One of the things that make the United Arab Emirates highly attractive to foreign investors is the country’s favorable tax regulations. Specifically, there is no general corporate tax in the UAE.
This is about to change, however. Subject to specific exemptions, the UAE will start charging a federal corporate income tax on all UAE-based companies as well as foreign companies having permanent establishment in the UAE or that earn UAE-sourced income.
How will the new corporate tax scheme work, and how will it affect the aforesaid companies already incorporated or planning to establish their business in the UAE? Read on to find the answers to the most frequently asked questions on the UAE’s new corporate tax regime.
1. How much is the federal corporate income tax?
The new corporate tax rate will be applied on taxable income as under:
● 0% if taxable income is AED 375,000 or lower
● 9% if taxable income is higher than AED 375,000
A different tax rate will apply to companies which are part of large multinational corporations that meet the prescribed consolidated revenue threshold.
2. When will it take effect?
The new federal corporate tax regime will take effect on 1 June 2023 for businesses whose fiscal years start in June. For companies whose fiscal years begin in January, however, the new corporate tax regime will become effective on 1 January 2024.
3. Who is liable under the new corporate tax regime?
There are exemptions (discussed in the following section), but generally speaking, the new corporate tax regime encompasses all UAE-incorporated companies.
For these entities, the regular corporate tax rate will apply to its worldwide income, although certain income earned overseas will be exempt, subject to certain conditions.
Foreign companies with a permanent establishment in the UAE and earning income from a source in the UAE are also subject to corporate tax in the UAE.
Natural persons engaged in any economic or commercial activity in the UAE are also subject to the proposed corporate tax. However, their corporate tax liability is limited to their business income. Wages and salaries or income earned from other sources are not subject to corporate tax.
In other words, if a person employed by a company in the UAE also operates a business, his income from his employment will remain tax-free. However, the income he earns from his business will become subject to the regular corporate tax. He must file a tax return on such income. Of course, if it is AED 375,000 or less, the applicable corporate tax rate will be 0%.
4. Will the new corporate tax affect free zone companies?
Free zone companies are in-scope of the proposed corporate tax, though they would have the benefit of 0% tax rate subject to fulfillment of certain conditions.
The said conditions are summarized as under:
The Free Zone companies:
· Maintain adequate substance
· Get their books of accounts audited
· Comply with all other regulations of the respective free zone
· Do not have any mainland sourced income except:
– Income from UAE mainland through a mainland-registered UAE branch
– Passive income (e.g., interest, royalties, dividends and gains from owning shares in mainland UAE companies)
– Sale of goods to mainland where the customer is importer on record
– Income from group companies incorporated in the mainland
However, it must be noted that if a mainland group company makes a payment to a free zone company, that mainland company cannot deduct such payment from its taxable income.
5. Who is exempt from paying the federal corporate tax?
· Companies that extract and exploit natural resources will remain under emirate-level corporate taxation. In the current emirate-level corporate taxation.
· The federal and emirate governments, government departments, wholly owned government companies are exempt from the federal corporate tax.
· Certain charities and public-benefit organizations may also be exempt from corporate tax.
· Public and regulated private social security and retirement pension funds, investment funds, and real estate investment trusts may also be exempt.
The above exemption would be subject to certain conditions.
6. What will this new corporate tax scheme change?
The proposed Corporate Tax regime would have a 360-degree impact on the businesses.
Business supply chain, processes, IT and MIS systems, accounting and auditing are a few of the areas where there will be direct impact.
Further, since the Corporate Tax is the tax on the net profits, the return on investment shall be directly affected and thus, the businesses would also need to review their existing long-term supplier and vendor contracts and possibly initiate renegotiations and re-visit their product pricing and marketing strategy as soon as possible.
At the outset, businesses will primarily be required to undertake the following:
· Review their existing business models, long-term agreements/contracts, intra group and cross-border transactions, etc. to assess the impact and undertake appropriate group level and/or transaction level restructuring from an efficiency and tax planning perspective
· Assess the readiness of the financial reporting systems, operating procedures, payroll structure, etc. to understand and implement necessary modification to be aligned with the proposed corporate tax regime
· Develop appropriate policies and procedures for smooth integration and transition into the proposed corporate tax regime
Following the integration and transition into the proposed corporate tax regime, businesses will need to undertake the applicable compliances under the Corporate Tax law.