The United Arab Emirates (UAE) Ministry of Finance (Ministry) announced on 31 January 2022 that it will introduce a federal Corporate Tax regime for the first time in the UAE. The Federal Corporate Tax law is expected to be issued by mid of the year along with executive regulations (CT Law).
What is Corporate Tax and what is its purpose?
Corporate Tax is the amount a corporation must pay on the profits earned in a financial year. It is also known as company tax.
Like income taxes levied on incomes earned by individuals, Corporate Taxes are the tax levied on the net income of a corporation. The Corporate Tax is calculated based on an organization’s taxable income which is the difference between the total revenue and the total expenses.
Taxable income = Total Revenues – Total Expenses*
*The expenses are composed of costs of goods sold, operating costs, expenses on R&D, marketing and selling costs, general and administrative costs and depreciation costs.
Like other taxes, Corporate Tax is a source of income for the government. The rate of tax and the tax slabs vary from country to country.
FAQs
Here are some frequently asked questions regarding the new Corporate Tax regime being introduced in the UAE. The aim is to bring more clarity and address key questions regarding CT.
The information set out in the FAQ is based on the announcement alert issued by the Ministry and remains subject to the CT Law provisions once issued.
Q1. When will Corporate Tax come into effect in the UAE and what is the financial period for filing it?
Corporate Tax will come into effect on or after June 1st, 2023, depending on when a company’s financial year starts.
For example, if a business has a financial year starting on the 1st of July 2023 and ending on the 30th of June 2024, it will be subject to Corporate Tax from the 1st of July 2023. Meanwhile, if a business’s financial year starts on the 1st January 2023 and ends on 31st December 2023, then the Corporate Tax will be effective from 1st January 2024.
Q2. What is the rate of tax and the tax slabs?
The CT rates are:
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0 per cent for taxable income up to AED 375,000
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9 per cent for taxable income above AED 375,000 and
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a different tax rate (not yet specified) for large multinationals that meet specific criteria set with reference to 'Pillar two' of the OECD Base Erosion and Profit Shifting Project.
For example, if a business’s taxable income is AED 500,000, the excess amount above AED 375,000, which is AED 125,000, would be subject to Corporate Tax at 9%. Hence AED 11,250 would be the Corporate Tax payable.
Q3. Which businesses will have to pay Corporate Tax, and which will benefit from exemptions, if any?
Corporate Tax would apply to all “business and commercial activities” (defined as any activity that requires a license or permit to be carried out) carried out in UAE. Individuals performing business, commercial or professional activity under a license or permit are also subject to CT.
The only business exempted are the ones involved in the extraction of natural resources which will remain subject to Emirate-level Corporate Taxation.
Q4. Does the Corporate Tax applicability differ for free zone entities, and if so, how?
Free zone entities are also subject to a Corporate Tax regime and are required to register and file Corporate Tax.
Certain free zone entities will continue to enjoy current tax incentives/tax holidays as long as they comply with all regulatory requirements and do not conduct business with the mainland.
Q5. How should taxable income be calculated, and how to produce financial reports as proof of it being above or below taxable income? If the taxable income is below 375,000, is tax filing necessary?
The taxable income will be calculated as the net profit after making certain changes as per the Corporate Tax Regulation. The net profit is the amount reported in the financial statements, prepared according to international accounting standards.
If a business has an income below AED 375,000, an audited financial statement or VAT return submissions can be used to justify the revenue position of the business. However, this needs to be clarified in the legislation. It is not clarified currently whether the return is to be filed by entities below taxable income of AED 375,000, but it is highly likely.
Q6. How to register and file Corporate Tax?
All businesses of all tax slabs are required to register for Corporate Tax. More information on the process and requirements for registration is yet to be released. Businesses with income above AED 375,000 will have to file CT once every financial year as per set compliance obligations that are yet to be specified. It is expected that it will be filed electronically similar to VAT and ESR. It is expected that tax would not have to be filed on the emirate level for businesses with branches in different emirates, similar to VAT filing. No advance or provisional CT filing would be required.
Q7. What is the expected impact of Corporate Tax on businesses below the taxable income?
Though not a direct impact, these businesses would now have to maintain reliable and accurate financial records.
Q8. Will Corporate Tax be applicable to non-resident entities as well?
Corporate Tax or withholding tax will be applicable to a foreign or non-resident entity only if they are engaged in ongoing regular trade or business in the UAE. Such entities or individuals will not be subject to Corporate Tax if they only invest in or provide loans to businesses in the UAE without being involved in conducting ongoing business.
Q9. Can a tax group be formed for CT?
Tax groups/fiscal units for CT can be formed by UAE group companies hence lowering administrative burden by allowing the filing of single CT returns instead of returns for each entity. All entities in the group are considered as a single taxable entity provided they meet certain conditions that are yet to be specified. Further details on grouping conditions are expected and currently, it is unclear if CT grouping has to be linked with VAT grouping.
Q10. Can tax losses be used to offset taxable income? If so, what are the conditions?
Businesses can carry forward losses in a financial year from the time CT becomes effective to offset against taxable income in subsequent financial periods. Tax losses from one group company can be used to offset the taxable income of another group company given certain conditions are met, though they are yet to be specified.
Q11. If there are multiple companies under single ownership, can one company’s profit be used to set off loss of another?
Yes, a loss of one company in a group can be used to offset the taxable income of another in a group given certain conditions that are yet to be specified are met.
Q12. Is there going to be any withholding tax?
From the information available so far, there will be no withholding tax on either domestic or cross border payments.
Q13. Is the profit earned by a subsidiary of a UAE-owned company outside the country taxable?
It is expected that the entity would be taxed based on its residency status as followed in international tax practice. Thus, if the company has permanent residency in UAE all income attributed to the permanent establishment irrespective of where it is earned would be subject to CT and tax credit would be available for taxes paid under another jurisdiction.
Q14. What is the expected tax rate for UAE entities that are part of large MNCs (multinational corporations) that are also subject to pillar two?
Pillar two rules are expected to apply to such entities in 2023 and it could be possible for them to be subject to both CT and Pillar two in 2024 and potentially be effectively taxed 15% together in line with Global Minimum Standard.
Q15. What effect would Corporate Tax have on ESR?
So far, there has been no definite information if the introduction of CT would result in changes to the UAE’s Economic Substance Regulations. Given the infrastructure development and formation of a permanent committee for ESR, it is unlikely that it would be removed, but there could be changes made. For example, it could possibly be phased out for entities paying a 9% CT rate.
Q16. What are the tax applicability conditions for individuals?
Individuals will only be subject to CT if they are conducting business using a commercial license or permit (Including licenses for providing professional services/freelance licenses). Employment incomes, personal real estate investments, returns on equity holdings and returns from bank deposits or saving schemes are not subject to Corporate Tax.
Q17. What are the CT implications of the Transfer Pricing Rules?
The transfer pricing rules and documentation requirements under CT regime will be aligned with OECD TP guidelines. The expected Transfer Pricing rules in the UAE will be applicable to intra-group transactions for entities subject to CT regime. It is advisable for MNCs with UAE entities to have updated Transfer Pricing policies before CT regime becomes effective.
Q18. How can a company prepare for Corporate Tax before it comes into effect?
Getting your financial records in good shape would be the top priority, especially to calculate and produce statements of taxable income. Businesses should assess the gap in their working capital and bridge it. While preparing the budget for the respective period, companies should consider the impact of CT on the business, and they can plan their actions accordingly based on receiving further details.
Q19. What impact will Corporate Tax have on businesses in the UAE?
The introduction of CT would involve implementation, training and compliance costs which would not be too high, as the tax system is very simple in the UAE. Since the rate announced by the government is highly competitive as compared to other countries, and double tax treaties are in place by the UAE government, the introduction of CT would not have any major impact on FDI.
Moreover, free zones would keep providing incentives to businesses as per their respective laws, so these companies will keep enjoying the benefits of the tax. Dividends and capital gains are not subject to CT, which serves to attract investors.
CT would be another income source for the Government which can further help boost the economy. Moreover, it would reduce reliance on oil-generated revenue and lead to diversified sources of income which build a healthy and mature economy.
CT would have a nominal impact on corporate savings and FDI, which would create an adverse impact on the growth of the country in the short run, but in the long run, it would develop the confidence of investors, which would lead to growth. CT has been crafted to incentivise investment and keep transparency to meet global standards which would provide a stable society where businesses would contribute and add value towards the growth of the economy.
Practical Questions
Q20. Even if my business makes less than AED 375,000, how will Corporate Tax coming into effect affect my business?
Even SMEs with income lower than AED 375,000 will have to maintain proper financial records and audit financial statements to calculate taxable income and meet various conditions as per the CT regime, avoiding penalization.
Q21. What penalties could companies face if not registered for Corporate Tax?
No compliance would result in penalties as in the case of all taxes. However, specific penalty details are yet to be given.
Q22. When can specific details on Corporate Tax be expected?
Federal Corporate Tax law is expected to be issued in due course along with executive regulations. However, a timeline has not been announced yet.
Final Note:
Introducing Corporate Tax in the UAE will undoubtedly have an impact on business operations, structures, and future mergers and acquisitions in the UAE. We encourage businesses to assess their existing structures and operations in an effort to apply the most efficient business structures and models in light of the Corporate Tax law provisions, once issued and in effect.
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