The United Arab Emirates (UAE) has recently announced the introduction of a Federal Corporate Tax (CT) that will be effective for financial years starting on or after June 1, 2023. The CT is a form of direct tax levied on the net income or profit of corporations and other entities from their business. The introduction of the CT is expected to cement the UAE’s position as a leading global hub for business and investment, and accelerate its development and transformation to achieve its strategic objectives.
The Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses, which provides the legislative basis for the introduction and implementation of the CT in the UAE, was issued on December 9, 2022. The CT law will levy corporate income tax on business profits made by UAE businesses over the course of a tax accounting period. The UAE CT regime will be based on international best practices, with a low/minimal compliance burden on businesses.
The introduction of the CT has raised questions among businesses about its impact, and whether they have sufficient information to assess it. The details of the regulation are expected to be issued in mid-2022, which will provide businesses with more clarity on the impact of the CT. In this article, we will explore the UAE CT in detail, including its objectives, implementation, and impact on businesses operating in the UAE.
Overview of UAE Corporate Income Tax
The United Arab Emirates (UAE) has recently introduced a new Corporate Income Tax (CIT) law, which will levy corporate income tax on business profits made by UAE businesses, over the course of a tax accounting period. The Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses provides the legislative basis for the introduction and implementation of a Federal Corporate Tax in the UAE. The law is effective from the beginning of the first financial year that starts on or after June 1, 2023.
According to the Corporate Tax Law, businesses subject to UAE Corporate Tax will be taxed on their net income or profits derived from their business activities conducted within the UAE. The tax rate is not yet officially announced, but it is expected to be between 5% and 10% of taxable income, which is relatively low compared to other countries that impose corporate income tax.
It is important to note that not all businesses in the UAE will be subject to Corporate Tax. The law provides exemptions for certain types of businesses, including those that are owned by the UAE government, charities, and non-profit organizations. Additionally, businesses that are engaged in oil and gas exploration and production activities that are subject to concession agreements with the UAE government will be subject to a separate income tax regime.
The introduction of Corporate Tax in the UAE is a significant change in the country’s tax landscape, as it was previously known for its tax-free environment. However, the government has emphasized that the introduction of Corporate Tax is necessary to diversify the country’s revenue streams and to support its long-term economic growth and development.
Tax Rates and Thresholds
Under the UAE Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses, the new corporate tax regime will be effective from the beginning of the first financial year that starts on or after 1 June 2023. The law prescribes two rates of corporate tax:
- 0% for income below certain thresholds, likely to be AED 375,000 as provided under the FAQs and to be confirmed by the Cabinet Decision.
- 9% for taxable income exceeding the threshold.
The rates and the threshold have been carefully decided to reflect the fairness and competitiveness of the UAE’s Corporate Tax regime. The 0% threshold for taxable profits up to and including AED 375,000 is a significant indication of the government’s ongoing support for start-ups and small businesses in recognition of their vital contribution to the UAE economy.
It is worth noting that under the Emirate level tax decrees, income tax is payable under a progressive rate system, with rates up to 55%. However, in practice, these tax decrees have not been applied. Instead, branches of foreign banks are subject to income tax at a flat rate of 20% under the new corporate tax regime.
Tax Exemptions and Incentives
The UAE Corporate Tax Law provides for various exemptions and incentives for businesses operating in the country. These include:
- Exemption for certain types of income: The law provides for an exemption for certain types of income, such as dividends and capital gains, subject to certain conditions.
- Participation exemption: The participation exemption allows companies to avoid paying tax on profits from their subsidiaries, provided that certain conditions are met.
- Research and development (R&D) incentives: The UAE provides incentives for companies that invest in R&D, including a tax credit for qualifying expenses.
- Investment incentives: The UAE offers a range of incentives for companies that invest in certain sectors or regions, such as free zones.
It is important to note that the availability and scope of these exemptions and incentives may vary depending on the specific circumstances of the business. Companies should consult with tax professionals to determine their eligibility and the potential benefits of these incentives.
Additionally, businesses operating in the UAE may also be eligible for tax treaties between the UAE and other countries, which can provide further tax relief and incentives. The UAE has signed tax treaties with a number of countries, including the United States, the United Kingdom, and France.
Overall, the UAE Corporate Tax Law provides for a range of exemptions and incentives designed to encourage investment and promote economic growth in the country. Companies operating in the UAE should carefully consider their eligibility for these incentives and work with tax professionals to ensure compliance with the law.
Filing and Payment Procedures
Businesses subject to UAE Corporate Tax must file their tax returns and make payments in accordance with the Federal Tax Authority (FTA) guidelines. The FTA requires businesses to file their tax returns and make payments electronically through the FTA’s online portal.
The first step in the filing process is to register for Corporate Tax with the FTA. Businesses must provide the necessary documentation and information to complete the registration process. Once registered, businesses must maintain accurate records of their financial transactions and ensure that they are in compliance with the Corporate Tax Law.
Businesses must file their tax returns within six months of the end of their financial year. For example, if a business’s financial year ends on December 31, 2023, the tax return must be filed by June 30, 2024. Businesses must also pay any tax owed within the same timeframe.
The FTA provides businesses with a range of payment options, including online payments, bank transfers, and cash payments at designated payment centers. Late payment of Corporate Tax may result in penalties and interest charges, so it is important for businesses to pay on time to avoid any additional costs.
It is also worth noting that businesses may be required to submit additional documentation or information to the FTA upon request. The FTA may conduct audits and investigations to ensure that businesses are in compliance with the Corporate Tax Law.
Overall, businesses subject to UAE Corporate Tax must ensure that they are aware of their filing and payment obligations, and that they are maintaining accurate records and complying with the Corporate Tax Law. Failure to do so may result in penalties and other consequences.
Penalties and Consequences
Non-compliance with the Corporate Tax Law in the UAE can lead to severe penalties and consequences. The government has not yet released all the details about the penalties, but it is expected that they will be significant. Here are some of the penalties and consequences that businesses may face for non-compliance:
- Penalties for late payment or non-payment of Corporate Tax
- Penalties for late filing of tax returns
- Interest on unpaid tax
- Legal action, including fines and imprisonment
- Revocation of business licenses
- Blacklisting of the company
It is critical for businesses to comply with the Corporate Tax Law to avoid these penalties and consequences. The penalties for non-compliance will be severe, and the government will take strict action against those who do not comply with the law. Therefore, it is essential for businesses to understand their obligations under the law and take steps to comply with them.
Businesses should seek professional advice from tax experts to ensure that they comply with the Corporate Tax Law. They should also keep accurate records of their financial transactions to ensure that they can file accurate tax returns on time. Failure to comply with the law can have severe consequences for businesses, including reputational damage and financial losses.
In conclusion, businesses in the UAE must comply with the Corporate Tax Law to avoid penalties and consequences. The government has not yet released all the details about the penalties, but it is expected that they will be significant. Therefore, businesses should seek professional advice and take steps to comply with the law to avoid any legal action or penalties.
Recent Developments and Future Outlook
The UAE recently issued its federal corporate tax law, which will impose a headline rate of 9% on taxable income exceeding Dh375,000 ($102,000). Taxable profits below this threshold will be subject to a 0% rate of corporate tax. The tax law will come into effect on June 1, 2023, and will apply to all businesses operating in the UAE.
This new tax law is a significant development for the UAE, which has traditionally been a tax-free jurisdiction. The introduction of corporate tax is part of the UAE’s efforts to diversify its revenue streams and reduce its reliance on oil revenue. The government aims to cement its position as a leading global hub for business and investment and accelerate its development and transformation to achieve its strategic objectives.
Foreign banks with operations in the UAE may be affected by the introduction of the Global Minimum Tax (GMT) in their parent jurisdiction if the UAE Effective Tax Rate (ETR) is below 15%. With a headline corporate tax rate of 20% applied to branches of foreign banks in the UAE, these banks may need to consider restructuring their operations to avoid the impact of the GMT.
Looking to the future, the UAE is likely to continue to develop its tax system to attract foreign investment and diversify its economy. The government has already announced plans to introduce a value-added tax (VAT) in the near future, which will further increase the government’s revenue streams. It is also possible that the UAE may introduce other taxes, such as a personal income tax or a capital gains tax, in the future.
