organisation for Economic Co-operation and Development (OECD)/G20 Base Erosion and Profit Shifting (BEPS) 2.0 project.

The MOF’s press release states: “Given the position of the UAE as a global financial centre and an international business hub, the UAE Corporate Tax regime will support investment and headquarters activities and ensure the free flow of capital, trade, financing, and services.” The press release further provides:

"As a leading jurisdiction for innovation and investment, the UAE plays a pivotal role in helping businesses grow, locally and globally. The certainty of a competitive and best in class Corporate Tax regime, together with the UAE's extensive double tax treaty network, will cement the UAE's position as a world-leading hub for business and investment."

While the CT law has not yet been issued, the MOF has publicly communicated key elements of CT policy and design through a Frequently Asked Questions (FAQs) document.

This Alert summarizes the key elements.

Detailed discussion

Timing: CT will be effective for financial years starting on or after 1 June 2023. Businesses with an accounting reference date of 31 December will become subject to CT from 1 January 2024.

Rate: The CT rates are 0% for taxable income up to AED375,000; 9% for taxable income above AED375,000; and “a different tax rate” (the FAQs do not specify a rate but 15% would be in line with the global minimum effective tax rate) for large multinationals that meet specific criteria set with reference to “Pillar Two” of the OECD BEPS project (referring to multinational corporations with consolidated global revenues in excess of €750m (c. AED3.15bn)).

Tax base: CT will be payable on the profits of UAE businesses as reported in their financial statements prepared in accordance with internationally acceptable accounting standards, with minimal exceptions and adjustments. Subject to certain conditions being met, losses incurred by entities subject to CT may be carried forward for offset against future taxable income. Tax losses may also be utilized against taxable income of another group company, subject to certain conditions being met.

Scope and exemptions: CT will apply to all persons (individual and corporate) carrying out business activities under a commercial business license in the UAE. Businesses engaged in the extraction of natural resources will remain subject to the current Emirate level tax rules and will be outside the scope of CT. Banking operations, including those currently taxed at the Emirate level, will be subject to CT. Dividends and capital gains earned by a UAE business from its qualifying shareholdings, as well as qualifying intra-group transactions and reorganizations subject to certain conditions being met, will be exempt from CT. Information on other CT exemptions and exclusions will be provided in due course.

Free zones: Businesses established in free zones (including financial free zones) will be subject to CT, but the CT regime will continue to honor the CT incentives currently being offered to free zone businesses that comply with all regulatory requirements and that do not conduct business with mainland UAE. There is no indication whether the free zones will amend or update their incentive regimes. Free zone businesses will be required to register and file a CT return.

Transfer Pricing: UAE businesses will need to comply with transfer pricing rules and documentation requirements set with reference to the OECD Transfer Pricing Guidelines.

Withholding tax: There will be no withholding tax applicable on domestic and cross-border payments of any nature.

Foreign tax credits: Any foreign CT imposed on UAE taxable income shall be allowed as a tax credit against the CT liability.

Administration: The Federal Tax Authority (FTA) shall be responsible for the administration, collection and enforcement of CT. Businesses will be required to register for CT purposes and will be required to electronically file one CT return per financial period. No provisional or advance CT filings will be required, nor any advance CT payments. A UAE group of companies may elect to form a tax group and be treated as a single taxable person (fiscal unity), provided certain conditions are met. A UAE tax group will only be required to file a single tax return for the entire group.

The UAE MOF plans to issue further information on the CT regime toward the middle of 2022.

Implications

Businesses should assess the potential impact of CT on their operations and prepare for CT compliance requirements in the UAE. Specifically, businesses should:

  1. Assess whether the existing tax function, operating model and governance (people, processes, systems and technology) are sufficient to address the requirements of the CT regime.
  2. Assess the impact of CT on existing legal structures and operating models. This could include a quantitative analysis showing the anticipated financial impact of CT.
  3. Identify potential exposures and opportunities to drive tax efficiencies from both a tax cost and administrative perspective prior to the CT implementation, e.g., legal entity rationalization, international and domestic restructuring, and transfer pricing.

Also, businesses should assess whether accounting policies and data management systems are appropriate to achieve a position of full compliance with both CT and existing Value Added Tax reporting obligations.

_________________________________________

For additional information with respect to this Alert, please contact the following:

EY Consulting LLC, Dubai

Ernst & Young – Middle East, Bahrain

Ernst and Young & Co Public Accountant (Professional LLC), Riyadh

Ernst & Young LLP (United States), Middle East Tax Desk, New York

 
 

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