The United Arab Emirates has been known as a zero-tax jurisdiction. The UAE implemented Excise tax on 1^st October 2017 as being the first type of indirect tax followed by Value Added Tax on 1^st January 2018.

UAE VAT revenue amounted to over AED 95.4 billion ($26 billion) since January 2018, while the total revenue from excise tax for the same period amounted to more than AED 8.6 billion ($ 2.3 billion).

The tax landscape in the UAE is set to change again with the Ministry of Finance’s (MOF) announcement on January 31, 2022, that the UAE will introduce a federal corporate income tax (a direct tax) effective for financial years starting on or after June 1, 2023.

Because the UAE is an Inclusive Framework member of the Organization for Economic Cooperation and Development’s (OECD) anti-Base Erosion and Profit Shifting initiatives, it has been expected that it would introduce legislation to implement the multinational-focused Global Minimum Corporate Tax (GMCT) of 15 percent. With MOF’s recent announcement, more details have come out on the contours of the UAE’s Corporate Income Tax regime.

UAE Corporate Income Tax regime

While the formal UAE Corporate Income Tax legislation has not yet been published, MOF’s announcement states that Corporate Income Tax will be payable on the profits of UAE businesses as reported in their financial statements prepared in accordance with internationally acceptable accounting standards.

UAE Corporate Income Tax will apply to all businesses and commercial activities alike, except for the extraction of natural resources, which will remain subject to Emirate-level corporate taxation.

The standard statutory UAE Corporate Income Tax rate will be 9 percent, whereas a 0 percent rate will apply for taxable profits up to AED375,000 to support small businesses and startups. Multinationals earning more than €750 million in global revenues will be subject to a 15 percent Corporate Income Tax rate, which constitutes the UAE’s implementation of the GMCT.

Taxable basis

We understand a participation exemption regime will be introduced, as MOF states that UAE businesses will be exempt from paying UAE Corporate Income Tax on capital gains and dividends received from qualifying shareholdings. Foreign corporate tax paid on UAE taxable income will be allowed as a tax credit against the UAE Corporate Income Tax liability.

Furthermore, MOF stated there will be generous loss utilization rules and UAE groups can be taxed as a single entity or can apply group relief in respect of losses and intragroup transactions and restructurings. Transfer pricing and documentation requirements will apply to UAE businesses with reference to the OECD Transfer Pricing Guidelines.

Tax compliance

According to MOF’s announcement, the UAE Corporate Income Tax regime will ensure the compliance burden is kept to a minimum for businesses that prepare and maintain adequate financial statements. It is anticipated that UAE businesses will only need to file one Corporate Income Tax return each financial year and will not be required to make advance tax payments or prepare provisional tax returns. The UAE Federal Tax Authority will be responsible for the administration, collection, and enforcement of UAE Corporate Income Tax.

Free zones

The Emirates of Abu Dhabi and Dubai contain many free zones, where international groups have been allowed to establish 100 percent owned subsidiaries without the need for a local shareholder. Most free zones provide tax incentives to companies and branches established therein, which are typically valid for a number of years. According to the MOF, free zone businesses will be subject to the new UAE Corporate Income Tax; however, the Corporate Income Tax regime will continue to honor the tax incentives offered to free zone businesses that comply with all regulatory requirements and that do not conduct business with mainland UAE (ie, with parties outside of the Free Zone).

Key takeaway

Many UAE companies and branches have for years enjoyed a 0 percent tax treatment for profits generated in the UAE, both in the free zones and on mainland UAE. The current announcements are set to change this significantly. While the relevant legislation has not yet been published, international groups with businesses in the UAE are advised to consider the potential impact of these changes