The UAE government has announced the introduction of federal corporate income tax following OECD principles and guidance.
Businesses in the UAE have historically enjoyed zero corporate tax on their profits. This, however, is set to change. The Ministry of Finance (MOF) announcement on 31 January 2022 that federal corporate income tax (CIT) shall be introduced in the UAE.
This article explores what we now know about this new corporate tax in the UAE, and provides suggestions on how to minimize its impact.
The New UAE Corporate Tax, How Much Is It?
The coming UAE Corporate Tax (CT) rates are:
0% for taxable income up to AED375.000 (USD$100.000)
9% for taxable income above AED375.000 (USD$100.000)
a different tax rate (not yet specified) for large multinationals that meet specific criteria set with reference to 'Pillar two' of the OECD Base Erosion and Profit Shifting Project.
The UAE’s corporate tax rate will be one of the lowest worldwide of OECD members. The tax rate of 9% remains highly competitive in comparison to other jurisdictions. The proposed corporate tax regime is based on well-recognised and practiced international principles similar to other OECD jurisdictions.
No Withholding Taxes in the UAE
The Ministry of Finance has also confirmed that there will be no UAE withholding tax on dividends, interest, royalties as well as capital repatriated.
When Will The Corporation Tax be introduced?
The tax will be applicable either on 1 July 2023 or on 1 January 2024, depending on the year end of each business.
For example, a business that has a financial year starting on 1 July 2023 and ending on 30 June 2024, will become subject to UAE CT from 1 July 2023.
Similarly, a business that has a financial year starting on 1 January 2023 and ending on 31 December 2023, will become subject to UAE Corporation Tax from 1 January 2024 (which is the beginning of the first financial year that starts on or after 1 June 2023).
How To Calculate the New UAE Corporation Tax?
The UAE Corporate Tax regime proposes to use the accounting net profit (or loss) position in the financial statements of a business as the starting point for determining taxable income.
Such IFRS standards are typically already used by businesses in the UAE.
Will You Need to Pay Taxes on Salaries?
No. UAE's tax-free salary regime remains. Individuals' salaries and other personal income shall not fall under the scope of the corporate tax regime, as long as the individual is carrying out these activities on a personal capacity and is not required to obtain a commercial license or permit in order to do so.
Will Corporate Tax apply to Free Zone and Offshore Companies?
Free zone and offshore businesses will also be required to register and file a corporate tax return. However, the new corporate tax regime will continue to provide the tax incentives currently offered to these businesses―to the extent that they do not conduct business with the UAE mainland.
Exemptions From UAE Corporate Tax
The Federal Tax Authority announced that dividends and capital gains earned by UAE businesses from their qualifying shareholdings would be exempt from corporate tax. ‘Qualifying’ shareholding refers to an ownership interest in a UAE or foreign company that meets certain requirements that will be further specified in the upcoming UAE Corporate Tax Law.
Likewise, qualifying intra-group transactions and reorganizations may not be subject to corporate tax.
What About Losses? Are They Deductible?
The UAE corporate tax regime will allow businesses to use losses incurred (as from the corporate tax effective date) to offset taxable income in subsequent financials, and excess corporate tax losses may be carried forward and used against taxable income in future years under certain conditions.
There will not be a withholding tax applicable in domestic and cross-border payments, and businesses will not be required to make any advance corporate tax payments. Foreign corporate tax paid on UAE taxable income will be allowed as a tax credit against the UAE corporate tax liability.
Online Corporate Tax Returns
Corporate tax returns must be filed electronically. More information on the registration process for UAE corporate tax and compliance obligations will be released on a later date.
Tax Optimizing Structures for Mainland Companies With Foreign Clients
Do you have a Mainland company that does business in the UAE and overseas as well? This allows for setting up a Freezone company for the out–of-UAE clients, while you continue operating the Mainland Company for the UAE based clients. This is called parallel structuring.
Currently we estimate that the new corporate tax regime will continue to honour free zone incentives. We view that Free zone companies that do not partake in business with Mainland companies and have the necessary substance in the UAE will continue to enjoy the favourable tax treatment such as zero corporation tax, no restrictions on repatriations on profits and many more.
Furthermore, regarding offshore entities in the UAE (JAFZA, RAKICC) we estimate that the UAE Tax authorities will follow suit and that they would keep most of their benefits.
Ok got it. Now what should I do?
Get cracking on the numbers. See if this makes financial sense to you. To setup a parallel structure with a Freezone. What are my next steps?
Easy lets us do everything on your behalf! You can focus on growing your business. We can do the rest.
Do not hesitate to Contact Us
should you have more questions about corporate tax, or wish to set up a parallel structure...