Corporate Tax (CT) | The UAE introduces its first-ever corporate taxes.
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The Ministry of Finance in the United Arab Emirates (UAE) has announced the implementation of a 9% federal corporate tax on business profits with a threshold of AED 375,000, starting from the financial year beginning June 1, 2023. The UAE’s corporate tax rate is one of the most competitive in the world and the lowest in the Gulf Cooperation Council (GCC), where Bahrain is now the only country without a corporate tax regime. The corporate tax regime in the UAE is expected to be implemented with easy compliance requirements and to follow best global practices.
Corporate Tax Rates in UAE
The following corporate tax rates have been proposed:
- A 0% tax rate for taxable income up to AED375,000.
- A 9% tax rate for taxable income above AED375,000.
- Different rates will apply to multinational corporations subject to OECD Base Erosion and Profit-Sharing laws that fall within Pillar 2 of the BEPS 2.0 framework (i.e. combined worldwide revenues of more than AED 3.15 billion).
Why is the UAE introducing taxes on corporate income?
The implementation of a corporate tax in the UAE aims to:
- Enhance the country’s reputation as a major commercial and investment center.
- Promote the UAE’s development and transformation to achieve its strategic goals.
- Meet international standards for tax transparency.
- Exclude harmful tax practices from the system.
- Reduce reliance on oil revenue.
Scope of Corporate Tax in UAE
The UAE has established a federal tax system that applies to all businesses and commercial activity throughout the emirates. The scope of corporate taxation includes:
- Most commercial, industrial, and professional businesses in the UAE, except those involved in the production of natural resources (such as oil and gas) and branches of foreign banks, which are already subject to Emirate-level taxes and a 20% tax, respectively.
- Businesses incorporated in Free Zones, as long as they comply with regulatory standards and do not conduct business on the mainland.
- All activities performed by a legal entity, which are considered “business activities” and are subject to the corporate tax framework.
Exempt Income
The following types of income will be exempt from corporate tax in the United Arab Emirates:
- Dividends earned from UAE companies
- Dividends paid by foreign companies, and capital gains from the sale of shares in both UAE and foreign companies, provided certain conditions are met
- Capital gains on the disposal of shares in a Free Zone Person, if the Free Zone Person is a holding company and a significant portion of its income is derived from shareholdings in subsidiary companies that qualify for the participation exemption
- Foreign branch profits of UAE companies, which can be claimed through either a foreign tax credit for taxes paid in the foreign branch country or an exemption for the foreign branch profits
- Income earned by a non-resident from operating or leasing aircraft or ships (and related equipment) used in international transportation, subject to certain conditions.
The impact of Corporate Tax on UAE businesses
The implementation of corporate tax in the UAE is likely to have a significant impact on the tax and compliance costs of many businesses in the country. To be compliant with the new tax regime, it will be necessary for entities to accurately assess the tax implications and make any necessary changes to their corporate structure, operating model, financial and tax operations, reporting systems, legal agreements, and transfer pricing policies.
How can we help you?
We at FZ Business Consultancy will assist you in establishing your business in UAE without any unusual costs and constraints. Our consultants with years of experience will make the procedure hassle-free for you. Email us at info@fzconsultancy.com for your queries.