UAE Publishes Corporate Income Tax Law

The UAE published the Corporate Income Tax (CIT) Law on 9 December 2022. The CIT law is applicable to business profits effective for financial years starting on or after 1 June 2023.

The UAE 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; and
• Accelerating the UAE’s development and transformation to achieve its strategic objectives.

UAE CIT applies uniformly across all seven Emirates, including Free Zones. In terms of subjective scope, UAE CIT covers most business and commercial activities, with certain exceptions. The new legislation also incorporates Transfer Pricing (TP) regulations and documentation requirements to align with international standards. The Federal Tax Authority (FTA) is entrusted with overseeing the administration, collection, and enforcement of CIT obligations. 

An important update occurred in November 2023 when the UAE Cabinet of Ministers issued Federal Decree-Law No. 60 of 2023, amending certain provisions of the UAE CIT Law. Key terms from the OECD Global Anti-Base Erosion (GloBE) Rules were introduced into the UAE CIT Law, such as definitions for Top-up tax and Multinational enterprise (MNE), which serve as initial steps towards integrating the GloBE framework into the UAE tax system. 

Further advancing this agenda, on 15 March 2024, the UAE Ministry of Finance (MoF) launched a digital Public Consultation to explore the implementation of Pillar Two rules based on the OECD Model Rules. This consultation, which concluded on April 10, 2024, aimed to gather stakeholder feedback on policy design options to address the global adoption of the GloBE Rules and ensure the UAE remains aligned with international tax developments.

As per Federal Decree-Law No. 60, further details are expected with regard to imposing the top-up tax on MNEs so that the total effective tax imposed on MNEs is 15%. Specifically, this would apply to MNEs that have consolidated global revenues in excess of EUR 750m (c. AED 3.15 billion) in any two of the previous four years.

Scope

UAE CIT applies to the adjusted worldwide accounting net profits of the business. The UAE CIT regime introduces two different rates:

• A 0% tax rate applies for taxable profits up to AED 375,000.
• The standard statutory tax rate of 9%. Because of the low tax rate, the UAE is expected to remain highly competitive at a global level.

Individuals are subject to UAE CIT insofar as they engage in business activity. The definition of business is inspired by the VAT definition and is, therefore, broad.  

Qualifying Free Zone Persons (QFZP) can enjoy a 0% CIT rate on their Qualifying Income provided they meet certain conditions. However, they can also elect to be subject to the normal CIT rate of 9%.

The withholding tax rate on UAE-sourced income derived by a Non-Resident is currently set at 0%.  This means that foreign investors who do not carry on business in the UAE will, in principle, not be subject to CIT in the UAE.

Foreign entities can be considered residents in the UAE if they are managed and controlled in the UAE, which needs to be assessed on a case-by-case basis. For foreign entities not considered residents in the UAE but who have a Permanent Establishment (PE) in the UAE, the PE definitions encompass a fixed PE and an agency PE.

The UAE CIT Law provides an exemption for Investment Managers (IM), subject to conditions.  Additionally, specific provisions apply to partnerships, which may be treated as tax-transparent under certain conditions. Similarly, family foundations can apply for tax transparency status.

Government entities and Government-Controlled entities are exempt from the UAE CIT Law, as are Qualifying Public Benefit entities and Qualifying Investment Funds. Extractive businesses (upstream oil and gas businesses) are also exempt to the extent they earn income from the extractive business. 

Date of Application

The UAE CIT Law applies to Tax Periods starting on or after 1 June 2023. Businesses with a financial year beginning on 1 January are subject to CIT as of 1 January 2024.

The Tax Period of a Taxable Person who is a natural person is usually the Gregorian calendar year. The Tax Period for a Taxable Person other than a natural person is the Financial Year or part thereof for which a Tax Return is required to be filed.

Deductible expenses

Expenses incurred wholly and exclusively for business purposes and which are not to be capitalized are deductible immediately. Deductions are not allowed for expenditures incurred to obtain exempt income. When there is a mixed purpose, the deduction is only partially allowed. Interest expenses are deductible subject to a cap of 30% of the EBITDA.

So-called financial assistance rules are in place, which prevents businesses from obtaining financing to pay out dividends or profit distributions. Entertainment expenses are capped at 50% deductibility.

Non-deductible expenses include donations made to a non Qualifying Public Benefit Entity, fines, bribes and dividends. Importantly as well, amounts withdrawn from the Business by a natural person who is a taxable person are not deductible.

Exempt income and relief

The following categories of income are exempt from UAE CIT:

• Capital Gains, Dividends and other profit distributions from a Resident Person
• Capital Gains, Dividends and other profit distributions from a Qualifying shareholding in a foreign legal person, subject to a holding period of 12 months, minimum participation of 5%, at a minimum subject to 9% CIT in the country of source
• Income from a Foreign PE, subject to conditions and an election to apply the exemption (rather than a credit)
• Income derived by a non-resident Person derived from operating aircraft or ships in international transportation

The following transactions are subject to specific relief, i.e. effectively a deferral of taxes:

• Qualifying intragroup transactions and restructurings – entities will qualify if they have 75% common ownership
• Business restructuring relief – subject to certain conditions.

Transfer pricing 

The UAE CIT Law requires related party transactions to be conducted in accordance with the arm’s length principle. It outlines the five traditional OECD TP methods as appropriate to support the arm’s length nature of related party arrangements while allowing the use of other methods where required. 

Article 55 focuses on the TP documentation obligations. Companies are expected to align with the OECD’s three-tier reporting framework, including the following:

1. Master file
2. Local file
3. Country-by-country reporting (CbCR)

In addition, businesses will need to file a controlled transactions disclosure form.

Materiality thresholds have been defined as follows:

• Master file and Local File:
  1. Taxable person part of an MNE Group with consolidated revenue of AED 3.15 billion or more in the relevant tax year, and
  2. The taxable person’s revenue is AED 200 million or more in the tax year
• CbCR: UAE tax resident part of an MNE Group with consolidated revenues equal to or exceeding AED 3.15 billion in the FY preceding the ‘financial reporting year’ concerned.
• Related Party Transactions Schedule: Total related party transactions exceed AED 40 million. Only aggregated related-party transactions in each category exceeding AED 4 million must be disclosed.
• Connected Persons Schedule: Transactions involving Connected Persons must be disclosed if the total transaction value exceeds AED 500,000 per Connected Persons.

Advanced pricing arrangements will be available as well through the regular clarification process already in place.

Beyond TP, the CIT Law mandates that payments or benefits provided to Connected Persons must be at market value to qualify as tax-deductible. This requirement mirrors the principles established under Article 34, reinforcing consistency with transfer pricing methodologies.

The introduction of these regulations reflects the UAE’s commitment to aligning its tax framework with global best practices, ensuring fairness and compliance in related party transactions while providing mechanisms to address potential tax disputes.

Administration and enforcement 

• The MoF remains the competent authority for the purposes of multi-lateral / bilateral agreements and the international exchange of information.
• The FTA will administer, collect, and enforce the new UAE CIT regime. The Tax Procedures Law determines penalties and fines.
• Businesses will need to obtain a Tax Registration Number with the FTA.

Businesses that are subject to UAE CIT are required to file a CIT return electronically for each financial period within 9 months of the end of the Financial Period. A financial period is generally any 12-month financial period year. Free Zone businesses subject to 0% CIT are also required to file a CIT return. 

Other considerations

• Foreign Tax Credits: Businesses may offset foreign taxes against their UAE CIT liabilities, up to the lower of the UAE CIT due or the withholding tax effectively deducted. However, unused credits cannot be carried forward, and taxes paid to individual Emirates are not eligible for credit.
• Tax Group: UAE businesses can form a Tax Group for CIT purposes if they meet specific conditions, including a 95% direct or indirect shareholding threshold. Entities in Free Zones subject to a 0% CIT rate cannot join a Tax Group. Additionally, the parent company, which may be intermediate, must be a UAE-based entity.
• Loss Carry Forward and Transfers: Losses may be carried forward to offset up to 75% of taxable income in subsequent periods. Losses can also be transferred between entities within a group, provided they share at least 75% direct or indirect common ownership. However, losses cannot be transferred from exempt entities or Free Zone companies, and the 75% cap applies to both transferred and carried forward losses.
• Change of Control Rules: Tax-deductible losses may be forfeited if there is a change in control (ownership of 50% or more) unless the new owner continues the same or a similar business.
• Sourcing Rules: Comprehensive sourcing rules govern the allocation of income within the UAE, which are particularly relevant for Free Zone businesses.
• General Anti-Abuse Rule (GAAR): GAAR addresses transactions primarily designed to secure a CIT advantage contrary to the UAE CIT Law’s intent. The FTA has the authority to counteract such arrangements. GAAR applies to transactions or arrangements entered into on or after October 10, 2022, when the UAE CIT Law was published in the Official Gazette (Issue #737).

Our 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 and small business relief, the UAE is striking the right balance. Interestingly, with the implementation of CIT, the UAE also introduced mandatory TP regulations.

Since the publication of the CIT Law, the FTA has published a number of cabinet decisions, ministerial decisions, and guides to offer businesses greater transparency and help them navigate the intricacies of the CIT regime.

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