In the past, the UAE did not impose corporate taxes on the profits of most corporations or other businesses. However, the UAE government will introduce a corporate tax to be imposed on businesses, effective for financial years beginning on or after 1 June 2023. This new tax regime is being introduced to strengthen the UAE’s position as a leading global center for business and investment, and will be based on the best international practices.
The details of the corporate tax regime given below are based on the press release and frequently asked questions published by the Treasury on its website.
What does corporation tax include?
Corporate tax will apply to all businesses and commercial activities. Activities that are carried out by a legal entity will be treated as business activities and fall within the scope of corporate tax. Companies engaged in the extraction of natural resources are currently outside the scope of the tax regime and such companies will continue to be subject to corporate taxation at the Emirate level. Other exemptions may be issued by the Government in due course.
The tax is federal in nature and will be levied in all emirates.
The tax will be charged on the net profit of a business after adjustments are made for certain items to be specified in the legislation.
What is the corporate tax rate?
The Treasury publishes corporate tax rates. The tax rate is 0% if the taxable income is up to AED 375,000. The tax rate is 9% on taxable income above AED 375,000. However, in this case, the corporation tax liability will be calculated on the part of the income that exceeds AED 375,000.
The Treasury also mentions an unspecified tax rate that will apply to large multinationals that meet specific criteria, citing the second pillar of the OECD’s base reduction and profit sharing project. In accordance with the Second Pillar, a large multinational corporation is a multinational corporation that has consolidated global revenues in excess of €750 million or AED 3.15 billion.
What about individuals?
The salary or other income from employment of an individual, investment in real estate and dividends, capital gains or other income from shares in a personal capacity will not be subject to corporate tax.
However, if an individual has a business permit or license to carry out a commercial, industrial or professional activity in the UAE, the business income earned under such a trade license will fall within the scope of the tax regime.
Interest and other income earned by an individual from bank deposits or savings schemes will not be subject to the tax regime. A foreign investor’s income from dividends, capital gains, interest, remuneration and investment returns will also generally not be subject to tax treatment.
Taxes in free zones
Businesses in the free zone will be subject to the tax regime, including registration and filing of returns. However, corporate tax incentives applicable to free zone businesses will continue to be offered to them if they meet all regulatory requirements and do not do business with the UAE mainland.
Withholding tax will not be applicable on domestic and cross-border payments of any nature under this regime. Additionally, a group of companies may choose to form a tax group, which will then have to file a single tax for the entire group.
The transfer pricing rules, which relate to transactions between related parties that take place on arm’s length terms, will be applicable to businesses in the UAE.
In addition, businesses will be required to be registered, submit periodic returns and be subject to penalties in case of non-compliance. The Federal Tax Service will be responsible for the administration and enforcement of the tax regime.
The new corporate tax regime aims to minimize the compliance burden for UAE businesses, take advantage of the UAE’s extensive network of double taxation treaties and focuses on compliance with international standards for tax transparency and prevention of harmful tax practices.