update – UAE introduces corporate tax | K&L Gates LLP

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The United Arab Emirates (UAE) Ministry of Finance announced on January 31, 2022 that it will introduce a federal corporate tax regime for the first time in the UAE. A federal law on corporation tax should be published soon, together with implementing regulations (CT law).

The information in this alert is based on currently available guidance from the Ministry and remains subject to the provisions of the CT Act once issued.

The corporation tax is expected to come into effect on or after June 1, 2023 and apply to profits generated in fiscal years beginning on or after June 1, 2023. The UAE Federal Revenue Authority will be responsible for administering, collecting and enforcing taxes in accordance with rules and regulations to be issued by the ministry.

Scope

Corporate tax will apply to all businesses and commercial activities in the UAE undertaken by legal or natural persons in the seven emirates. Natural resource extraction will remain subject to corporate tax at the emirate level.

All activities carried out by a legal person are considered to be “commercial activities” which fall within the scope of the corporation tax regime. On the other hand, an individual will be considered to have a “business” that falls within the scope of the TB Act if the individual has (or is generally required to have) a business license or permit to conduct its relevant activities in the UNITED ARAB EMIRATES.

Companies incorporated in Free Zones or Financial Free Zones of the UAE will also be subject to federal corporate tax. However, it appears that these companies will continue to benefit from applicable tax breaks and incentives in the manner and for the duration provided for by the legal framework of the competent free zone authority.

For example, the Dubai International Financial Center (DIFC) Act and the Abu Dhabi Global Market (ADGM) Act provide that a company incorporated as a DIFC or ADGM is subject to zero tax during a period of 50 years from the date on which the law in force in question comes into force. As a result, DIFC and ADGM companies could expect to remain subject to a zero tax rate until 2071 and 2063, respectively.

It is unclear whether the tax treatment will be different depending on whether free zone companies operate inside or outside the free zone.

Rates

The corporation tax rates will be as follows:

  • A tax rate of 0% for taxable income up to AE$375,000 (approximately US$02,095).
  • A tax rate of 9% for taxable income over AE$375,000 (approximately US$102,095).
  • A different tax rate for large multinationals that meet specific criteria defined with reference to the rules of the Global Anti-Base Erosion Model (second pillar) of the OECD Erosion Project tax base and profit shifting.

Non-taxable income

Corporation tax will not apply:

  • Salary or income of an individual from employment. However, a natural person will be subject to corporation tax if their income is derived from activities carried out under a license or a self-employed permit.
  • Investment in real estate by individuals on a personal basis, provided that the individual is not required to obtain a business license or permit to engage in such activity in the UAE.
  • Dividends, capital gains and other income from owning stocks or other securities personally.
  • Interest and other income earned by an individual from bank deposits or savings plans.

Exempt income

The ministry also said that the following people will be exempt from corporation tax:

  • Dividends and capital gains earned by a UAE company from “qualifying holdings” (i.e., an equity interest in a UAE or foreign company that meets certain conditions to be specified under the CT law).
  • Qualifying intragroup transactions and reorganizations that meet certain conditions and requirements to be defined under the CT law.

Final remarks

The introduction of corporate tax in the UAE will undoubtedly have an impact on business operations, structures and future M&A activities in the UAE. We encourage companies to evaluate their existing structures and operations with the goal of applying the most effective structures and business models in light of the provisions of the CT Act once issued and in effect.

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