Overview:
A competitive Corporate Tax (CT) regime, based on international best practices, shall strengthen the UAE's position as a leading global hub for business and investment, accelerating the UAE's development and transformation to achieve its strategic objectives. Introducing a CT regime shall also reaffirm the UAE's commitment to meeting international standards for tax transparency and preventing harmful tax practices.
The UAE CT regime will become effective for financial years starting on or after 1 June 2023 and will be applied, as federal tax, across all Emirates.
Scope and Rate:
UAE CT will apply to all UAE businesses and commercial activities alike (except for the extraction of natural resources, which will remain subject to Emirate level corporate taxation). UAE CT will generally also apply to income earned from activities carried out under a freelance license/permit.
The taxable income will be the accounting net profit of a business after making adjustments for certain items to be specified under the UAE CT law (further regulations). The accounting net profit of a company is the amount reported in the financial statements prepared in accordance with internationally accepted accounting standards.
The Corporate Tax rates are:
• 0% for taxable income up to AED 375,000;
• 9% for taxable income above AED 375,000; and
• a different tax rate for large multinationals that meet specific criteria set with reference to 'Pillar Two' of the OECD/G20 Base Erosion and Profit Shifting project.
For the record, UAE CT will not apply on an individual’s salary and other employment income (whether received from the public or private sector).
Free Zone setup:
Free zone businesses will be subject to UAE CT, but the UAE CT regime will continue to honour the CT incentives currently being offered to free zone businesses that comply with all regulatory requirements and that do not conduct business with mainland UAE. Further clarification is expected.
Since a business established in a free zone will be subject to CT, it will be required to register and file a CT return.
The UAE CT treatment that will apply to businesses in all free zones will be the same; this includes financial free zones.
Tax Group:
A UAE group of companies can elect to form a tax group and be treated as a single taxable person, provided certain conditions are met. A UAE tax group will only be required to file a single tax return for the entire group.
Transfer Pricing:
Transfer pricing rules seek to ensure that transactions between related parties are carried out on arm’s length terms (i.e. as if the transaction was carried out between independent parties). In line with international best practise, UAE businesses will need to comply with transfer pricing rules and documentation requirements set, with reference to the OECD Transfer Pricing Guidelines.
Income exempt from Corporate Tax:
Dividends and capital gains earned by a UAE business from its qualifying shareholdings will be exempt from UAE CT. A qualifying shareholding being defined as an ownership interest in a UAE or foreign company that meets certain conditions, which will be specified in the UAE CT law.
Qualifying intra-group transactions and reorganisations will not be subject to UAE CT provided the necessary conditions are met.
The content of this newsletter is based on publicly available information. It is not intended as legal advice or as a comprehensive analysis of the matter herein.
Further regulations and clarification from the competent authorities are expected shortly. Swiss Group will further monitor the situation and update on any changes and enhancements the UAE Government will publish.