UAE Corporate Income Tax
The UAE implements the business income tax on the financial years starting on or after 1 June 2023.
The UAE Ministry of Finance (“MoF”) has announced that the UAE will introduce a Federal Corporate Income Tax (“CIT”) on business profits. The introduction of the CIT in the UAE was expected. It came in light of the Pillar Two Global Minimum Tax (“GloBE”) reform introduced by the Organization for Economic Co-operation and Development (“OECD”).
Corporate Tax is a form of direct Tax levied on corporations and other businesses’ net income or profit. Corporate Tax is sometimes referred to as “Corporate Income Tax” or “Business Profits Tax” in other jurisdictions.
CIT will be effective for financial years starting on or after 1 June 2023 (i.e., businesses having a financial year starting on 1 January will become subject to UAE CIT from 1 January 2024).
Watch our recorded webinar: UAE’s Corporate income Tax (CIT)
First tax period
The UAE CIT regulations will become effective for FYs starting on or after 1 June 2023. For example, a company that follows the calendar year and has a FY of 1 January 2023 to 31 December 2023 will be subject to CIT in UAE from 1 January 2024.
Applicability and Tax Rate
CIT will generally apply to income earned from activities carried out in the UAE by licensed businesses and calculated on the adjusted accounting net profits of the business. The UAE CIT introduces three different rates:
- An exemption for taxable income up to AED 375,000 to support small businesses and startups.
- The standard statutory tax rate of 9% on taxable income above AED 375,000.
- A different tax rate for Multi-National Entities (MNEs) falls within the scope of OECD’s ‘Pillar Two’ (i.e., MNEs with consolidated global revenues over EUR 750m).
There will be no withholding tax on domestic and cross-border payments. This means that foreign investors who do not carry on business in the UAE will, in principle, not be subject to CIT. Accordingly, foreign entities and individuals will be subject to UAE CIT if they conduct any trade or business in the UAE regularly.
Free Zones Entities
For Free zone businesses, the CIT will apply. Still, the tax holidays will continue to be granted to businesses established within UAE free zones that (1) comply with all regulatory requirements and (2) do not conduct business with the UAE mainland. Further details on the compliance obligations of free zone businesses will be provided in due course.
Individuals will not be subject to CIT in the UAE on salary and other employment income, dividends, capital gains and other income earned from owning shares or other securities in their personal capacity. Further, interest and other income earned by an individual from bank deposits or saving schemes will also not be subject to CIT in the UAE.
The following income will be exempt from CIT:
- Capital gains and dividends received by UAE businesses from qualifying shareholding.
- Qualifying intragroup transactions.
- Income from the extraction of natural resources (it will remain subject to Emirate-level corporate taxation).
UAE businesses must comply with transfer pricing rules and documentation requirements set regarding the OECD Transfer Pricing Guidelines.
The MoF will be the competent authority for multilateral/bilateral agreements and the international exchange of information. The FTA will be responsible for the administration, collection, and enforcement of the new CIT regime.
Businesses subject to UAE CIT will be required to file a CIT return electronically for each financial period. They will be subject to penalties for non-compliance with the CIT regime.
Other points for consideration are as follows:
- Foreign Tax will be allowed to be credited against UAE corporate income tax payable.
- Fiscal consolidation: UAE companies will form a “fiscal unity” for UAE CIT purposes.
- Transfer of losses and utilization rules.
Carry forward of losses
Entities will be allowed to utilize prior period losses (from the effective date onwards) to offset taxable income. If certain conditions are met, excess losses can also be carried forward to the subsequent year. The UAE CIT law will provide further details on the set-off and carry forward of tax losses.
The UAE CIT regulations will allow companies to form a tax group and file a single tax return for the entire group, subject to certain conditions. Further guidance and details on the tax grouping will be provided in the UAE CIT law.
So far, the UAE CIT does not envisage withholding taxes on domestic as well as cross-border payments of dividend, interest, royalties or any other payments.
Registration and Compliance
All licensed businesses are required to be registered under the CIT. More information on the registration process and ongoing compliance obligations for businesses are expected soon.
UAE businesses are encouraged to assess the impact and plan and organize on how CIT will apply to their activities and ensure they are ready to implement CIT in 2023.
How it affects your business
Whether an organization’s income is subject to tax or not depends on the laws under which it operates, in addition to its net profits—corporate income tax is applied after calculating earnings and deducting expenses.
As a business owner, reducing your organization’s taxable income is possible through proper planning and utilization of allowed charges such as management fee, insurance, travel expenses, interest payments, advertising, sales taxes, etc.
At XB4, our team of experts will work with you hand in hand to provide you with distinctive solutions that cater to your business. We will proficiently assist you in managing your organization’s tax obligations, as well as:
- Tax planning and establishing best practices and policies will reduce business tax exposure.
- Identifying and reducing tax risks
- Fulfilling compliance obligations
- Establishing efficient tax models
- Adjusting to any emerging changes