The UAE recently stated that it will implement a business gains tax that will take effect on June 1st 2023, following in the footsteps of its neighbors. Historically, businesses have not been required to pay income taxes on their profits; however, this is about to change, as the Ministry of Finance (MOF) announced on January 31, 2022. Companies should now start preparing for the new CIT system that will take effect in Fiscal Year 2023.
The UAE has made the decision to enact a corporation tax rate in order to adhere to international tax regulations. This action prevents neighboring Gulf governments from gaining an advantage, as well as lowering the burden of compliance on enterprises operating in the UAE and protecting small businesses and start-ups from potentially detrimental taxation rates. Despite this new adjustment, businesses situated in Dubai, the country’s principal business center, will continue to enjoy some of the lowest corporate taxes in the world while also providing the state with alternative revenue sources outside of the petroleum industry.
Younis Haji Al Khoori, undersecretary of the ministry of finance, praised the UAE’s competitive and top-notch corporate tax system along with its extensive network of double taxation treaties, confidently stating that these measures will solidify the UAE as a major hub for international trade and investment.
The following are the main components of the future CIT regime as announced by the Ministry of Finance, which may be changed after it is implemented:
COMMENCEMENT DATE
The CIT regime will go into effect on June 1, 2023, and will last for all fiscal years starting on or after that date.
SCOPE
All commercial, industrial, and professional operations carried out in the UAE are expected to be subject to the new CIT regime, with the exception of resource extraction, which is already subject to local Emirate taxes and will continue to be so.
CIT rules will also apply to anybody who have a business licence or license to conduct commercial, industrial, and/or professional operations in the UAE. This includes any compensation received by independent contractors for work carried out in accordance with their individual licences or licenses.
The planned federal corporate income tax regime will cover banking activities in the UAE, according to the Ministry of Finance, notwithstanding the existence of a CIT regime at an Emirate-level for branches of foreign banks.
As long as they follow all applicable rules and refrain from conducting business on the UAE’s mainland, companies operating in free zones will still be eligible for corporate tax advantages. The numerous businesses who currently use dual licensing programs to operate in both free zone and mainland UAE regions may be significantly impacted by this.
Businesses must nevertheless adhere to certain requirements set forth in the CIT rule even when they are a part of a free zone. These include signing up for and submitting an annual Corporate Income Tax Return.
The Ministry of Finance will release further details about CIT exemptions and exclusions soon.
SUGGESTIVE RATES
There have been three different corporate income tax rates put out, ranging from 0% for taxable incomes up to AED 375,000 (around $102,000) to 9% for all other taxable income amounts. In accordance with the BEPS project’s Pillar Two recommendations published by the OECD, a separate rate will also be applied to large corporations with consolidated global revenues above EUR 750 million (about AED 3.15 billion).
REVENUES EXEMPT FROM CIT
The following services are exempt from taxes, according to the Ministry of Finance:
- money earned from the extraction of natural resources;
- According to the upcoming law on income tax of the United Arab Emirates (CIT), dividends and capital gains accrued from a UAE business’s qualifying ownership stake in either another UAE or foreign company are exempt from taxation.
- Intra-group transactions and reorganizations are qualified provided they satisfy the requirements set forth in the Corporate Income Tax Law of the UAE.
- companies and individuals who are not UAE residents and do not regularly or continuously conduct business there.
- Diverse income streams, including dividends, capital gains, interest payments, royalties, and other returns on assets, are available to foreign investors.
For more info on exemptions check out this Analysis of the implementation of Corporate Tax in Dubai, Abu Dhabi & the UAE
EXTRA FEATURES
Foreign Tax Credit: The UAE has ratified more than 130 double taxation agreements, which makes it simpler for firms to pay taxes on time when conducting business or holding property across international boundaries both before and after the implementation of CIT taxing. Losses: Under the CIR regulations, businesses may also use losses made during the implementation of the CIT regime to lower their taxable income for future financial quarters.
Tax groupings UAE group companies will have the option to choose to create a tax group and be classified as one entity for taxing purposes, provided that they meet certain requirements that will be outlined in the UAE CIT law. A tax group in the UAE will be able to submit a single tax return for the group as a whole.
Transferring prices Businesses operating in the UAE will also need to abide by transfer pricing regulations and paperwork requirements based on OECD transfer pricing standards.
Despite being nearing completion, the CIT legislation has not yet been made public. Companies based in the UAE (especially those working with both mainland and free zones under one licence) would do well to consider how this regime may influence them and make all necessary preparations for upcoming changes in law, even though what ultimately takes effect could differ from what the MOF announced.
