On 31 January 2022, the UAE Ministry of Finance (‘MoF’) announced the introduction of a federal corporate tax (‘CT’) in the UAE that will be effective for financial years starting on or after 1 June 2023.
The UAE CT regime will be based on international best practices, with a low / minimal compliance burden on businesses.
High level details on the proposed CT regime are set out in the press release and the Frequently Asked Questions (FAQs) published on the website of the MoF and the Federal Tax Authority.
Further information is expected to be released by mid 2022.
Based on the press release and FAQs, we expect the UAE CT system to be a residence-based CT regime that taxes the worldwide profits of UAE resident businesses, and only the UAE-sourced business income of non-residents. This approach would be consistent with most other countries.
Where a business is resident for CT purposes would typically be determined based on the place of incorporation / registration (legal seat), or the place of effective management and control of the business.
UAE CT will apply to financial periods beginning on or after 1 June 2023. As most businesses have a calendar financial year (1 January - 31 December), the majority of UAE businesses would become subject to UAE CT from 1 January 2024 onwards. As not all UAE businesses currently prepare financial records, we expect that their default financial period for UAE CT purposes will be set at the Gregorian calendar year (1 January - 31 December).
A statutory tax rate of 9% coupled with an exemption for qualifying dividends and capital gains and other measures to prevent double taxation would place the UAE’s CT regime amongst the most competitive in the world. The UAE would have the lowest CT rate of all Middle East countries, with the exception of Bahrain which thus far has not announced any corporate tax regime changes in response to the call for a global minimum effective tax rate.
A 0% CT rate for taxable income up to AED 375,000 should support small & medium sized businesses, and start ups.
The UAE is not looking to introduce a personal income tax. We understand that UAE CT will not apply to individuals and their personal income (e.g., salary, dividends, capital gains, income from real estate holdings etc.), with the exception of business income earned by individuals who hold (or are required to have) a commercial license or permit.
For individuals who undertake a commercial, industrial and/or professional activity in the UAE, we would expect that a separation between business and personal assets and activities will need to be made.
The press release and FAQs imply that the UAE will not impose corporate tax or withholding tax on foreign companies and individuals that invest in or make loans to UAE businesses, or who otherwise earn income that is not related to a “trade or business conducted in the UAE in an ongoing or regular manner”.
We assume this means that the UAE CT regime will only tax foreign companies and individuals that have a ‘permanent establishment’ in the UAE, and we would expect the UAE to design its domestic ‘taxable presence’ rules in line with international practice and the definition of ‘permanent establishments’ in the latest OECD Model Tax Convention.
Free Zone businesses will be able to continue to benefit from existing Free Zone CT holidays / 0% taxation regimes, provided they comply with all regulatory requirements and do not conduct business with mainland UAE. The press release and FAQs do not confirm for how long the Free Zone tax regimes will be grandfathered, which may mean that the existing Free Zone tax holiday periods (which range between 5 and 50 years) will be respected.
UAE CT will be payable on the accounting net profit / income of UAE businesses as per their financial statements prepared in accordance with IFRS or other international financial accounting standards recognised in the UAE, subject to certain adjustments for UAE CT purposes. Where a business is loss making, no UAE CT would be payable, and losses can be carried forward to offset taxable income in subsequent financial periods.
We would expect a ‘business use’ criteria to apply, where ordinary and necessary expenses incurred by a business for the production of taxable income should generally be tax deductible. Given the UAE CT regime will exempt certain types of income (e.g. qualifying dividends and capital gains), we expect that expenses related to such exempt income will not be deductible for UAE CT purposes.
As a member of the OECD Inclusive Framework on BEPS, the UAE CT regime may introduce rules on the deductibility of interest that follow the recommended approach in OECD BEPS Action 4. This would limit the deduction of interest and other financial payments to between 10% and 30% of the taxable EBITDA (earnings before interest, taxes, depreciation, and amortization) of a UAE business or group, subject to exemptions like banks and insurance companies.
Most jurisdictions allow businesses to carry forward tax losses to reduce taxable income in subsequent financial periods. Generally, such tax loss carry-forward rules have anti-abuse provisions that restrict the use of tax losses in the event of a (significant) change in ownership of the business coupled with a change in the activity of the business. Furthermore, in some countries tax losses expire if they have not been used within a certain time period.
Given the reference to “generous loss utilisation rules”, we expect that UAE tax losses can be carried forward indefinitely or for at least a period of five years, and that the quantum of tax loss relief will not be subject to significant restrictions.
The press release and FAQs mention that UAE group companies can form a tax group (‘fiscal unity’) and file a single (consolidated) tax return for the entire group. Generally, the ability to form a tax group (‘fiscal unity’) for CT purposes is subject to minimum (common) ownership requirements that range from 95% - 100%. We expect the UAE CT regime to impose similar (common) ownership requirements.
We understand that the UAE CT regime will allow for intra group transactions, mergers, and reorganisations to be undertaken tax neutrally, and allow group companies to utilise the tax losses of other group entities to reduce their taxable profits. Internationally, minimum (common) ownership requirements for group relief range from 75% to 100%. We expect the UAE CT regime to impose similar (common) ownership requirements.
Leading international financial centers and headquarter locations such as the Netherlands, the United Kingdom and Singapore offer tax exemptions for dividends and capital gains derived from qualifying shareholdings. Broadly, such regimes require the shareholding to meet certain conditions such as a minimum ownership threshold (5%-10%), a minimum holding period (12-24 months) and other conditions. We expect the UAE CT regime to have similar requirements.
Further, in line with UAE’s double tax treaties, we would expect the UAE CT regime to exempt foreign branch profits or to allow for a tax credit for tax paid in the foreign branch country.
As a member of the OECD Inclusive Framework on Base Erosion and Profit Shifting (‘BEPS’), we expect that the UAE will actively adopt and implement the ‘Pillar One’ and ‘Pillar Two’ proposals, including the introduction of a global minimum effective tax rate of 15% for large multinationals (referred to as the “GloBE” rules).
The Subject to Tax Rule (‘STTR’) under Pillar Two allows developing countries to levy a ‘top-up’ tax on certain related party payments where the recipient company in its home jurisdiction is not subject to a tax rate of at least 9% on those payments. With a statutory UAE CT rate of 9%, UAE businesses may not face a foreign top-up tax under the STTR.
According to the press release and FAQs, the UAE CT regime will have a different tax rate for large multinationals that meet specific criteria set with reference to 'Pillar Two' of the OECD BEPS project. We assume this means that the UAE will adopt a minimum 15% CT rate or a Qualified Domestic Minimum Top Up Tax for entities that are part of a multinational group with annual global consolidated revenues above €750m.
It is currently unclear what impact the proposed UAE CT regime will have on the requirement for UAE businesses that carry out “Relevant Activities” to maintain and demonstrate an adequate ‘economic presence’ in the UAE and to comply with annual notification and reporting obligations. With a statutory CT rate of 9%, there is a possibility that UAE businesses may no longer be required to comply with Economic Substance Requirements, with the exception of Free Zone Businesses that continue to benefit from Free Zone tax holidays / 0% taxation.