On 31 January 2022, the UAE Ministry of Finance (MoF) announced the introduction of a new federal Corporate Tax (CT) regime, effective from fiscal years beginning on or after 1 June 2023 and applicable to all UAE registered companies.
The introduction of corporate tax in the UAE is part of the country’s efforts to diversify its revenue streams and reduce its reliance on oil revenues. It is also aligned with the country’s efforts to comply with international tax standards, including the OECD’s Base Erosion and Profit Shifting (BEPS) initiative.
The new CT regime represents a significant shift in the country’s tax policy which will have major implications for businesses operating in the country. It is therefore crucial that companies are adequately prepared and have adopted necessary measures to manage the additional financial and compliance obligations.
What will be the corporate tax rate?
The CT has been set at a standard rate of 9% and will be applied to all UAE registered business whose profits exceed AED 375,000. Companies with annual revenue below this threshold will be subject to a 0% rate but will still be required to register for CT and file annual tax returns.Large multinational corporations with global revenues in excess of EUR 750 million, will be subject to a different rate to be determined by Pillar Two of the OECD BEPS.
What is the scope of the new Corporate Tax?
The corporate tax will be levied on all UAE registered entities as well as any foreign businesses that have a permanent establishment in the country. This includes LLCs, PSCs, PJSCs and other entities recognised under UAE law or those of a foreign jurisdiction. There are, however, certain entities that will fall outside the scope of the CT regime.
Which entities are exempt from the corporate tax?
The following entities are exempt from the CT, either automatically or through application and subsequent confirmation from the Federal Tax Authority:
- Public institutions or UAE government departments
- Government owned businesses carrying out a mandated activity
- Organisations created for public benefit
- Investment funds (subject to meeting FTA requirements)
- Public or private pension or social security funds (subject to meeting FTA requirements)
- Entities that are fully owned and controlled by exempt organisations
Free Zone registered companies
Free zone registered companies are within the scope of the CT regime and will therefore have the same compliance obligations as mainland companies to register and file tax returns. However, existing exemptions will be honoured, and they will continue to benefit from a 0% rate provided they maintain adequate economic substance in the country and derive their income from overseas companies or other free zone entities. If any income is found to have been generated from trade on the mainland, it may result in the loss of this exemption and all income would then be subject to the 9% rate. This condition acts as a safeguard against free zone companies gaining an unfair competitive advantage over mainland companies.
Trusts and Foundations
Foundations and certain types of trusts can be considered as transparent ‘unincorporated partnerships’ for the purposes of UAE corporate tax and as such their founder/settlor and beneficiaries are seen as owners of the assets. This would mean that any income from these entities would not be liable for CT.
Branches
Branches of UAE registered parent companies are taxable entities under the CT regime but will be included in the income and tax return of the head office. They are not required to register separately or file separate returns.
Foreign branches, as with local branches, will be included in the taxable income of the parent company unless corporate tax has already been paid on the foreign branch profits in the foreign jurisdiction, in which case, it is eligible for exemption from UAE CT.
How can Global Link help?
The introduction of corporate tax in the UAE will undoubtedly bring new challenges for companies operating in the country. It may require the allocation of additional resources to manage compliance requirements and may also necessitate changes to operational models and business structures to optimize tax liabilities and minimize the impact of the new regime.
Global Link has over 16 years’ experience working with local and global businesses, providing bespoke consultancy services for company incorporation and other corporate services in Dubai and the wider UAE.
We can assist you with navigating the challenges of corporate tax in the UAE, helping you manage your compliance obligations and providing advice on any incentives and exemptions that you may be eligible for.
If you need advice on this or any other aspect of company incorporation, PRO services or visa acquisition, please get in touch with us on +971 4 553 9901 or email us at [email protected] and we will be happy to assist you.