UAE to Introduce Corporate Tax in 2023

Many have enjoyed the zero-income tax on profits in UAE. However, this is soon to be changed, with the Ministry of Finance (MOF) announcing on 31 January 2022 that federal corporate income tax (CIT) will be made known in the UAE. CIT is expected to take place for fiscal years starting on or after 1 June 2023.

The tax implementation is steered by UAE’s inclination to meet international tax standards, adjoining states all took similar moves to minimize any compliance burden for UAE businesses and protecting smaller businesses.

The MOF has released the following key features of the proposed CIT regime (subject to changes):

Effective date:

Fiscal years starting on or after 1 June 2023.

Scope:

Expected to apply to all business activities in the UAE, except for the extraction of natural resources, which is already subjected to taxation.

The CIT regime is not only for businesses but also individuals, who hold a business license or permit to carry out commercial, industrial and/or professional activities in the UAE. This includes income generated by activities carried out by freelancers. On top of that, banking operations in the UAE will also be subjected to taxation.

It is also reported that corporate tax incentives that were offered to free zone businesses will continue to be honoured as long as they comply with all applicable regulatory requirements and stay away from conducting business in mainland UAE.

Proposed Rates:

  • 0% rate on taxable income up to AED 375,000 (c. US$ 102,000);
  • 9% rate on taxable income above AED 375,000; and
  • A different rate (which has not been announced yet) for large multinationals that generate consolidated global revenues above EUR 750m (c. AED 3.15 bn) in line with the Pillar Two of the OECD Base Erosion and Profit Shifting (BEPS) project.

Income Exemption from CIT:

  • Income derived from the extraction of natural resources (see above);
  • Dividends and capital gains earned by a UAE business from its qualifying shareholdings (ie, an ownership interest in a UAE or foreign company that meets certain conditions to be specified in the UAE CIT law;
  • Qualifying intra-group transactions and reforms subject to certain conditions to be specified in the UAE CIT law;
  • Foreign entities and individuals who do not conduct a trade or business in the UAE on an ongoing or regular basis; and
  • Foreign investors’ income from dividends, capital gains, interest, royalties and other investment returns.

Other Features:

  • Foreign tax credits. UAE has 130 double tax treaties, an element which will assist to correct operation of the tax system for cross border trade and ownership relationships both pre and post CIT introduction.
  • The CIR regime will allow businesses to use losses incurred to reduce taxable income for subsequent financial periods.
  • A group of companies in the UAE will be able to form a tax group and be treated as a single entity for taxation purposes. A UAE tax group will be able to file a single tax return for the entire group.
  • Businesses in UAE will have to comply with transfer pricing rules and documentation requirements based on the OECD transfer pricing guidelines.

Note that although the regime that will come into force may ultimately deviate from MOF’s announcement, businesses operating in the UAE should examine the potential impact and prepare themselves for the upcoming change in law.

If you wish to understand more on how to prepare your business moving forward, do not hesitate to reach out to us here for further advice and guidance.

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