Introduction and effective date
In a landmark decision the Ministry of Finance (“Ministry”) on 31 January 2022 announced the United Arab Emirates (“UAE”) will introduce Corporate Tax (a type of direct taxes) effective on or after 1 June 2023. The Federal Tax Authority (“FTA”) will be responsible for the enforcement, collection, and administration of UAE Corporate Tax. Corporate Tax will be applied to all UAE businesses and commercial activities alike, except for the extraction of natural resources, which will remain subject to Emirate level Corporate Taxation.
The news came in as the UAE aims itself as a world leading hub for business, innovation and competitiveness to align itself on global level for achieving transparency and preventing harmful Taxes practices together with accelerating the UAE’s development and transformation to achieve its strategic objectives.
Rate of Corporate Tax and threshold
The Corporate Tax Rate will be
9% Standard rate for companies (with annual income above AED 375,000)
0% to support small business (with annual income below AED 375,000) – to that the Ministry added “The Tax regime will be amongst the most competitive in the world”
A different tax rate for large multinationals that meet specific criteria set with reference to ‘Pillar Two’ of the OECD Base Erosion and Profit Shifting project (this will further be explained in the legislation).
Examples for Corporate Tax application
A business that has a financial year starting on 1 July 2023 and ending on 30 June 2024 will become subject to UAE CT from 1 July 2023 (which is the beginning of the first financial year that starts on or after 1 June 2023). The taxable income will be the accounting net profit / income of a business, after making necessary adjustments for certain items to be specified under the UAE Corporate Tax Law (draft not yet available).
Exclusions (out of scope of UAE Corporate Tax) – explicitly defined by the Ministry of Finance
Personal income from employment
Real Estate investment (by individuals)
Dividend income, capital gains and other income earned from owning shares or other securities (by individuals), also Dividends and capital gains earned by a UAE business from its qualifying shareholdings will be exempt.
Interest income (by individuals)
Any income generated by individual (which is not arising as a result of a business)
No withholding Taxes
Free zone businesses will be subject to UAE Corporate Tax, but the UAE Corporate Tax regime will continue to honor the Corporate Tax incentives (if any) currently being offered to free zone businesses that comply with all regulatory requirements and that do not conduct business with mainland UAE.
Corporate Tax Returns – cycle of submission
Only one Corporate Tax Return will need to be filed per financial period, no provisional or advance CT filings will be required, a financial period will generally a year. UAE businesses will not be required to make advance UAE Corporate Tax payments (as observed in regimes in other countries).
Corporate Tax Violations
Similar to other Taxes in the UAE (e.g. VAT), businesses will be subject to penalties for non-compliance with the Corporate Tax regime.
Immediate action required
UAE companies will need to consider impact assessment and readiness towards the Corporate Tax and its implementation, upgrade ERP as required.
To understand accurately how this Corporate Tax regime will impact your business, preparing an implementation plan and assistance with reporting and updating your ERP, reach out to our Tax Team at Taxation@affiniax.com.
Author Jilal Ahmed – 31 January 2022