The introduction of Corporate Tax has been announced in the UAE | Client alert has been saved
The introduction of Corporate Tax has been announced in the UAE | Client alert
31 January 2022
On 31 January 2022, the Ministry of Finance (MoF) announced that the United Arab Emirates (UAE) will introduce a federal Corporate Tax (CT) on business profits that will be effective for financial years starting on or after 1 June 2023.
The UAE Corporate Tax regime has been designed to incorporate best practices globally and minimize the compliance burden on businesses. Corporate Tax will be payable on the profits of UAE businesses as reported in their financial statements prepared in accordance with international accounting standards, with minimal exceptions and adjustments.
Whilst the law has not yet been issued, the UAE Federal Tax Authority (FTA) has publicly communicated the key design principle and policy choices of the new regime, which we have summarized in the following alert.
- The CT will become effective for the financial year staring on or after the 1 June 2023. The Frequently Asked Questions document (FAQ) that has been published on the FTA’s website considers the following examples:
- A business that has a financial year starting on 1 July 2023 and ending on 30 June 2024 will become subject to CT from 1 July 2023 (which is the beginning of the first financial year that starts on or after 1 June 2023);
- A business that has a (calendar year) financial year starting on 1 January 2023 and ending on 31 December 2023 will become subject to the UAE CT from 1 January 2024 (which is the beginning of the first financial year that starts on or
after 1 June 2023).
- The MoF plans to issue further information on the UAE CT regime towards the middle of the year.
Scope of application
- The CT will apply to all persons (individuals and legal persons) carrying outbusiness activities under a commercial license in the UAE. This includes entities operating in the banking sector.
- However, the following exceptions will apply to:
- Entities engaged in the extraction of natural resources will remain subject to the Emirate level corporate taxation.
- Entities operating in free zones will continue to benefit from tax incentives currently being offered to them if they comply with all regulatory requirements and they do not conduct business with mainland UAE. However, the latter will be required to register and file a CT return. The FTA will be releasing more information in this respect.
- The CT will apply to the net profit/income of a business, subject to certain adjustments. The accounting net profit/income is the amount reported in the Financial Statements (FS) prepared in accordance with international accounting standards.
- Based on the announcement, there will only be minimal adjustments. However, no information has been provided regarding the nature of the adjustment.
- Entities subject to CT will be able to carry forward excess losses and will be able to utilize losses incurred as of the CT effective date.
- Dividends and capital gains of qualifying shareholding will be exempt from tax. A qualifying shareholding refers to an ownership interest in a UAE or foreign company that meets certain conditions.
- Qualifying intra-group transactions and reorganizations will not be subject to CT.
- Information on other UAE CT exemptions and exclusions will be provided.
- There will be a progressive rate applicable as follows:
- 0% for taxable income up to AED 375,000;
- 9% for taxable income above AED 375,000; and
- A different tax rate might apply for large multinationals that meet specific criteria set with reference to 'Pillar Two' of the Organization for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting project.
- For the above purposes, a multinational corporation is a corporation that operates in more than one country. Earning income from outside its home country without a foreign presence or registration would not make a business a multinational corporation. As per the FTA FAQ document, ”large” refers to a multinational corporation that has consolidated global revenues in excess of EUR 750m (c. AED 3.15 bn) in line with GloBE rules.
Other elements of the CT system
- Relief of double taxation: Foreign taxes will be allowed to be credited against the UAE Corporate Tax payable.
- Transfer Pricing (TP): Transfer Pricing and documentation requirements will apply to UAE businesses with reference to the OECD Transfer Pricing guidelines.
- Fiscal unity and loss relief: A UAE group can elect to form a tax group and be treated as a single taxable person provided certain conditions are met. In this case, only one single tax return will need to be filed per group. The FTA has clarified that tax losses may be offset between group companies, provided certain conditions are met.
Administrative and compliance
- The FTA will be the responsible institution for the administration, collection and enforcement of the CT. The MoF will remain the “competent authority” for exchange of information and bilateral/multilateral agreements.
- Business will need to register and file a CT return. Details for the registration process have not been released.
- The FTA has clarified that the CT return will need to be filed electronically per financial year.
- No advanced or provisional CT filings are required.
- The FTA will provide further information on applicable penalties.
Deloitte remarks and key takeaways
Through the announcement of the FTA, a number of key design features have now been confirmed. At the same time, a number of uncertainties remain. What is clear now is that there will be a broad-based CT system with a statutory rate of 9% (free zones and extraction businesses are out of scope). Whilst the announcement implicates that large multinationals will be taxed at a higher rate, it remains to be seen how this will be implemented from a policy perspective (e.g. increase in tax rate or a domestic minimum tax/parallel tax) is not yet fully clear.
The potential implications can be far-reaching and tax/finance teams should work on developing a roadmap. As a first step, businesses should gain a good
understanding of the proposed changes to fully assess the implications. The
changes may have implications on, or require changes to, the legal structure,
business model, contracting and (transfer) pricing, accounting, profit, systems
and data and organization structure (e.g. tax function).
Our team of tax experts can support you in understanding the potential impact of CT, and how this may affect your specific business. This could involve the following:
- Conduct and deliver technical trainings and workshops to tax and finance teams
- Perform qualitative impact and readiness/maturity assessments covering technical,systems and governance aspects
- Perform quantitative assessment and modeling work
- Provide implementation support from tax technical, accounting and systems perspectives
A detailed commentary will be issued shortly.