The UAE is to introduce a federal corporate tax on business profits that will be effective for financial years starting on or after 1June 2023, according to a statement issued by the Ministry of Finance on 31 January. The standard statutory tax rate will be set at 9% of taxable profits, with a zero-rate applying to profits up to AED375,000 (approx. USD100,000) to support small businesses and start-ups.
The Ministry said the corporate tax regime has been designed to incorporate best practices globally and minimise the compliance burden. Corporate tax would be payable on the profits of UAE businesses as reported in their financial statements and prepared in accordance with international accounting standards, with minimal exceptions and adjustments.
The corporate tax is to apply to all businesses and commercial activities, except for the extraction of natural resources, which will remain subject to Emirate level corporate taxation. No corporate tax will apply on personal income from employment, real estate and other investments, or on any other income earned by individuals that does not arise from a business or other form of commercial activity licensed or otherwise permitted to be undertaken in the UAE.
“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,” said Undersecretary at the Ministry of Finance Younis Haji Al Khoori.
“The UAE reaffirms its commitment to meeting international standards for tax transparency and preventing harmful tax practices. The regime will pave the way for the UAE to address the challenges arising from the digitalisation of the global economy and the other remaining Base Erosion and Profit Shifting (BEPS) concerns and execute its support for the introduction of a global minimum tax rate by applying a different corporate tax rate to large multinationals that meet specific criteria set with reference to the above initiative.”
This will allow the UAE to comply with the two-pillar solution to address the tax challenges arising from digitalisation and globalisation of the economy agreed in October 2021 by 137 countries and jurisdictions under the OECD/G20 Inclusive Framework on BEPS. This will introduce a global minimum corporate tax rate set at 15% for multinational enterprises with revenue above €750 million
Recognising the contribution of free zones to the UAE’s economy and competitiveness, the Ministry specifically confirmed that the UAE would continue to honour the corporate tax incentives currently being offered to free zone businesses that comply with all regulatory requirements and that do not conduct business with mainland UAE.
To maintain its role as a global financial centre and international business hub, the UAE said it would not be imposing withholding taxes on domestic and cross border payments and would not be subject foreign investors who do not carry on business in the UAE to corporate tax.
As an international headquarter location, a UAE business will be exempt from paying tax on capital gains and dividends received from its qualifying shareholdings, and foreign taxes will be allowed to be credited against UAE corporate tax payable.
The UAE corporate tax regime will have generous loss utilisation rules and will allow UAE groups to be taxed as a single entity or to apply group relief in respect of losses and intragroup transactions and restructurings.
The UAE corporate tax regime will ensure the compliance burden is kept to a minimum for businesses that prepare and maintain adequate financial statements. Businesses will only need to file one corporate tax return each financial year and will not be required to make advance tax payments or prepare provisional tax returns. Transfer pricing and documentation requirements will apply to UAE businesses with reference to the OECD Transfer Pricing Guidelines.
“Following the recent relaxation of the UAE’s foreign ownership legislation, modernising the corporate tax regime was the next logical step in aligning with new global standards,” said Simon Gordon, Managing Director of Sovereign Corporate Services. “The introduction of a corporate tax regime should help the UAE achieve its strategic ambitions and incentivise businesses to establish and expand their activities in the UAE. It’s very encouraging to see that SMEs and Free Zone companies will likely remain exempt from the new tax rate but a base rate of 9% is still highly attractive for international investors.”
The UAE Ministry of Finance plans to issue further information on the UAE corporate tax regime toward the middle of the year to help businesses get ready and be fully compliant.