After Qatar, Oman, Saudi Arabia and Kuwait, the UAE has now introduced the Corporate Tax, which will be applied across the Emirates.
On 9th December 2022, the United Arab Emirates issued the Federal-Decree Law No. (47) of 2022 regarding the taxation of corporations and businesses. This law provides the basis for the implementation of a Federal Corporate Tax in the UAE from the financial year starting on or after 1st June 2023. However, the rules related to transition and General Anti-Avoidance (GAAR) will be applicable, which is published in the Official Gazette. The enforcement and collection of the corporate tax will be handled by the Federal Tax Authority. Along with the Federal-Decree Law, a list of FAQs was also published on their website for further clarifications. So, what does this imply? How will it affect the business and investment environment of the confederation of the seven Emirates?
Let’s start at the very beginning. Over the past decade, the UAE has been systematically moving away from its traditional image of an oil-based economy to a more diversified economy. This was done with the dual objective of minimizing vulnerability to oil price fluctuations and making the region an attractive proposition for investors. Consequently, diversification across trade, logistics, tourism, real estate backed by innovation and technology has seen the region undergo a massive and profound transformation over the past few years. Today, the UAE is noted for its modern infrastructure, global financial center and international trade and tourism.
The Emirates has always been a tax haven for investors. There was excise tax that was imposed on the importation, production, and stockpiling of tobacco, electronic smoking devices, carbonated, sweetened and energy drinks. However, over the past few years, Emirates has been steadily introducing and modifying tax laws with a view to complying with international standards. VAT was introduced in January 2018 at 5%, in accordance with the GCC VAT agreement. The Federal Corporate Tax is the latest addition to the list.
So, what is this Corporate Tax and the scope of its application?
Corporate Tax (or Corporate Income Tax or Business Profits Tax) is a direct tax levied on the net income or profits of corporations and other businesses. As per the Ministry of Finance, the tax rate is 9% for taxable income (the accounting income as reported in the standalone financial statements) above AED 375,000. This implies that there will be no tax levied on companies whose taxable income is up to AED 375,000. This is primarily with the intention of supporting the small businesses and startups. According to the MoF website, the corporate tax applies to:
- Businesses or companies and other juridical persons that are incorporated in the UAE and also organizations or businesses that are effectively managed and controlled in the UAE;
- Individuals or natural persons who do businesses or conduct a business activity in the UAE that is, those obliged to obtain a trade license.
- Foreign legal entities, in other words, non-resident juridical persons, which have a Permanent Establishment in the UAE.
Thus, the corporate tax will be applicable to all individuals and businesses operating under a commercial license.
The exemptions to this rule are:
- The companies that operate in the UAE Free Zone are also within the scope of the new law. However, they can be exempted from the corporate tax if they meet the conditions as per the FTA rules and regulations. In other words, a zero rate will apply to ‘qualifying income’ made in these zones. Further clarity on qualifying income will be given through subsequent announcements.
- A qualifying free-zone person, as defined by the corporate law, is a free-zone registered business or branch that:
- Maintains adequate substance in the UAE
- Derives qualifying income
- Transfer pricing requirements are met
- Meets all other conditions that will be communicated through a ministerial decision
- There are certain organizations and businesses that are exempt from the corporate tax based on notifications and approvals from the MoF, the Cabinet and/or the Federal Tax Authority. (Ex: Govt entities, extractive businesses, non-extractive natural resource businesses, qualifying public benefit entities, Investment funds, public or private pension and social security funds, and all of their subsidiaries)
- Individuals with income unrelated to trade or business and foreign investors who do not do business in UAE will also be exempted.
- It will also not be applicable on qualifying intragroup transactions, restructurings, capital gains, and dividends earned by UAE businesses from its qualifying shareholdings.
Businesses will be subjected to corporate tax from June 1, 2023. This gives the organizations enough time to work out the implications and get their books in order. The financial statements will now have to be prepared in accordance with internationally acceptable accounting standards. This is primarily to ensure seamless integration with existing international frameworks, thereby increasing the ‘attraction quotient’ of the region in terms of ‘ease of doing businesses. For organizations whose financial year ends in December, this gives a 12-month period to prepare their financial books in accordance with the new law.
Why was the corporate tax introduced?
According to the MoF, “The Corporate Tax was introduced with the dual intention to help the United Arab Emirates achieve all of its planned strategic objectives, and also to accelerate development and transformation in the region. The Corporate Tax regime ensures competitive rates and also adheres to international standards. This combination of a competitive taxation structure along with the UAE’s extensive network of double tax treaties, will strengthen and consolidate the region’s position as the leader for business and investment purposes.”
Value Added Tax (VAT) was introduced in 2018, the Economic Substance Rules (ESR) and the Country-by-Country reporting regulations in 2019 and so on. In fact, the introduction of a corporate tax law had been in the pipeline for quite some time now. The Corporate Tax Law of December 2022 follows the public consultation document of April 2022, which entailed the main features and principles of the proposed law. So, there were no big surprises there.
Impact and Implications
With its strategic location, liberal trade laws, well established infrastructure and financial system, and a favorable tax environment, the UAE has always been an attractive hub for investment. The introduction of corporate tax will not dent this image. For one, the 9% corporate tax rate is one of the lowest globally. Also, this move is another step towards complying with the international tax standards set by the Organization of Economic Cooperation and Development (OECD), thus aligning itself with the global community. Additionally, the 9% rate is much below the OECD’s global minimum rate of 15%.
Experts and analysts have noted that the introduction of corporate tax will only help the Emirates gather momentum in its journey towards becoming an economic powerhouse. Complying with the international standards of tax transparency will ensure that the region retains its competitive edge in the world economy. Importantly, the Corporate Tax Law also lays the foundation for the UAE to align with the proposals under Pillar Two of the OECD Base Erosion and Profit Shifting (BEPS) project. (The proposals focused on the global minimum effective tax rate concept.)
As June 2023 is approaching and more official clarifications and additions are in the offing, companies and businesses need to gauge and understand the legalities and complexities of the new system to ensure a smooth transition into a level playing field.