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Introduction of corporate tax in the UAE | Huriya Private

What the introduction of corporate tax means for businesses in the UAE

On January 31, 2022, the Ministry of Finance of the United Arab Emirates (UAE) announced that it will introduce a federal Corporate Tax (CT) on business profits, applicable across all emirates and effective from the financial years beginning on or after 1 June 2023.

The move comes as a result of reforms introduced by the Organisation for Economic Cooperation and Development (OECD) and is a sign of the UAE’s commitment to the OECD’s Base Erosion and Profit Shifting (BEPS) project which aims to tackle tax avoidance and create a more transparent and cohesive tax environment.

This article examines the scope of the new tax regime, and its implications on business practices in the UAE. It also addresses some of the questions that may arise from existing businesses in the UAE, or those considering establishing a presence in the Emirates to ensure the transition is as smooth as possible.

Current tax regime and proposed changes

At present, the UAE levies very little tax on businesses operating withing the country. It does not have a federal corporate tax regime and instead corporation tax is determined by tax decrees from the governments of each of the seven emirates and applied separately. Under these decrees, CT is levied through a progressive rate system and imposed up to 55%. However, in practise these taxes are only enforced on foreign oil and gas companies or branches of foreign banks.

Businesses operating from any of the 40+ free zones across the emirates also enjoy significant tax exemptions and benefits. free zone entities in the UAE operate under their own regulations, and as such are able to offer benefits such as 100% repatriation of capital and profits, exemptions from all import/export duties and no income or corporation tax.

The new corporate tax regime has been introduced to ensure that the UAE adheres to international standards and honours its commitment to the OECD’s BEPS project. As a member of the OECD (Organisation for Economic Cooperation and Development), the UAE has agreed to comply with the OECD’s Base Erosion and Profit Shifting (BEPS) project.

Who will be subject to UAE corporate tax?

Under the new regime, corporation tax will be levied on:

  • UAE incorporated companies including LLCs, PSCs, PJSCs and LLPs
  • foreign legal entities with a permanent establishment in the UAE, or which are tax resident in the UAE
  • branches of foreign and UAE companies
  • free zone entities with a branch in the mainland (only mainland derived income is taxable under the new CT)
  • Natural persons operating sole establishments or as individual partners in an unincorporated partnership

Proposed tax rates

The CT rate has been set at 0% for taxable income up to AED 375,000. The announced rate of 9% is applicable only to businesses generating taxable income in excess of AED 375,000.

For large multinational enterprises (MNEs) with global revenues of more than AED 3.15 billion, there will be a higher rate applied. This has yet to be announced but is likely to be 15%, considering the global minimum effective tax rate proposed by the OECD.

Exemptions

There will be certain exemptions to the new CT regime, such as any businesses engaged in the extraction of natural resources. These will subject to corporation tax deemed at an individual emirate level.

Other types of income which will also be exempt include dividends and capital gains, interest royalties and other investment returns, and profits from intra-group transactions and reorganisations.

Key considerations

Organisational and data considerations

To prepare for the introduction of the new CT regime, it’s imperative that businesses adequately prepare their finance departments for the impending changes. Staff should be informed, and processes put in place that consider the CT impact of all transactions and book entries moving forward.

It will also be important that businesses have robust data management systems in place so that records are kept of tax data and the business is fully prepared for the transition and any reporting requirements or data sharing that may be requested by the Federal Tax Authority (FTA).

Free Zone companies 

There are many businesses operating from free zones that generate a proportion of their revenue from trading goods or services onshore via a licensed distributor or branch office. Under the new rules, this part of their income will be subject to corporate tax. This will likely entail additional administrative requirements to manage these tax requirements, so companies should consider any restructuring or new staff that may be required in advance of the CTs implementation. Ultimately, businesses may choose to transition their operations fully onshore to mitigate these obligations. 

Mergers and Acquisitions 

The introduction of CT will also affect the mergers and acquisitions market. The new corporate tax requirements will mean that greater due diligence costs will likely be incurred for businesses trying to understand what corporate tax liabilities are being acquired. This may require that any agreements made include more comprehensive tax warranties and indemnities and deals may take longer to conclude.

Final Thoughts 

The introduction of corporate tax in the UAE will have far-reaching implications for business investment. It will impact investors decisions around market entry options and corporate structuring, and businesses will have to thoroughly examine what impact CT will have on things such as existing shareholding arrangements, agreements between group entities and eligibility for corporate tax relief.

It is paramount that businesses begin pre-empting the introduction of CT by gathering data to analyse its impact on their operations and implementing any necessary systems to manage these changes.

It may be too early to predict whether the introduction of corporate tax will dampen investors’ interest in the UAE. However, it should be noted that the proposed CT rate of 9% remains lower than corporate tax rates in most other countries and will still be the lowest among its GCC neighbours.

How can Huriya Private help? 

Huriya Private has a highly qualified team, well versed in accounting, tax and auditing requirements with unparalleled knowledge of international governments and financial policies.

We can advise you on the implications of the new UAE corporate tax regime on your existing business and help you structure your operations to ensure you are fully compliant with forthcoming legislation while incurring as little tax burden as possible.

If you need help with corporate tax in the UAE or any other immigration, financial or corporate structuring issue, please don’t hesitate to contact us on …………… and we will be happy to help.