UAE announces Corporate Income Tax

51 years after the inception of the UAE today is the historic day on which the UAE announces the introduction of corporate income tax.

In a historic moment, the Ministry of Finance has announced today that the UAE will introduce a Federal Corporate Income Tax on business profits.

The CIT regime has been implemented by the UAE in view of achieving the following objectives:

• Cementing the UAE’s position as a world-leading hub for business and investment
• Meeting international standards for tax transparency and preventing harmful tax practices
• Accelerating the UAE’s development and transformation to achieve its strategic objectives

We include hereafter the main features of the new regime, as announced by the Mistry of Finance (“MoF”) and the Federal Tax Authority (“FTA”). 

Scope

CIT will apply on the worldwide adjusted accounting net profits of the business. The UAE CIT regime introduces three different rates:

• An exemption will apply for taxable profits up to AED 375,000 to support small businesses and startups.
• The standard statutory tax rate will be 9 percent. Because of the low tax rate, the UAE will continue to be highly competitive at a global level.
• A different tax rate will be applicable for MNEs that fall within the scope of under ‘Pillar Two’ of the OECD Base Erosion and Profit Shifting project. Specifically, MNEs that have consolidated global revenues in excess of EUR 750m (c. AED 3.15 billion) will be subject to different tax rates.

For Free zone businesses, the CIT will apply but the tax holidays will continue to be granted to businesses established within UAE free zones that (1) comply with all regulatory requirements and (2) do not conduct business with the UAE mainland. Further details on the compliance obligations of free zone businesses will be provided in due course.

There will be no withholding tax on domestic and cross border payments. This means that foreign investors who do not carry on business in the UAE will in principle not be subject to corporate tax.

In principle, banking operations will be subject to CIT. Further details on the current Emirate level corporate taxation will be provided in due course.

Date of implementation 

The UAE CIT regime will become effective for financial years starting on or after 1 June 2023. Businesses will become subject to UAE corporate tax from the beginning of their first financial year that starts on or after 1st June 2023.

Exempt income

The following categories of income will not be subject to CIT:

• Capital gains and dividends received by UAE businesses from qualifying shareholding. A qualifying shareholding refers to an ownership interest in a UAE or foreign company that meets certain conditions to be specified in the UAE CIT law.
• Qualifying intragroup transactions (presumably this refers to the fiscal consolidation regime) and restructurings (presumably this refers to tax neutral mergers).
• Income from the extraction of natural resources (relevant for the oil and gas industry). This income will remain subject to Emirate level corporate taxation.

Businesses engaged in real estate management, construction, development, agency and brokerage activities will be subject to UAE CIT.

Transfer pricing 

UAE businesses will need to comply with transfer pricing rules and documentation requirements set with reference to the OECD Transfer Pricing Guidelines. This likely means three tiers, master file, local file and country by country reporting. 

Administration and enforcement 

• The Ministry of Finance will be the competent authority for the purposes of multi-lateral / bilateral agreements and the international exchange of information.
• The Federal Tax Authority will be responsible for administration, collection and enforcement of the new corporate income tax regime.
• Business which are subject to UAE CIT will be required to file a CIT return electronically for each financial period. A financial period is generally a year. Businesses established in a free zone will be required to register and file a CIT return.
• Businesses will be subject to penalties for non-compliance with the CIT regime. 

Other

• Foreign tax will be allowed to be credited against UAE corporate tax payable.
• Fiscal consolidation: UAE companies will be able to form a “fiscal unity” for UAE CIT purposes.
• There will be beneficial transfer of losses and utilisation rules.

Our initial thoughts

The introduction of CIT is a direct result of OECD’s ‘Pillar Two’ which is part of the Base Erosion and Profit Shifting (“BEPS”) project.

With a headline rate of 9% on taxable income, carve outs for start-ups and small business and free zone companies, while at the same time imposing different tax rates for MNEs, the UAE is striking the right balance.

Interesting as well is that with the implementation of CIT, the UAE seems to have also introduced mandatory transfer pricing regulations.

Free zone companies are seemingly outside the scope of the new CIT regime, however, it seems that the carve out is at least subject to certain conditions, such as complying with all regulatory requirements and not conducting business in mainland UAE.

We also anticipate that the implementation of CIT will have an impact on the Economic Substance Regulations that were implemented in 2018.

Next steps 

UAE businesses will need to assess how CIT will apply to their activities and ensure they are ready for the implementation of CIT in 2023. Businesses and tax professionals will have to await the publication of the CIT law to know the exact scope.

For example, the law foresees in an income exemption for dividends received by UAE businesses from qualifying shareholding. What constitutes a qualifying shareholding will depend on the conditions in the law. 

What to look out for

We have listed 10 items to be looking out for once the Corporate Income Tax law is published:

• Extent non business expenses
• Interest deduction limitation
• Conditions participation exemption
• Clarifications Free Zones
• No special regimes? (Transparent partnerships, collective investment vehicles, investment trusts, …)
• Confirmation application FTP Law
• Transitional provisions
• Anti-avoidance rules (e.g. rep offices used for commercial purposes)
• Existence exit tax
• Extent PEs and profit allocation rules