The United Arab Emirates (UAE) has announced that the country will be implementing a new federal corporate tax on business profits which is expected to take effect in the financial year beginning on or after 1st June 2023.
The UAE corporate tax regime was designed to incorporate best practices globally and minimize the compliance burden on businesses. The rate of taxation is 0% for taxable income up to AED 375,000 while 9 percent applies above that amount on meeting certain criteria.
Corporate tax in the UAE will apply to all commercial activities across all emirates, with an exception for the extraction of natural resources, which will continue to be taxed at the Emirate level.
MNCs: Large MNCs will be taxed at a different rate under the "pillar two" criteria set by Organization for Economic Co-operation and Development (OECD). More information is yet to be divulged by the authority on the higher rate. However, the tentative higher rate of 15% could be applicable to MNCs which is in line with the global minimum tax rate.
Freezones: Free zones in UAE will remain eligible for holidays / 0% taxation if they comply with all regulatory requirements. Entities in freezones can elect to become subject to CT in the UAE but the decision will be an irrevocable election. If a freezone entity has a mainland branch in the UAE, then it will only be required to pay corporate tax on mainland sourced income whilst continuing to benefit from 0% CT rate on its income from freezone branch. Moreover, if a freezone entity(seller) transacts with the mainland entity (buyer) and the buyer imports the goods into the state, then the freezone entity will continue to remain eligible for the 0% corporate tax rate.
Group companies: Companies in a UAE group can elect to be treated as a single taxable person by forming a tax group to reduce the compliance burden and file a single tax return for the whole group. However, the necessary conditions must be met. The FTA has also confirmed that the tax losses can be offset among group companies provided the necessary conditions are met. However, each member of the group will be jointly and severally liable. Losses can also be transferred to members outside the group if 75% of common ownership criteria is met.
Withholding tax: 0%withholding tax will apply on domestic and cross-border payments made by UAE businesses. Additionally, foreign tax credits will also be available for taxation incurred by businesses in the UAE on income generated outside the UAE.
Double Taxation Relief: A legal person incorporated in the UAE with place of effective management and control in the UAE, would be able to avail the facility to take credit against the UAECT payable on the relevant foreign income earned, providing relief against double taxation.
Transfer Pricing (TP): Transfer Pricing and documentation requirements will be applicable to businesses in the UAE in line with the OECD Transfer Pricing guidelines.
Administration: The Federal Tax Authority (FTA) shall be responsible for the administration, collection and enforcement of CT. Businesses will be required to register for CT purposes and will be required to electronically file one CT return per financial period. No provisional or advance CT filings will be required, nor any advance CT payments.