Why the Corporate Tax in the UAE?
Long known as a Tax-free country, the UAE has finally announced Corporate Taxon 31 January 2022. The Laws, regulations and procedures governing the Corporate Tax are yet to be promulgated and published.
UAE is a signatory to the Organization of Economic Cooperation and Development’s (OECD) Inclusive Framework on Base Erosion and Profit Shifting (BEPS). As a result, and to avoid Harmful Tax Practices amongst the businesses, UAE rolled out Economic Substance Regulations (ESR) and Country by Country Reporting which in the year 2019.
OECD released a report on Pillar One and Pillar Two blueprints which addressed the BEPS Action 1 – “Addressing the Tax Challenges of the Digital Economy”. The report was widely accepted by all the forums including G7 and G20. Pillar Two solution which deals with minimum tax rate (15%), was accepted by G20 in July 2021.
UAE’s Corporate Tax proposes to incorporate global best practices and also reduce the compliance burden on the businesses. Corporate Tax would be paid on the taxable income, after making allowable adjustments to be specified in the proposed CT Law. The income or profit would be as reported in the financial statement prepared in accordance with internationally acceptable accounting standards.
What you need to know about the UAE Corporate Tax?
The Corporate Tax Law is a Federal Law. All businesses and commercial activities (legal entities) in the UAE will be subject to tax.
Are any sectors exempted from the Taxes?
For now, no exemption is given to any specific industry.
However, businesses in extraction of natural resources which are subject to the existing tax laws and rates (Emirates level corporate taxation). As we understand, the Corporate Tax Law would also be applicable to the banking sector.
UAE Corporate Tax Law would be applicable to foreign entities and individuals if they conduct any business or commercial activities in the UAE on a regular basis.
From when the Corporate taxes are effective?
Corporate Tax Law would be effective from financial years commencing on or after 1 June 2023. For e.g. if a company follows calendar year as its financial year, i.e., 1 January to 31 December, its first corporate tax financial year would be 1 January 2024 to 31 December 2024. Likewise, if a company follows April to March as its financial year, its first corporate tax financial year would be 1 April 2024 to 31 March 2025.
Is one single Financial Year mandatory for all Businesses for Corporate Tax?
No. Businesses can continue its current accounting or financial year or choose a new accounting year/ financial year. This is like the Economic Substance Regulations compliance requirements. This is a welcome move as many businesses would not be required to change its accounting year/ financial year.
What are the Registration requirements for Corporate taxes?
All business entities would be required to register with Federal Tax Authority under the proposed CT Law. Please remember VAT registration was mandatory only if a business attains mandatory or voluntary threshold in terms of Turnover.
What are the Tax Rates under the new law?
The Ministry of Finance has proposed the following tax rates:
An illustration: Taxable income of a business (after specified adjustments) for the financial year 2023-24 is AED 525,000. It would have to pay corporate tax of AED 13,500, calculated as below
Businesses are not required to pay any Advance Tax or Provisional Tax.
Corporate Tax Law would allow a business to avail credit of any foreign tax paid on its taxable income.
What is not taxable under the Corporate tax?
Dividends and capital gains earned by a UAE business from its “qualifying shareholdings” would not be included in computing the taxable income. What is “qualifying shareholding” will be defined in the Law.
Foreign investor earns income in the UAE by way of dividend, capital gains, interest, royalties or other investment returns, such income would not be taxed in the UAE.
Employment and salary income would not be taxable.
What about the Withholding taxes?
Withholding tax will not be applicable on domestic and cross-border payments of any nature under the Corporate Tax Law.
At the same time, the taxes withheld in other jurisdictions on income or payment made to UAE businesses will be allowed as a credit.
Treatment of business losses
Businesses would be allowed to carry forward their business losses and set it off against the taxable profits from the subsequent years. This would be allowed once the conditions set in the Corporate Tax Law are met. However, the period up to which a business will be allowed to carry forward the losses is not defined yet.
Grouping of related parties
Corporate Tax Law allows UAE group of companies to form a tax group and be treated as a single taxable person once it meets the required conditions. In such cases, tax group as a whole would be required to file a single tax return for the entire group.
Tax losses of one group company may be offset against the taxable income of the other group company, subject to conditions.
UAE businesses will need to comply with transfer pricing rules and documentation requirement set with reference to OECD Transfer Pricing Guidelines.
Applicability to Free Zone businesses
Free Zones have committed the businesses inside the Zones, with corporate tax incentives of up to 50 years. Corporate Tax Law is applicable to all businesses in the UAE including the Free Zones. Corporate Tax Law will provide corporate tax incentives to such Free Zone businesses which comply with all regulatory requirements and that do not conduct business with mainland UAE.
Administration of Corporate Tax in UAE
The Ministry of Finance will remain as the Competent Authority for the purposes of bilateral/ multilateral agreements and the international exchange of information for tax purposes.
The Federal Tax Authority will be responsible for administration, collection and enforcement of Corporate Tax Law.
Corporate Tax law will prescribe the administrative mechanism such as registration, compliance requirements and penalties for non-compliance of the Corporate Tax Law.