UAE Corporate Tax 2023: Understanding the new Tax Law

The UAE has officially introduced a federal decree-law on UAE corporate tax 2023, which sets the tax rate at 9% on taxable business profits that exceed AED 375,000. This new law was announced in December 2022 and is set to come into effect for financial years starting on June 1, 2023. In this article, we will discuss all you need to know about the UAE Corporate Tax 2023.

Corporate Tax Rates

Under the new law, companies will have to pay a zero percent tax rate on the portion of taxable income that is below AED 375,000, while a nine percent tax rate will be applied to taxable income that exceeds AED 375,000. It is important to note that corporate tax rates apply to both UAE companies and other juridical persons incorporated or effectively managed and controlled in the UAE.

ALL MNEs that fall under the scope of Pillar 2 of the BEPS 2.0 framework (i.e. consolidated global revenues in excess of AED 3.15 billion) shall be subject to different rates as per OECD Base Erosion and Profit-Sharing rules.

Corporate Tax Exemptions

There are certain exemptions to the corporate tax in the UAE. Government entities, government-controlled entities, persons engaged in extractive and non-extractive natural resource businesses, qualifying public benefit entities, qualifying investment funds, public pension or social security funds subject to regulatory oversight, private pension or social security funds subject to regulatory oversight, and a juridical person incorporated in the state that is wholly owned and controlled by an exempt person are all exempted from corporate tax.

All businesses and commercial activities operating within the seven emirates in the UAE are now subjected to the federal tax system, with a few exceptions. For instance, businesses involved in natural resource extraction will remain subject to tax decrees issued by the respective Emirate.

Similarly, individuals who earn income in their personal capacity, such as salary or investment income, will not be subject to corporate tax as long as their income-generating activity does not require a commercial license. Businesses registered in Free Trade Zones will also be exempted from corporate tax provided that they meet all regulatory requirements and do not conduct business with mainland UAE.

It is worth mentioning that the foreign banking sector, which was previously subject to the Emirate-level bank tax decree, will now be governed by the UAE Federal Tax Law. The implications of this shift on the Emirate-level banking tax decree will be communicated in due course, affecting both branches of foreign banks and local banks that will now be subject to corporate tax similar to other businesses.

Corporate Taxable Persons

Corporate taxable persons are UAE companies and other juridical persons that are incorporated or effectively managed and controlled in the UAE. Natural persons who conduct a business or business activity in the UAE as specified in a cabinet decision to be issued in due course, and non-resident juridical persons that have a permanent establishment in the UAE are also included in the scope of corporate tax.

Juridical persons established in a UAE free zone are also within the scope of corporate tax as taxable persons and are required to comply with the requirements set out in the Corporate Tax Law. However, a free zone person that meets the conditions to be considered a qualifying free zone person can benefit from a corporate tax rate of 0 percent on their qualifying income.

Income Exempt from Corporate Tax

1. Dividend income from qualifying shareholdings Under the UAE Federal Tax Law, dividend income earned by a UAE company from its qualifying shareholdings will be exempt from income tax. However, the qualifying shareholdings will be defined in the law.
2. Capital gains Capital gains are also exempt from income tax under the UAE Federal Tax Law. This means that any profits made from the sale of assets, such as stocks or real estate, will not be subject to corporate tax.
3. Group reorganization profits Profits from group reorganizations, such as mergers or acquisitions, are also exempt from corporate tax in the UAE. This exemption is meant to encourage businesses to consolidate and streamline their operations.
4. Intra-group transaction profits Profits from transactions between companies within the same group are exempt from corporate tax in the UAE. This exemption is meant to incentivize companies to conduct business within their own corporate groups rather than outsourcing to third-party companies.
5. No withholding tax on domestic and cross-border payments The UAE Federal Tax Law does not impose withholding tax on domestic or cross-border payments, which means that businesses will not be required to withhold a portion of their payments to vendors or contractors for tax purposes.

It’s worth noting that the law may include a participation exemption or similar principles commonly seen in international markets. Businesses will need to evaluate whether they meet the prescribed conditions, if any, to avail the exempt income scheme.

You can read more about the changes as of May 10th 2023 from UAE Corporate Tax 2023 Exemptions.

Impact of UAE Corporate Tax on Freezones

The UAE is committed to providing a tax exemption of zero percent (or as applicable) to businesses registered in Free Trade Zones, as long as they don’t engage in any business with the mainland, until the end of the holiday period. However, all free zones must file an annual corporate tax return.

Businesses that operate in both Mainland UAE and Free Trade Zones, as well as those under the dual license scheme, should carefully consider the impact on their operating model.

Calculate Taxable Income

To determine the taxable income of a tax group, the parent company must prepare consolidated financial accounts covering each subsidiary that is a member of the tax group for the relevant tax period. Transactions between the parent company and each group member, and transactions between the group members, would be eliminated for the purposes of calculating the taxable income of the tax group.

Corporate Tax Deadlines

The corporate tax regime’s payment and compliance deadline allows taxpayers a generous time frame of up to 21 months from the start of their financial year to prepare for filing and making their tax payments. This means that businesses with a financial year starting on June 1, 2023, and ending on May 31, 2024, will have until February 28, 2026, to file their tax returns and make their payments.

In conclusion, the introduction of the corporate tax in the UAE marks a significant step towards diversifying the country’s revenue streams and ensuring the sustainability of its economic growth. While the new tax law may impose a burden on businesses operating in the UAE, exemptions and other favorable conditions have been put in place to encourage investment and support business growth. Understanding the provisions of the law is crucial to ensure compliance and avoid penalties.