February 16, 2022
Background
At the end of January, the Ministry of Finance (MOF) of the United Arab Emirates (UAE) announced that will introduce a federal corporate tax from financial year 2023 onwards. As a federal tax, it will apply across all Emirates and so will be levied on any foreign-owned legal entities based in Abu Dhabi or Dubai undertaking business activities.
Since July 2021 that MOF had confirmed that the UAE would support the global minimum effective tax rate under the Organisation for Economic Cooperation and Development (OECD)/G20 Base Erosion and Profit Shifting (BEPS) 2.0 project.
Scope of application
The corporate tax will apply to all UAE businesses and commercial activities alike, except for the extraction of natural resources, which will remain subject to Emirate level corporate taxation.
In this regard, please note that free zone businesses will also be subject to corporate tax, notwithstanding the UAE will continue to offer incentives to businesses of this restrict zone that comply with all regulatory requirements and that do not conduct business with mainland UAE.
Rates
The corporate tax rates will be as follows:
- A tax rate of 0% for taxable income up to AED 375,000;
- A tax rate of 9% for taxable income above AED 375,000; and
- A different tax rate (potentially 15%) for large multinationals that meet specific criteria set with reference to ‘Pillar Two’ of the OECD BEPS project.
Non-taxable income
Corporate tax will not apply to:
- An individual’s salary and other employment income. However, an individual will be subject to corporate tax if his or her income is earned from activities undertaken under a freelance license or permit and exceeds AED 375,000;
- Investment in real estate by individuals in their personal capacity, provided the individual is not required to obtain a commercial license or permit to carry out such activity in the UAE;
- Dividends, capital gains, and other income earned from owning shares or other securities in a personal capacity;
- Interest and other income earned by an individual from bank deposits or saving schemes.
Exempt income
The following income will be exempt from corporate tax:
- Dividends and capital gains earned by a UAE business from “qualifying shareholdings” (i.e., an ownership interest in a UAE or foreign company that meets certain conditions to be specified under the corporate tax law); and
- Qualifying intra-group transactions and reorganizations provided the necessary conditions are met.
Foreign persons
Please also note that foreign entities and individuals will be subject to corporate tax only if they conduct a trade or business in the UAE in an ongoing or regular manner. Notwithstanding, corporate tax will generally not be levied on a foreign investor’s income from dividends, capital gains, interest, royalties and other investment returns.
Losses
The corporate tax regime will allow a business to use losses incurred to offset taxable income in subsequent financial periods.
Additionally, excess tax losses may be carried forward and used against taxable income in future years, provided certain conditions are met.
In the specific case of groups, tax losses from one group may be used to offset taxable income of another group company, provided certain conditions are met.
Tax group
A UAE group of companies can opt to form a tax group and be treated as a single taxable person, provided certain conditions are met. In this regard, please consider that a UAE tax group will only be required to file a single tax return for the entire group.
Withholding tax
UAE withholding tax will not be applicable on domestic and cross-border payments of any nature under the UAE corporate tax regime.
Tax credits
Foreign corporate tax paid on UAE taxable income will be allowed as a tax credit against the UAE corporate tax liability.
Transfer pricing
UAE businesses will need to comply with transfer pricing rules and documentation requirements set with reference to the OECD Transfer Pricing Guidelines.
Final notes
Introducing corporate tax in the UAE will undoubtedly have an impact on business operations, structures, and future mergers and acquisitions activities in the UAE. We encourage businesses to assess their existing structures and operations in order to promote more efficient business structures and models in light of the new corporate tax law.
For more information, please click here.
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The information presented above is not intended to be an exhaustive analysis of all the changes to the current legal regime, but rather a selection of those that we believe to be the most relevant, and does not preclude consultation of our Company and / or legislation to which it refers.
For more information contact: Catarina Breia (+351 91 7575 832 or cbreia@pt-nexia.com) from our Tax Department.
