Introduction of UAE Federal Corporate Tax
February 2, 2022 / Haroon Juma / VAT & Tax Blog
On 31 January 2022, the UAE Ministry of Finance (MoF) announced the introduction of The UAE Federal Corporate tax (CT). Under this announcement, corporate tax will be effective for financial years starting on or after 1 June 2023.
The UAE Corporate Tax will be applied across all of the Emirates and to all business and commercial activities except for the extraction of natural resources. This will continue to be subject to Emirate-level taxation.
Based on the press release and FAQs, the Corporate Tax system will follow most other countries. It is likely the UAE Federal Corporate Tax system will be a residence-based model that taxes the worldwide profits of UAE resident businesses, and only the UAE-sourced business income of non-residents.
That is, the business is considered a resident for Corporate Tax based on the place of incorporation or registration (legal seat), or the place of effective management and control of the business.
Corporate will be applicable at the following rates:
UAE Corporate Tax Rate
|AED 0 – AED 375,000||0%|
|Above AED 375,000||9%|
Further information is expected to be released by mid-2022
The proposed UAE Corporate Tax regime is designed to create a competitive framework and one of the most competitive in the world and region. It will include exemptions and reliefs including 0% CT for small businesses and startups, exemptions for UAE-based headquarters and international business hubs, no taxation on foreign direct investment, no taxation on personal income, and minimal compliance burden for businesses.
Will be within the scope of CT, register, and file a CT return.
They will be eligible to benefit from CT holidays / 0% taxation if they adhere to all regulatory requirements and do not conduct business in mainland UAE.
|Multinationals||Published releases highlight there will be a different tax rate for large multinationals that satisfy the criteria under ‘Pillar Two’ of the OECD BEPS project (i.e. that have consolidated global revenues above EUR 750m).|
|Basis of CT payable|
Corporate Tax will be payable on the accounting net profit as reported in the financial statements of the reporting business, with minimal exceptions and adjustments.
Tax losses incurred can be carried forward to offset taxable income in future financial periods.
|No UAE CT will apply to|
Employment income, income from real estate, savings, investment returns, and other income earned by individuals in their personal capacity and not in a business;
Dividends, capital gains, and other investment returns earned by foreign investors.
Exemption from UAE CT
|Capital gains and dividends earned from qualifying shareholdings|
|Qualifying intra-group transactions and restructurings.|
|International Transactions on CT|
Domestic and cross-border payments of interest, dividends, royalties, and other payments will not attract a withholding tax in the UAE.
In addition, foreign tax credits will be available for taxes incurred by UAE businesses on income earned outside the UAE.
|Return Periods||UAE Corporate Tax will be filed electronically once for each financial period. There will be no requirement for advance UAE Corporate Tax payments based on provisional tax returns.|
|Tax Groups||UAE group companies can form a tax group. This will enable them to file a single tax return for the entire group. In this way, they will be eligible to transfer tax losses to other group members.|
|Transfer Pricing Rules||The UAE will adopt transfer pricing (TP) rules and documentation requirements in line with the OECD TP Guidelines.|
|Responsible Authority||The Federal Tax Authority will be responsible for the administration, collection, and enforcement of CT.|
Further specifics and technical details are expected to be made available by mid-2022. However, businesses should assess the impact and their readiness for the new UAE Corporate Tax regime. This would give UAE businesses at least 12 months to get ready.
In preparation for corporate tax introduction, it is advisable to start considering and preparing. This is especially true for wholly UAE resident companies unfamiliar and unaccustomed to complying to other jurisdictional Corporate Tax regimes.
1. Assess and Plan Ahead
Your business should analyse the impacts from corporate tax with respect to your resident entities especially. The outcome of this should be to determine an effective tax rate (ETR). Of note are payments from UAE treaty countries.
Under BEPS Pillar 2.0 provisions, a 9% deduction on payments may be made at a source that adheres to the Subject to Tax Rule (STTR). The STTR provides for withholding tax on payments included on a defined list (e.g., interest, royalties). Details on this rule are expected to be released in early 2022.
This will help to determine the optimal legal structure, ETR, and whether it is advantageous to benefit from the potential free zone exemptions. In addition, transfer pricing models in line with the OECD TP Guidelines should be drafted where required and updated once the final rules are issued.
2. Preparation of Financial Statements
Attention should be made to increase granularity and details in current expenses journals. This granularity will be required in assessing possible exemptions to the CT calculation and form the annual corporate tax calculation.
Discipline and completeness in accounting must be started now to provide an accurate historical baseline. It is likely a historical view may be required during the registration process and variances from historical to the initial Corporate Tax filing could lead to risk and costs in attracting clarifications and a possible audit.
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