UAE announces introduction of federal corporate tax system

The United Arab Emirates Ministry of Finance (MoF) announced on January 31, 2022 the introduction of a Federal Corporate Tax (CT) scheme which will apply to all companies in the United Arab Emirates, exception of those operating in the extraction of natural resources (which will remain subject to emirate level corporate taxation). The UAE CT Regime will apply, under certain circumstances, to persons who hold a business registration to engage in such activity in the UAE.

The federal CT system will come into effect for fiscal years beginning on or after June 1, 2023. The applicable tax rate will be 0% for taxable income up to AED 375,000 (approximately USD 100,000) and 9% on taxable income above this threshold. Large companies, defined as those with an overall consolidated turnover of more than €750 million, may be subject to a different tax rate (expected at 15%), which will be in line with the BEPS Pillar 2 project of the OECD.

The starting basis for determining the taxable income will be the net accounting profit (in accordance with internationally acceptable accounting standards). Specific CT adjustments that may be made will be announced in due course, although it is expected that ordinary and necessary business expenses incurred in producing taxable income will be deductible. Income from (i) dividends, (ii) capital gains and (iii) qualifying intra-group transactions and reorganizations will not be included in taxable income, subject to the satisfaction of certain conditions (which are likely to apply). include an ownership threshold and a minimum holding period) .

Entities that operate only in free zones (and in accordance with regulatory requirements) should retain existing tax exemptions (which could be for 15 to 50 years), although there will remain a reporting obligation for entities in free trade zones. . Banking transactions will be subject to the tax, but further details on current emirate-level corporate taxation will be provided in due course. There will be no withholding tax on payments made to non-residents.

The filing date for the tax return has not been confirmed, however, only one CT return is required per financial period (i.e. year) and this must be filed electronically. No details were provided regarding the due date for payment of any TC, but it was confirmed that there will be no prepayment scheme.

Take away key

The UAE Ministry of Finance has confirmed that there will be no introduction of personal income tax in the UAE. As such, income generated by individuals should not be subject to UAE IC unless an individual holds a UAE business license in respect of such UAE sourced income. Therefore, persons who hold a business license and derive income from it will need to understand if their activities fall within the scope of the UAE TB.

Businesses, such as family offices and/or asset holding companies, should fall under the UAE CT. As these entities are established and operate only in a UAE Free Zone, they should not be subject to the UAE TC, although there will still be a requirement to register and file the TC annually. Where entities are established outside a UAE Free Zone, but the business activities are outside the UAE / conducted only in a UAE Free Zone, it may be worth considering restructuring existing UAE operations to host those located in a UAE Free Zone such that the revenue generated is not subject to UAE TC.

As a general observation, the current wording of the UAE TC framework should remain attractive to UAE-based investment entities due to the inclusion of (i) the dividend exemption and (ii) the exemption participation for capital gains on disposal of investments.

Next steps

We expect the UAE Ministry of Finance to release further details on the expected UAE TC framework by mid-2022, which is expected to include the release of draft legislation and issuing executive directives in a timely manner.

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