Introduction
The effect of UAE Corporate Tax Law is immense on international businesses. United Arab Emirates (UAE) is a leading global hub for business and investment, with a diverse and dynamic economy that offers attractive opportunities for domestic and foreign investors. The UAE has recently introduced a Federal Corporate Tax (CT) law that will apply to all businesses and individuals conducting business activities under a commercial license in the UAE, including Free Zone businesses.
The CT law will become effective for financial years starting on or after 1 June 2023 and will impose a standard rate of 9% on Taxable Income exceeding AED 375,000. Profits up to and including this threshold will be taxed at a zero per cent rate to support small businesses and startups. This blog post aims to provide an overview of the UAE CT law and the effect of UAE Corporate Tax Law for international businesses operating or investing in the UAE.
Applicability of the CT Law:
It applies to all businesses and individuals conducting commercial activities in the UAE, regardless of legal form, ownership structure, or place of incorporation. Free Zone businesses, Tax Groups, Unincorporated Partnerships, Qualifying Public Benefit entities, Related Parties, Connected Persons, etc., Foreign entities, and individuals engaged in ongoing or regular trade or business activities in the UAE, through branches, agents, or representative offices, are also subject to the CT law.
Calculation of Taxable Profits:
Taxable profits exceeding AED 375,000 are subject to a standard rate of 9%. Taxable Income is calculated by deducting allowable expenses from gross income. Certain expenses, such as bribes, fines, penalties, and non-business-related expenditures, are non-deductible or subject to limitations.
Exemptions and Exceptions:
CT exemptions include dividends and capital gains from Qualifying intra-group transactions like Business Restructuring, Participation Exemption. Entities that are exempt from CT include Government Entities, Government-controlled Entities, Extractive and Non-Extractive Natural Resource Businesses, Qualifying Public Benefit Entities, pension and social security funds, Qualifying Investment Funds, and wholly-owned UAE subsidiaries of certain exempt entities.
Compliance and Reporting Requirements:
All Taxable Persons must obtain a Corporate Tax Registration Number from the Federal Tax Authority (FTA) before commencing business activities. Annual CT return filing within nine months from the financial year-end. CT return submission must be accompanied by payment of the CT due for the financial year. Late filing, payment, underpayment, or non-compliance with the CT law may result in penalties.
FTA Authority
The FTA has the authority to audit, assess, and collect CT from Taxable Persons. The FTA can exchange information with other authorities in the UAE at the Federal and Local levels.
Effect of UAE Corporate Tax Law on International Businesses
International businesses will need to review their existing or planned company structures and operations in the UAE to assess their exposure to CT and to ensure compliance with the CT law. For example, international businesses may need to reconsider their choice of legal form, ownership structure, place of incorporation, business activities, commercial license, etc.
Effects of UAE Corporate Tax Law on Operations in Free Zones or Mainland
Similarly, international businesses that operate in Free Zones in the UAE may be subject to CT on their income derived from carrying on a trade or business in the UAE, whereas international businesses that operate outside free zones in the UAE may be subject to other taxes or fees imposed by the relevant emirate authorities. Therefore, international businesses may need to compare the costs and benefits of operating in Free Zones or outside Free Zones in the UAE.
Reviewing Accounting Standards
International businesses may also need to review their accounting systems, financial statements, transfer pricing policies, etc. to ensure that they can accurately calculate and report their taxable profits and allowable expenses in accordance with the CT law.
Effect of UAE Corporate Tax Law on tax planning and Structure
International businesses will need to review their existing or planned tax planning and structure in relation to their UAE operations or investments to optimize their tax efficiency and minimize their tax risks. For example, international businesses may need to reconsider their financing arrangements, intra-group transactions, dividend policies, capital gains strategies, etc.
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Effect of UAE Corporate Tax Law on Investment by International Businesses
Similarly, international businesses that receive dividends or capital gains from their UAE operations or investments may be exempt from CT under the CT law if they meet certain conditions. Therefore, international businesses may need to plan their holding period and exit strategy for their UAE operations or investments.
Effects of UAE Corporate Tax on Small Business Relief
Under the UAE Corporate Tax Law, there are certain conditions to get small business relief with the revenue threshold determined at AED 3 million by the Ministerial Decision.
Implications of DTAAs
International businesses may also need to take into account the UAE’s extensive network of double tax treaties, which may provide relief from double taxation or reduced withholding tax rates on certain income streams.
Changes in Investment Patterns
The introduction of CT in the UAE may affect the attractiveness and competitiveness of the UAE as a destination for foreign direct investment (FDI) or portfolio investment. On one hand, CT may reduce the net returns for some investors or increase the cost of doing business in the UAE. On the other hand, CT may enhance the credibility and stability of the UAE as a business-friendly jurisdiction that adheres to international standards and best practices. Moreover, CT may not have a significant impact on some investors who are already subject to corporate tax in their home countries or who can benefit from the UAE’s double tax treaties.
Conclusion
The UAE CT law is a landmark development that will transform the UAE’s tax landscape and have far-reaching implications for domestic and foreign businesses alike. The CT law is intended to help the UAE achieve its strategic objectives and accelerate its development and transformation while reaffirming its commitment to meeting international standards for tax transparency and preventing harmful tax practices. The CT law also builds on best practices globally and incorporates principles that are internationally known and accepted, ensuring that the UAE CT regime will be readily understood and clear in its implications.
International businesses operating or investing in the UAE will need to carefully assess the effect of UAE Corporate Tax Law on their company formation and operations, tax planning and structure, and investment patterns. International businesses will also need to ensure compliance with the Corporate Tax law and its requirements. By doing so, international businesses can continue to leverage the UAE’s diverse and dynamic economy that offers attractive opportunities for business and investment.
