UAE to introduce federal corporate tax on business profits from 2023

The UAE will introduce a federal corporate tax on business profits from the financial year starting on or after June 1, 2023, its Ministry of Finance has said.

The corporate tax has been set at a standard statutory tax rate of 9 per cent. However, a zero per cent tax rate will be applicable on taxable profits up to Dhs375,000, in an attempt to support small businesses and startups.

No corporate tax will apply on personal income from employment, real estate and other investments, or on any other income earned by individuals that does not arise from a business or other form of commercial activity licensed or permitted to be undertaken in the UAE, according to state-run news agency WAM.

The corporate tax will be payable on the profits of UAE businesses as reported in their financial statements, prepared in accordance with internationally acceptable accounting standards, with minimal exceptions and adjustments.

The Ministry of Finance to introduce federal corporate tax on business profits that will be effective for financial years starting on or after 1 June 2023. pic.twitter.com/fbn5QiAByj

— وزارة المالية | الإمارات (@MOFUAE) January 31, 2022

The corporate tax will apply to all businesses and commercial activities alike, except for the extraction of natural resources, which will remain subject to emirate-level corporate taxation. The new tax regime will also continue to honour the corporate tax incentives currently offered to free zone businesses that do not conduct business within mainland UAE.

The UAE will reportedly not impose withholding taxes on domestic and cross border payments, or subject foreign investors who do not carry-on business in the UAE to corporate tax. Furthermore, as an international headquarter location, a UAE business will be exempt from paying tax on capital gains and dividends received from its qualifying shareholdings, and foreign taxes will be allowed to be credited against UAE corporate tax payable.

The new corporate tax regime will reportedly have “generous loss utilisation rules” and will allow UAE groups to be taxed as a single entity or to apply group relief in respect of losses and intragroup transactions and restructurings.

The ministry added that UAE businesses will be given time to prepare for the introduction of this new corporate tax, with the ministry expected to provide further information on the new corporate tax in the middle of this year.

“With the introduction of corporate tax, the UAE reaffirms its commitment to meeting international standards for tax transparency and preventing harmful tax practices. The regime will pave the way for the UAE to address the challenges arising from the digitalisation of the global economy and the other remaining BEPS [Base Erosion and Profit Shifting] concerns, and execute its support for the introduction of a global minimum tax rate by applying a different corporate tax rate to large multinationals that meet specific criteria set with reference to the above initiative,” said Younis Haji Al Khoori, undersecretary of the Ministry of Finance.

The UAE corporate tax regime will ensure the compliance burden is kept to a minimum for businesses that prepare and maintain adequate financial statements, the statement added.

Businesses will only need to file one corporate tax return each financial year, and will not be required to make advance tax payments or prepare provisional tax returns. Transfer pricing and documentation requirements will apply to UAE businesses with reference to the OECD Transfer Pricing Guidelines.

“The UAE seeks to diversify its income base, and raising corporation tax was the logical next move towards achieving this following the introduction of VAT in 2018,” Scott Livermore, ICAEW economic advisor, and chief economist and managing director, Oxford Economics Middle East, told Gulf Business. “The introduction of the global minimum corporate tax of 9 per cent means that tax competition becomes less severe, and the move will be less discouraging of foreign direct investment.”

“With tax differentials becoming less, FDI will be drawn by other factors such as quality of infrastructure and the general business environment – both are areas where the UAE should feel confident. Other countries in the region will likely follow as they all face the similar challenge of diversifying their tax base.”

Business leaders from the region have reacted to the development. Rizwan Sajan, chairman and founder Danube Group, said, “This new structure will be dampening for businesses initially but I feel, once we look at the larger picture, this tax will help keep funds in check for the economic and overall holistic development plans of the UAE. This tax has been brought in a few weeks after the government in the UAE changed the working week and is aligning to position the UAE as a global economic hub in terms of business and investment. The UAE corporate tax regime will ensure the compliance burden is kept to a minimum for businesses that prepare and maintain adequate financial statements. Businesses will only need to file one corporate tax return each financial year and will not be required to make advance tax payments or prepare provisional tax returns.”