From June 1, 2023, the Corporate Tax Law will come into effect in Dubai, introducing a new regime for the taxation of companies and businesses. The regulations include a 9% tax rate.
In this article, find out exactly who will be taxed, how, and what exemptions are available.
On December 9, 2022, the UAE (United Arab Emirates) Ministry of Finance published the Law on Taxation of Companies and Businesses. This law creates a new corporate tax regime in the UAE. It will be effective from June 1, 2023, for accounting periods beginning on or after that date. There is a 12-month transition period for companies that compile their financial statements in December to prepare for the new rules. However, anti-avoidance and transition rules will be in place from the day the law is published in the Official State Gazette.
Before that happens, here is a summary of the most important points for you to consider:
- The UAE Ministry of Finance has published a corporate income tax law that will take effect from June 1, 2023.
- The tax rate will be 9%.
- The new corporate income tax regime applies to all companies in the UAE (except for companies that extract mineral resources).
- There are exemptions for certain industries and individuals in free zones can continue to remain tax-exempt if they meet certain conditions.
The main features of the proposed corporate income tax system and its principles
What is a “taxable person” in Dubai?
A “taxable person” is generally considered to be both a UAE resident and a non-resident.
The following persons are considered residents and taxable persons:
- A legal entity incorporated or recognised in the UAE (including the free zones).
- A legal entity registered or recognised outside the UAE but effectively managed and controlled in the UAE.
- A natural person doing business in the UAE.
This means that foreign companies and individuals will have to pay corporate income tax if they operate a business or do business in the UAE on a permanent or regular basis. The tax authority has announced that any activity carried out by a legal entity is considered a “business activity” and therefore subject to corporate income tax.
The following persons are considered non-residents and subject to tax:
- A non-resident may be subject to corporate tax (CT) if it has a permanent establishment (PE) in the UAE, generates UAE-related income, or has a connection to the UAE.
This means that foreign companies with a fixed place of business or a business establishment in the UAE are subject to corporate income tax in the same way as if they were resident in the UAE.
Income from employment
Wages and other income derived from employment activities of individuals, as well as income from private real estate and other investments, are not subject to corporate income tax as long as the individual performs these activities as a private individual and does not require a business licence or permit to do so.
Thus, no tax will continue to be levied on income from employees, nor on income from real estate or capital gains.
Dubai tax rates
From June 2023, companies in the UAE will have to pay a 9% tax.
EXCEPTION: Taxable income that does not exceed the maximum contribution* of AED 375,000 (approx. €95,084.40) will remain tax-exempt.
* This maximum contribution is set by a ministerial decision and is expected to be AED 375,000, but it is not 100% fixed as yet.
Multinational corporations
Although the Ministry of Finance had previously indicated that a higher rate under Pillar Two may be applicable to large international companies, this is not specified in the Corporate Tax Law. However, the document emphasises that the UAE will introduce these rules shortly and that further developments are expected.
Exemptions
There are certain individuals who are exempt from tax in the UAE if certain conditions are met.
These include persons involved in the exploitation of natural resources in the UAE, governments and government-controlled entities, charities, pension or social security funds, and certain investment funds.
There is a possibility that a company incorporated in the UAE and owned and controlled by such a person may also be exempt if it carries out part or all of the activities of the exempt person, holds assets or invests funds for its benefit, or carries out ancillary activities. Some exemptions, including for qualified investment funds, must be filed with the Federal Tax Authority (FTA).
Tax base Dubai
UAE companies are also subject to tax on their worldwide income. However, dividend income and capital gains are exempt from tax, provided that the conditions of shareholdings are met.
The law also provides an exemption for profits from foreign branches if those profits have already been taxed abroad at a rate of at least 9%.
Foreign tax credits are granted for taxes paid abroad on forms of income that are not exempt from UAE tax liability.
Individuals resident in the UAE and subject to CT are taxed only on income derived from business activities in the UAE.
Non-residents are subject to CT on any taxable income connected or deemed to be connected with a permanent establishment in the UAE.
Permanent establishment
Non-residents or even non-residents are considered to have a permanent establishment (PE) in the UAE if they have a permanent establishment. In turn, a PE arises if they have a permanent place of business or an agent in the country. The Corporate Tax Law states that other forms of connections in the UAE that could create a PE are determined by a ministerial decision.
Income earned in the UAE (UAE-sourced income)
The Corporate Tax Law defines various types of income that are considered UAE-sourced income. In general, UAE-sourced income is any income generated by a UAE-resident company. Similarly, income derived from activities carried out in the UAE or from assets located in the UAE or from rights used for economic purposes in the UAE will also be considered UAE-sourced income.
Free zones / Free zones in Dubai / Concept of a “Qualifying Free Zone Person”
The Corporate Tax Law introduces the term “Qualifying Free Zone Person” (QFZP), which is broadly defined as a company or branch registered in a free zone that meets the following criteria:
- Has substance in the UAE
- Generates income (to be determined by a ministerial decision)
- Price requirements met
- Meets all other conditions as determined by a ministerial decision
A QFZP is still subject to corporate income tax, but may benefit from a 0% tax rate on its qualifying income. A QFZP may decide to abandon this preferential regime and will then be subject to the normal corporate income tax rate.
Simply put, the corporate tax rate then also applies to companies in the free zones, which must file a corporate tax return. Provided companies do not do business with the UAE mainland and “other necessary requirements are met”, it may be possible to retain the tax incentives of the free zones. However, the extent to which this is specifically possible cannot be accurately stated at this time, as the Ministry has not provided further clarification. Companies in the UAE’s numerous free zones have long enjoyed tax exemption and full foreign ownership rights, among other benefits.
Taxable income in Dubai
Taxable income is determined based on the income reported in the individual financial statements. However, this is subject to adjustments, including the following:
- Unrealised gains or losses arising in connection with capital items
- Income and related expenses earned by a tax-exempt person in connection with their tax-exempt activities
- Dividend income and other profit sharing from a resident individual
- Dividend income and capital gains under the participation exemption
- Income from a non-resident PE that has been taxed at a rate of 9% or higher
- Income earned by a non-resident from the operation or leasing of aircraft or maritime vehicles in international traffic
- Gains or losses from reorganisations or intra-group transfers of assets and/or liabilities under certain conditions
- Net interest expenses are limited to 30% of EBITDA (earnings before interest, taxes, depreciation, and amortisation)
- Maintenance-related expenses are deductible up to 50% of the amount spent
When limiting interest deductibility, the Corporate Income Tax Act states that the non-deductible amount can be carried forward for a period of 10 years. In the case of related debts, further limitations may apply.
The Corporate Income Tax Act also contains an additional list of non-deductible expenses that include donations, administrative penalties, refundable value-added tax (VAT), dividends, or similar benefits to an owner of a taxable person.
Summarised in simple terms
Taxable income in the UAE is calculated on the basis of accounting profit according to individual financial results. However, this is subject to adjustments, including: unrealised gains or losses, income and costs of a tax-exempt person related to their tax-exempt activity, dividend income, capital gains under the partnership exemption, and income from a branch outside the UAE that has already been subject to tax. Some expenses, such as donations, penalties, or dividends to owners, cannot be deducted. There is also a cap on interest depreciation.
Companies that are registered in a certain free zone and meet certain conditions (e.g., sufficient presence in the UAE and income from qualifying sources) can benefit from a tax exemption on their taxable income.
Tax loss relief in the UAE
Companies can use their tax losses indefinitely to offset up to 75% of their future taxable income under certain conditions. Losses incurred prior to the commencement of tax liability cannot be utilised.
Tax groups in Dubai
A parent company of a group of companies can apply to the Federal Tax Authority (FTA) to form a tax group with its subsidiaries in the UAE. To do so, certain conditions must be met, such as a 95% ownership relationship. Tax losses can also be exchanged between companies if there is a 75% ownership relationship.
Withholding tax in Dubai
A 0% withholding tax is payable on payments made by UAE companies to non-residents deriving income from the UAE. Exceptions may apply to payments made to branches or permanent business establishments in the UAE. The amount of withholding tax may be determined by a government decision.
Administration of companies in the UAE
UAE companies subject to corporate income tax must register and obtain a tax number. Normally, the registration application must be submitted to the Federal Tax Authority (FTA) before the law becomes effective. Further instructions on this are expected.
UAE companies subject to corporate income tax must file a tax return each year and pay any tax due within nine months of the end of the fiscal year. Parent companies of tax groups are only required to file one tax return.
Companies may also be required to submit their financials to the FTA and have their financial statements audited by an auditor or certification body.
Transfer Pricing (TP)
UAE companies must ensure that their transactions with related parties and connected persons comply with the arm’s length principle. The definitions of related parties and connected persons are broader than international practice; even relatedness up to the fourth degree can trigger a relationship. Companies must retain TP documentation (master file and local file) and submit it to the FTA within 30 days of a request. They are also expected to submit a TP disclosure form with the CT return. Companies may also request a pre-pricing agreement.
General anti-abuse and transitional provisions
The Corporate Tax Law contains anti-abuse rules (GAAR) to ignore transactions or arrangements that are primarily intended to obtain a CT benefit. These rules are effective from the date the law is published in the Official State Gazette.
As part of its transition rules, the Corporate Tax Law also indicates that the beginning balance for CT purposes will be the closing balance of the accounting system for the fiscal year immediately preceding the first tax year.
Summary
The new tax regime in the UAE has far-reaching implications for all companies and individuals doing business there. These should begin to examine the impact of these new rules. This includes examining the applicability of these rules, considering the impact on cash flow, reviewing exemption rules, and developing processes and procedures to comply with these rules. As more details are announced through a series of ministerial decisions in the coming months, companies should continue to monitor these developments and prepare for compliance with these rules before they go into effect.
