UAE Ministry of Finance (“MoF”) has announced that the UAE will introduce a Federal Corporate Income Tax (“CIT”) on business profits.
For financial years beginning on or after June 1, 2023, the UAE will impose a federal corporate tax on business profits. The UAE Corporate Tax regime was created to embrace worldwide best practices and reduce compliance costs for UAE firms.
The UAE’s corporate tax regime will encourage investment and headquarters activities while ensuring the free flow of capital, trade, financing, and services, given the UAE’s position as a global financial center and international commercial hub.
What is Corporate Income Tax, or CIT?
Corporate tax is a form of direct tax levied on the net income or profit of corporations and other businesses.
When will the UAE CT regime become effective?
CIT will be effective for financial years starting on or after 1 June 2023 (i.e., businesses having a financial year starting on 1 January will become subject to UAE CIT from 1 January 2024).
CIT will apply on the worldwide adjusted accounting net profits of the business. The UAE CIT regime introduces three different rates:
- An exemption for taxable income up to AED 375,000 to support small businesses and startups.
- The standard statutory tax rate of 9% on taxable income above AED 375,000.
- A different tax rate for MNEs that fall within the scope of OECD’s ‘Pillar Two’ (i.e., MNEs with consolidated global revenues more than EUR 750m).
For Free zone businesses, the CIT will apply but the tax holidays will continue to be granted to businesses established within UAE free zones that
- comply with all regulatory requirements
- do not conduct business with the UAE mainland.
There will be no withholding tax on domestic and cross-border payments. This means that foreign investors who do not carry-on business in the UAE will in principle not be subject to corporate tax.
Exemption From CIT
- Capital gains and dividends received by UAE businesses from qualifying shareholding.
- Qualifying intragroup transactions (presumably this refers to the fiscal consolidation regime) and restructurings (presumably this refers to tax neutral mergers).
- Income from the extraction of natural resources (it will remain subject to Emirate-level corporate taxation).
UAE businesses will need to comply with transfer pricing rules and documentation requirements set with reference to the OECD Transfer Pricing Guidelines.
Businesses subject to UAE CIT will be required to file a CIT return electronically for each financial period and will be subject to penalties for non-compliance with the CIT regime.
The MoF will be the competent authority for the purposes of multilateral/bilateral agreements and the international exchange of information. The FTA will be responsible for the administration, collection, and enforcement of the new CIT regime.
UAE businesses will need to assess how CIT will apply to their activities and ensure they are ready for the implementation of CIT in 2023. Businesses and tax professionals will have to await the publication of the CIT law to know the exact scope.
According to the MoF, further information on the UAE CIT regime will be provided towards the middle of 2022.
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