United Arab Emirates: introduces a new corporate tax

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The CT, at the main rate of 9%, will apply to companies whose financial year begins on or after June 1, 2023

In short

The UAE Ministry of Finance (“MoF”) announced yesterday the introduction of a Corporate Tax (“CT”) scheme which will apply to companies. It will come into effect for fiscal years beginning on or after June 1, 2023.

The headlines are that the tax rate will be 0% for taxable income up to AED 375,000 and 9% on taxable income over AED 375,000. Large companies (which should be those with a turnover of more than 750 million euros) may be subject to a different tax rate (potentially 15%) in accordance with the OECD BEPS Pillar 2 project. Group tax consolidation would be allowed.

Entities that operate only in free zones (in accordance with regulatory requirements) should retain existing tax exemptions, although there will remain a reporting requirement for free zone entities. The extraction of natural resources will continue to be subject to taxation at the Emirates level. Banking transactions will be subject to the tax, but further details on current emirate-level corporate taxation will be provided in due course.

There will be no withholding tax on payments to non-residents.

We expect the government to release further details by mid-2022. More details on yesterday’s announcement are presented below.

Immediate consideration for businesses

UAE CT could have a significant impact on most businesses, especially their domestic operations in the UAE, cross-border transactions and the interface with their global global structures. Pending the publication of applicable tax law within the next six months (by mid-2022), we will help our clients review the legal and financial impact and plan ahead to ensure that their tax structures company and company are efficient and optimally placed. , in preparation for the new UAE TC regime.

Additionally, reviews of legal positions, contracts and operating models may be desirable to ensure they are sound from a tax perspective, prior to the implementation of the new regime.

More in detail

Who should be affected?

All companies established in the UAE should currently be covered by the UAE CT Law, with the exception of those operating in the extraction of natural resources (which will remain subject to corporate tax at the emirate level). ). Additionally, it is referenced in the FAQ published by the UAE Ministry of Finance that exemptions may be available for certain entities and this will be described in due course.

Treatment of free zone entities

Free zone entities will have a registration and filing requirement under the UAE CT Law, but existing tax exemptions offered by free zones should be retained provided that the free zone entity(ies) operate only within the Free Zone and in accordance with regulatory requirements.

What are the thresholds?

The UAEF intends to operate a three-tier CT framework in which

  • The first AED 375,000 of taxable income is subject to 0% CT;
  • 9% CT will apply to taxable income over AED 375,000; and
  • or companies with a turnover exceeding €750 million, a different tax rate (which has not yet been announced) will apply in accordance with the OECD BEPS Pillar 2 project. This rate can be expected to be 15%, in accordance with the rate given in the OECD Model Rules.

To the extent that an entity generates a tax loss, it must be carried forward to offset taxable income generated in future taxable periods.

How is taxable income calculated?

The starting basis for determining the taxable income will be the net accounting profit (in accordance with internationally acceptable accounting standards). Specific CT adjustments that may be made will be announced in due course, although it is expected that ordinary and necessary business expenses incurred in producing taxable income will be deductible.

Income from (i) dividends (ii) capital gains and (iii) qualifying intra-group transactions and reorganizations will not be included in taxable income, subject to the satisfaction of certain conditions (which are likely to include an ownership threshold and a minimum holding period).

Group tax consolidation

A group of UAE entities may choose to form a tax group. The minimum ownership requirement to form a tax group is unclear, but these thresholds are generally quite high (90% and above).

The taxpayer is expected to be able to determine their own tax group, subject to meeting the ownership criteria. Entities within a group will be able to transfer tax losses between other entities in the group.

A single tax return will be filed by an integrated tax group, under certain conditions.

How should CT be administered?

The filing date for the tax return has not been confirmed, but only one CT return is required per financial period (i.e. one year) and this must be filed electronically.

No details were provided regarding the due date for payment of any TC, but it was confirmed that there will be no prepayment scheme.

Does this mean there will be a personal tax?

The UAE does not currently intend to introduce a personal income tax and the TC framework will not apply to individuals and their personal income unless the individual holds (or is required to hold ) a business license or permit (eg, freelancers).

The content is provided for educational and informational purposes only and is not intended and should not be construed as legal advice. This may qualify as “lawyer advertising” requiring notice in some jurisdictions. Prior results do not guarantee similar results. For more information, please visit: www.bakermckenzie.com/en/disclaimers.

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