The United Arab Emirates or UAE’s Ministry of Finance or the MOF, stated on 31st of January 2022 that the UAE will implement a Federal Corporation Tax, which is also referred to as CT, for financial years beginning on or after 1st of June 2023.
The UAE’s support for the global minimum effective tax rate under the Organization for Economic Co-operation and Development (OECD)/G20 Base Erosion and Profit Shifting or BEPS 2.0 programmer was confirmed by the Ministry of Finance during the month of July in the year 2021.
The Press Release of MOF stated that the UAE Corporate Tax regime would stimulate investment and headquarters operations while ensuring the free movement of capital, commerce, financing, and services, given the UAE’s position as a worldwide financial centre and international commercial hub. The UAE plays a critical role in helping businesses thrive both locally and worldwide as a leading jurisdiction for innovation and investment. The UAE’s position as a world-leading centre for business and investment will be cemented by the certainty of a competitive and best-in-class corporate tax policy, along with the UAE’s large double tax treaty network.
A Detail Analysis of UAE to Impose 9% Corporate Tax
Now let’s discuss further on the basis of the FAQ document which was released by the MOF for providing the business and its management clarity with regard to the new tax which is the CT introduced.
Timing of the Taxation
CT will take effect for financial years beginning on or after 1st of June 2025. From January 1, 2025, businesses having a year-end accounting reference date of December 31 will be subject to CT.
Rate of the Corporate Tax
The CT rates are 0% for taxable income up to AED 375,000, 9% for taxable income above AED 375,000, and “a different tax rate”, which the FAQs do not specify a rate, but 15% would be in line with the global minimum effective tax rate, applicable for large multinationals that meet specific criteria set with reference to the OECD BEPS project’s “Pillar Two” which basically is referring to multinational corporations with consolidated global revenues in excess of €750m (c. AED 3.15 billion).
Tax Base
With minor exclusions and changes, CT will be paid on the earnings of UAE enterprises as reported in their financial accounts produced in compliance with a globally accepted business valuation in Dubai. Losses incurred by CT-affected firms, or corporate entities may be carried forward and offset against future taxable income if certain requirements are satisfied. Certain requirements must be completed before tax losses can be applied to another group company’s taxable income.
Scope and the Exemptions
CT will apply to all individuals (individuals and corporations) that conduct business in the UAE under a commercial business licence. Businesses that extract natural resources will continue to be subject to current Emirate-level tax legislation and will be exempt from CT. Banking operations will be subject to CT, including those that are now taxed at the Emirate level. CT will not apply to dividends and capital gains obtained by a UAE firm from qualified shareholdings, as well as qualifying intra-group transactions and reorganisations that meet specified circumstances. Other CT exemptions and exclusions will be published as soon as possible.
Free Zones
Enterprises formed in free zones (including financial free zones) will be subject to CT, however CT incentives will continue to be granted to free zone businesses who comply with all the regulatory compliance requirements and do not conduct business with the UAE or virtual accountant in UAE as specified. There is no indication that the free zones’ incentive programmes will be changed or updated. Businesses in free zones will have to register and file a CT return.
Transfer Pricing
Businesses in the UAE will be required to follow transfer pricing laws and paperwork requirements based on the OECD Transfer Pricing Guidelines.
Withholding Tax
On all domestic and cross-border payments of any kind, there will be no withholding tax.
Foreign Tax Credits
Any foreign CT levied on taxable income in the UAE will be permitted as a credit against the CT liability.
Administration
The Federal Tax Authority (FTA) will be in charge of administering, collecting, and enforcing CT. Businesses will be required to register for CT purposes and to file one CT return each financial period online. There will be no provisional or advance CT applications or fees necessary. If certain requirements are satisfied, a UAE group of firms can create a tax group and be classified as a single taxable person (fiscal unity). A tax group in the UAE will only have to file one tax return for the whole group.
Major Implications
Businesses in the UAE should examine the impact of CT on their operations and plan for CT compliance needs. Businesses should, in particular,
- Examine if the current tax function, operational model, and governance (people, processes, systems, and technology) are enough to meet the CT regime’s criteria.
- Examine the influence of CT on current legal frameworks and business practices. This might include a quantitative assessment of CT’s expected financial effect.
- Examine if the current tax function, operational model, and governance (people, processes, systems, and technology) are enough to meet the CT regime’s criteria.
Businesses should also consider whether their accounting practices and data management systems are enough to ensure complete compliance with both CT and current VAT reporting requirements.
Thus, we can now conclude that according to a statement released by the state news agency WAM, the UAE will levy a 9% corporation tax on enterprises beginning next year.
The federal company tax will take effect for financial years beginning on or after June 1, 2023, according to a statement from the Ministry of Finance (MoF) posted on the WAM Twitter account.
In an effort to encourage small firms, corporate income beyond AED 375,000 ($102,000) would be taxed at a regular statutory rate of 9%, with profits below that taxed at zero percent, according to the statement. According to the statement, no corporation tax would be levied on income from employment, real estate, or other investments, or any other income not derived from a licensed or otherwise allowed company or commercial activity in the UAE.
According to the MoF, those who follow all requirements and do not conduct business with mainland UAE enterprises will continue to benefit from free zone benefits under the new corporate tax regime, which recognises the contribution the zones provide to the UAE economy. 100 percent foreign ownership, 100 percent repatriation of capital and earnings, import and export tax exemptions, and exemption from income and corporation tax are among the benefits offered by free zones around the UAE.
The new regime, as per the statement of MOF would assist the UAE in addressing difficulties originating from the global economy’s digitalization as well as those stemming from Base Erosion and Profit Shifting (BEPS) concerns. It will also carry out the country’s support for the adoption of a global minimum tax rate by imposing a separate corporate tax rate on major multinational corporations that fulfil certain requirements.
So, we can expect the same to be a momentary and history-creating decision that has been made by the MOF of the UAE. As the country has been opening up their borders and trading economy to global players, it is important that they also come up with such taxes and tax systems which does not put a burden on such players who are entering the markets of UAE while ensuring that there is proper trail and account for all the transactions that are taking place.
The markets are becoming one due to globalization, so every country and its ministries or finance authorities and governments should be introducing such tax compliance procedures and systems which can be easily adopted and adhered to by these foreign players or investors so as to make their country a foreign investor-friendly one.
