As has been widely publicized in recent weeks, the United Arab Emirates has announced that it is introducing a federal tax on corporate profits. Given that the country has built a remarkable landscape with minimal taxation, the announcement represents a major (if not quite surprising) change in the way businesses will operate in the UAE.
The introduction of corporate tax is a natural consequence of the UAE joining the OECD BEPS 2.0 regime. From June 1, 2023, taxable profits of UAE companies above Dhs 375,000 ($102,000) will be taxed at 9%. Multinationals with revenues exceeding MAD 3.15 billion will be subject to the OECD BEPS 2.0 rate of 15%.
Some of the UAE’s GCC neighbors already impose corporate tax (such as Saudi Arabia and Qatar). With investment levels at their current levels in the UAE, the time to introduce a corporate tax seems ripe.
Corporation tax will be payable on the profits of UAE companies as shown in their financial statements prepared in accordance with internationally acceptable accounting standards, with minimal exceptions and adjustments. Under certain conditions, losses incurred by entities subject to corporation tax may be carried forward to be set off against future taxable profits. Tax losses can also be set off against the taxable income of another group company, provided that certain conditions are met.
It was also announced that companies in the free zone will be subject to corporation tax. However, the tax incentives currently offered to establishments in the free zone will continue, although it is uncertain whether they will continue to be granted in their current form, to new companies or under the same conditions.
Given that it is not uncommon for free zone companies to derive some of their revenue from the provision of goods or services ashore, it remains to be seen how the final legislation will deal with revenue streams from the onshore to free zone flows. It should be noted that, given the UAE’s recent relaxation of local ownership requirements (which potentially could have relieved free zones of their main selling point – allowing 100% foreign ownership), economic free zones of the UAE seem to have received a new breath of life. .
Despite this legal reform, the UAE is likely to continue to attract highly qualified people to the country because as things stand they will maintain their zero income tax rate and there are currently no tax levied on income or gains from personal investments (except a tax levied by the Dubai Land Department on transfers of immovable property).
It should be noted that companies involved in the extraction of natural resources will be exempt from the new tax and the UAE will also not impose withholding taxes on domestic and cross-border payments, nor subject investors foreigners to corporation tax if they do not carry on business in the country. UNITED ARAB EMIRATES. The legislation will likely provide further exemptions and exclusions when released.
This change in legislation raises many theoretical and practical questions, such as how the country intends to structure its tax system in the long term and the ultimate consequences of an increase in taxes on people living in the UAE. At present, it is not expected that this new tax will deflect investment to other GCC countries given that the UAE presents a significantly different social and economic proposition than its neighbours.
Compared to other commercial centers in the world, a corporate tax of 9% (or even 15%) is relatively low. For example, Gibraltar has a tax rate of 10%, while Ireland offers a corporate tax rate of 12.5%. Hong Kong taxes range from 8.5% to 16.5%, and Singapore has a tax rate of 17%.
The new UAE corporate tax appears to have been positively received by businesses. With the introduction of corporate tax, the UAE reaffirms its commitment to upholding international standards of tax transparency and preventing harmful tax practices. In anticipation of the introduction of corporate tax, we expect businesses to start assessing their current operating, holding and business structures (as was the case with the introduction of VAT in the UAE) .
In particular, companies will generally want to: (i) assess the impact of corporate tax and determine whether their existing tax model and governance are sufficient to meet the requirements of the corporate tax regime; and (ii) identify potential exposures and opportunities to generate tax efficiencies prior to corporate tax implementation.
Adela Mues is Partner and Tufayel Hussain is Partner at Reed Smith