The introduction of corporate tax in the UAE

Each year, hundreds of foreign companies relocate or set up businesses in the UAE to take advantage of special tax incentives, state-of-the-art infrastructure, and access to major economies across the Middle East, Asia, and Europe. However, the recent announcement of the introduction of corporate tax (CT) will have significant impacts on companies that operate within the UAE. It’s therefore important for businesses to understand how the new taxes will impact them.

Why has the UAE introduced a corporate tax?

Currently, the UAE has limited taxes on corporations that operate within the country. Most corporate taxes are determined by specific tax decrees that target certain industries such as oil and gas companies and foreign banks.

As a member of the OECD (Organisation for Economic Co-operation and Development), the UAE has committed to following the guidance set forth with Pillar II of the OECD’s Base Erosion and Profit Shifting Project (BEPS). This project is intended to help eliminate large multinational enterprises from moving profits between nations to avoid taxation.

In January of 2022, the UAE’s Ministry of Finance announced the introduction of a federal corporate tax (also referred to as CT). The corporate tax will go into affect for any fiscal year starting on or after 1 June 2023.

As well as being compliant with the OECD inclusive framework, the UAE will benefit from the new tax regime in many other ways. The new CT will increase tax revenue, allow the UAE government to diversify tax revenue from the hydrocarbon industry, and better align with other international taxation practices. It remains to be seen if the new CT regime will dissuade future foreign investment. However, it should be noted that, at 9%, the rate of tax proposed is still the lowest in the GCC region and considerably lower than the global average rate of 23.54%

Which businesses does the new corporate tax regime effect?

Businesses that meet a certain set of requirements will be required to pay the new corporate tax. The tax amount will vary depending on the company’s overall profits. The tax will be applied to the company’s net profit (or loss) shown in its financial statements. Financial statements must follow the IFRS accounting standards of the UAE.

● 0% Tax - No tax will be required for businesses that generate 375,000 AED (about $102,000 USD) or less of taxable income.

● 9% Tax - Companies that exceed 375,000 AED (or $102,000 USD) of taxable income will pay a 9% tax rate.

● Variable - Large multinational enterprises that exceed 3.15 billion AED (roughly $850 billion USD) will be required to pay a different rate as established by the OECD.

Certain types of income will be exempt from the new corporate tax including dividend income earned by the company, capital gains, profits from group reorganisation, and profits from intergroup transactions. In addition, recorded losses will be allowed to offset future taxes.

What organisations will be impacted?

The Ministry of Finance has created a list of entities and organisations which will be required to pay the new corporate tax. These are:

● UAE-incorporated companies including LLCs, partnerships, and LLPs.

● Foreign entities with a permanent establishment and source of income in the UAE.

● Free zone entities with a branch in the mainland (only mainland source of income will be taxed under the new CT).

What organisations will be exempt or excluded from the corporate tax?

There is a wide range of companies and organisation types that will be excluded from the new corporate tax regime. It’s critical for each organisation to speak to a qualified professional to find out whether their entity is eligible for an exemption. The following business entities will be exempt:

● Businesses that extract natural resources in the UAE. These will continue to be taxed under individual tax decrees respective to their industry.

● Companies registered in free zones (that do not conduct business in the mainland) will continue to follow the tax requirements for their specific free zone.

● The federal government (including their departments), government-owned UAE companies, and other public institutions.

● Approved charities and public benefit organisations.

● Private and regulated social security and pension funds.

● Investment funds.

It’s important to note that the UAE will continue to levy zero income tax on individuals if their earnings come from a personal capacity (like a salary) and do not require a commercial licence.

Ensure your business is compliant with all UAE tax laws

Understanding tax law can be extremely confusing, especially if you are unfamiliar with the UAE’s existing tax regulations. Failure to comply with the new corporate tax can result in your company being fined or losing the right to operate within the UAE. This can be especially confusing for foreign-owned entities that operate from free zones. For this reason, it is highly recommended that businesses get advice from a professional to understand the impacts of the new tax laws on their specific business situation.

How can PRO Partner Group help?

PRO Partner Group and their locally based tax and audit specialists can advise you on the implications of the new corporate tax on your business and how you can best plan to ensure that your company has the right structure and systems in place to manage your tax obligations going forward.

If you need assistance with any issues pertaining to the introduction of corporate tax in the UAE, or for any other related company setup, restructuring, local partner or PRO support matter in Abu Dhabi, Dubai, the wider UAE, Oman, Qatar or KSA, then please do get in touch with us on +971 (0)4 456 1761 for Dubai or +971 (0)2 448 5120 for Abu Dhabi, email us at info@propartnergroup.com or complete the contact form below and we will be delighted to assist you.