UAE TO IMPLEMENT CORPORATE INCOME TAX IN 2023 – STEPPING INTO THE MAINSTREAM

Key Gulf state follows neighbours with creation of tax on company profits

Many businesses in the UAE have historically enjoyed zero income tax on their profits. This, however, is set to change, with the Ministry of Finance (MOF) announcing on 31 January 2022 that federal corporate income tax (CIT) will be introduced in the UAE. The CIT regime is expected to apply for fiscal years starting on or after 1 June 2023.

This move is motivated by UAE's desire to meet international tax standards, following similar moves in neighbouring Gulf states, while minimising the compliance burden for UAE businesses and shielding small businesses and start-ups. The UAE, home to the key business hub Dubai, will still have one of the lowest corporate tax rates in the world but the move will diversify state income away from hydrocarbons.

Younis Haji Al Khoori, Undersecretary of MOF, stated that "the certainty of a competitive and best-in-class corporate tax regime, together with the UAE's extensive double tax treaty network, will cement the UAE's position as a world-leading hub for business and investment".

The MOF has announced the following main features of the proposed CIT regime (subject to possible changes once the regime enters into full force): 

EFFECTIVE DATE

The CIT regime is expected to apply for fiscal years starting on or after 1 June 2023.

SCOPE

The proposed CIT regime is expected to apply to all business (ie, commercial, industrial and professional) activities in the UAE, except for the extraction of natural resources, which is already (and will remain) subject to taxation at an Emirate-level.

The CIT regime will also apply to individuals to the extent they hold (or are legally required to hold) a business licence or permit to carry out commercial, industrial and/or professional activities in the UAE. This includes income earned by freelance professionals for activities carried out under a freelance licence or permit.

The MOF has stated that the proposed federal CIT regime will also apply to banking operations in the UAE (although branches of foreign banks are already subject to a CIT regime at an Emirate-level).

It was also announced that corporate tax incentives currently offered to free zone businesses will continue to be honoured, to the extent the free zone business complies with all applicable regulatory requirements and does not conduct business in mainland UAE. This may affect many businesses currently operating in both mainland UAE and in free zones under a dual licensing scheme.

Free zone businesses will nevertheless have to comply with certain obligations under the CIT regime, including the requirement to register and file a CIT return.

Further details on CIT exemptions and exclusions will be provided by the MOF in due course.

PROPOSED RATES

Three different rates of corporate income tax are proposed to apply, as follows:

• 0% rate on taxable income up to AED 375,000 (c. US$ 102,000);
• 9% rate on taxable income above AED 375,000; and
• a different rate (which has not been announced yet) for large multinationals that generate consolidated global revenues above EUR 750m (c. AED 3.15 bn) in line with the Pillar Two of the OECD Base Erosion and Profit Shifting (BEPS) project.

INCOME EXEMPTED FROM CIT

The MOF has announced that the following types of income will be exempted from the CIT regime:

• income derived from the extraction of natural resources (see above);
• dividends and capital gains earned by a UAE business from its qualifying shareholdings (ie, an ownership interest in a UAE or foreign company that meets certain conditions to be specified in the UAE CIT law;
• qualifying intra-group transactions and reorganisations subject to certain conditions to be specified in the UAE CIT law;
• foreign entities and individuals who do not conduct a trade or business in the UAE on an ongoing or regular basis; and
• foreign investors' income from dividends, capital gains, interest, royalties and other investment returns.

OTHER FEATURES

Foreign Tax credits. Foreign CIT paid on UAE taxable income will be allowed to be credited against UAE payable CIT.  Note in this context that UAE has entered into over 130 double tax treaties, a matter which will further facilitate the correct operation of the tax system in the context of cross border trade and ownership relationships both pre and post the introduction of UAE CIT.

Losses. The CIR regime will allow businesses to use losses incurred (as from the entry into force of the CIT regime) to reduce taxable income for subsequent financial periods.

Tax groups. UAE group of companies will be able to elect to form a tax group and be treated as a single entity for taxation purposes, subject to certain conditions to be specified in the UAE CIT law. A UAE tax group will be able to file a single tax return for the entire group.

Transfer pricing. UAE businesses will also have to comply with transfer pricing rules and documentation requirements based on the OECD transfer pricing guidelines.

The relevant CIT legislation is still being finalised and has not been published yet. Although the regime that will come into force may ultimately diverge from MOF's announcement, businesses operating in the UAE (in particular businesses operating in both mainland UAE and in free zones under a dual licensing scheme) should consider the potential impact of the announced regime and prepare for the upcoming change in the law.

Do not hesitate to reach out to us should you require any advice or guidance on the potential impact of CIT on your organisation and operations in the UAE. Our corporate team is here to provide any support needed with potential restructurings, pre-deal preparation and valuation considerations, as well as negotiating robust tax indemnities and covenants in UAE transaction documents once the CIT legislation enters into full force.