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UAE Corporate Tax – Important Developments

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published on 16 May 2022 | reading time approx. 3 minutes

 

On 31 January 2022, the Ministry of Finance announced that the United Arab Emirates (UAE) will launch a federal Corporate Tax (CT) on business profits of 9% effective for financial years starting on or after 1 June 2023. Recently it has released a Public Consultation Document in which it informs on the proposed UAE Corporate Tax regime. This is not yet a final draft, but no significant changes are expected.

 


The motivation behind the introduction of a federal CT regime is to enable the UAE to remain a competitive and productive economy as well as to continue to support and encourage growth. Besides the UAE want to be sufficiently flexible to respond to changing international and domestic environments and tax developments. The UAE intend to continue to attract foreign investment and to provide certainty for both - businesses and the tax administration. Moreover, they purpose to minimize the compliance burden for businesses. 

The Ministry of Finance has been directed in the development of the UAE CT regime by a set of internationally accepted principles such as flexibility and alignment with modern business practice, certainty and simplicity, neutrality and equity as well as transparency. 

Taxable persons include UAE companies and other legal persons incorporated in the UAE as well as foreign legal entities that have a permanent establishment in the UAE or that earn UAE sourced income. UAE CT will also apply to natural persons engaged in a business or commercial activity in the UAE. But apart from that the UAE CT regime will be implemented without a parallel tax on the income of natural persons, in particular individuals. 

Legal persons are Limited Liability Companies, Private Shareholding Companies, Public Joint Stock Companies as well as other entities established under the laws of the UAE that have separate legal personality. Legal persons incorporated in a foreign jurisdiction that are effectively managed and controlled in the UAE are considered UAE incorporated entities for tax purposes. Limited and general partnerships and other unincorporated joint ventures and associations of persons will be treated as “transparent”. This implies that they will not be taxpayers in their own right. 

Some persons will be exempt from UAE CT like amongst others the Federal and Emirate Governments and their departments, authorities and other public institutions as well as wholly Government-owned UAE companies that carry out a sovereign or mandated activity, and that are listed in the Cabinet Decision. Businesses engaged in the extraction and exploitation of UAE natural resources that are subject to Emirate-level taxation are not subject to UAE CT.

Companies and branches that are registered in a Free Zone (hereafter referred to as “Free Zone Persons”) are subject to the UAE CT and tax return filing requirements. However, the UAE CT regime will take into account the tax incentives currently being offered to Free Zone Persons.

A Free Zone Person can e.g. profit from a 0 % CT rate on income earned from transactions with businesses located outside of the UAE, or from businesses located in the same or any other Free Zone. A Free Zone Person that has a branch in mainland UAE will be taxed at the regular CT rate on its mainland sourced income, whilst continuing to profit from the 0 % CT rate on its other income. A Free Zone Person that transacts with a mainland UAE but does not have a mainland branch, can further profit from the 0 % CT rate if for example its income from mainland UAE is limited to “passive” income. This would involve interests and royalties, and dividends and capital gains from owning shares in mainland UAE companies. The 0 % CT will also be applicable to transactions between Free Zone Persons and their group companies based in mainland UAE. 

Any other mainland sourced income may exclude a Free Zone Person from the 0 % CT regime with regard to all their income. This is to prevent an unfair competitive advantage compared to businesses established in mainland UAE. 

UAE resident persons will be taxable on their worldwide income in the UAE. Residents are legal persons that are incorporated in the UAE as well as any natural persons who are engaged in a business or commercial activity in the UAE. A foreign company is handled like a resident person if it is effectively managed and controlled in the UAE. Income taxes paid in foreign jurisdictions can be counted as a credit against the CT payable in the UAE on the relevant income to prevent double taxation. 

The CT regime will also apply to non-residents if they have taxable income from their Permanent Establishment in the UAE or if they have income which is sourced in the UAE. Whether there is a permanent establishment is assessed according to the OECD Model Tax Convention. This is to be affirmed if the foreign company has a fixed place of business in the UAE or if it has a dependent agent in the UAE who works exclusively for the foreign company. 

For the calculation of taxable income accounting net profit (or loss) should be used. This corresponds to international standard. Businesses will use their financial accounting period as their (annual) tax period or the Gregorian calendar year. 

Certain forms of income will be exempted from taxation. This includes income earned by UAE companies from investments in other companies, and from operations conducted outside the UAE through foreign subsidiaries or foreign branches. There will be exemptions for dividends and capital gains to avoid double taxation. 

There will be some expense deduction limitations to prevent possible situations of abuse or excessive deductions. 

Due to the circumstance of the UAE being a global financial center and an international business hub, a 0 % withholding tax will apply on domestic and cross-border payments made by UAE businesses. This includes UAE sourced income earned by a foreign company that is not attributable to a Permanent Establishment in the UAE of that foreign company. 
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