Introduction of Corporate Tax UAE in 2023

The UAE is planning to introduce Corporate income tax from January 1, 2023

In January 2022, the Ministry of Finance announced the introduction of the corporate tax UAE from the following year. Although the information is not complete yet, we do have enough data to know what it is about. This tax will apply to certain people and companies that meet the criteria established by the said ministry.

In this article, we explain the details of this new tax, as well as the current tax status in the UAE. Likewise, we will give details of the exemptions and the rates of said tax. Let us see:

1. What is a corporate tax in UAE?
2. UAE corporate taxes
3. The implementation of VAT in the UAE
4. Corporate tax UAE today
5. How can we help you understand the Corporate tax UAE application?

1. What is a corporate tax in UAE?

The UAE is planning to introduce income tax from January 1, 2023. This announcement was made by the emirates Ministry of Finance in January 2022. This tax is levied on the net income of corporations and other spin-off entities. Therefore, it will apply to UAE businesses, except for natural resource extraction.

However, foreign companies or corporations will only have to pay this tax if they carry out regular activities in the territory. In addition, the application of the Corporate tax UAE will be equitable for all categories of profits and other income. Likewise, the financial statements of the company will be taken into account, according to international accounting standards.

1.1 Objectives of the UAE corporate tax 2023

The main objectives of the implementation of the Corporate tax UAE (CT) are as follows:

• Continue to be one of the global leaders in doing business and investing.
• Meet their strategic objectives through accelerated development.
• Affirm their commitment to comply with international standards of fiscal transparency.
• Continue to prevent inappropriate tax practices.

One of the conceptions about the TC is that it represents an important step for the diversification of income for the budget. In addition, it will be based on the best international financial practices. Likewise, the authorities have announced that they are guided by a series of legislative principles.

These principles are the following:

• Alignment with modern financial practices that will help in adapting to social and economic circumstances.
• Certainty and simplicity of UAE federal corporate tax rules to support businesses.
• Fair and equitable treatment for all types of businesses.
• Transparency in operations and related information.

In this way, the local government establishes a competitive CT that adheres to international standards.

1.2 What will be the scope of the UAE federal corporate tax?

The following entities, processes, and persons must contribute to the federal corporate tax UAE:

• All persons or entities that have a license to conduct business in the United Arab Emirates.
• Foreign persons or entities that carry out commercial activities in the country on an ongoing basis.
• Companies established in free zones. However, the current incentives will remain in place for companies that comply with the regulations.
• Those companies that are dedicated to various real estate operations.
• Banking operations.

1.3 Who will be exempt from UAE corporate taxes?

Corporate tax UAE payments are going to be as follows:

• Corporations that work in the extraction of natural resources. These will continue to be under the current tax criteria in the UAE.
• The federal government and each emirate and its departments, authorities, or public institutions.
• Wholly government-owned companies carrying out a sovereign activity, which are included in cabinet decisions.
• Public charities in the list of cabinet decisions and applying to the Ministry of Finance.
• Retirement pension and social security fund in public and private sectors.
• Real estate and regulated investment funds that meet certain criteria.
• Also, profits made by an emirate company from its authorized shareholdings.
• Intragroup transactions that meet the established conditions.
• Nor do they apply for this tax, individual salaries, and other labor benefits, both in the public and private sectors.
• Income from royalties, dividends, capital gains, interest, or investment income from a foreigner.
• Interest and income received by a person from bank deposits or savings plans.
• Investments in real estate owned by an individual.
• The gains obtained by natural persons for shares or other securities, only in a personal capacity.

Therefore, there is a wide variety of exemption advantages for certain taxpayers and benefits.

1.4 What will the UAE corporate tax rate be?

The corporate tax rate UAE was established by the Ministry of Finance as follows:

• A 0% rate for taxable income up to AED 375,000.
• A 9% rate for income over AED 375,000.
• Another rate is not specified for the income of multinationals. In this case, it is only for those that meet the criteria of the OECD Tax Base Erosion and Profit Shifting Project.

In addition, the Federal Tax Authority (FTA) is the entity that will administer, collect and execute the corporate tax (CT). Therefore, there is an expectation regarding the characteristics, registration, and presentation of this tax.

1.5 Other notable features of UAE corporate tax 2023

Some particular characteristics also apply to the corporate tax UAE; they are the following:

• To obtain a CT reduction in the following fiscal year, companies can provide proof of operating losses. However, they must do so from the date the said tax is implemented.
• Also, companies can form a tax group to register as a single entity. However, they must comply with the conditions and regulations imposed in the corporate taxes. In this way, this tax group can make the payment of taxes on behalf of each member.
• A company can credit the income tax paid abroad against the CT. This is due to the more than 130 taxation treaties in which the UAE participates.
• In addition, each of the UAE companies will have to comply with transfer pricing rules and documentation requirements. These are those specified in the Organization for Economic Corporation and Development (OECD).

In this way, the new law of UAE corporate tax 2023 offers certain advantages for individuals and companies.

2. UAE corporate taxes

Until now, the UAE does not have national corporate tax but rather a tax determined on a territorial basis. In this way, each of the emirates has its tax decrees. In addition, some of them have established banking tax decrees for branches of foreign agencies.

Also, some of these decrees specify the payment of ISR at progressive rates that can reach 55%. In the case of foreign bank branches, the payment of this type of tax is a fixed rate of 20%. However, these types of taxes are generally applied to upstream oil companies, as well as foreign banks.

On the other hand, companies located in free zones are subject to their specific regulations and standards. Commonly, such companies enjoy tax exemptions in terms of corporate taxes between 15 and 50 years. Therefore, many of the companies registered in the UAE are not subject to tax filing at present.

Thus, issues relevant to TC, such as deductibility or double taxation, are limited from a national perspective.

3. The implementation of VAT in the UAE

Within the CCG there were discussions for more than 10 years about the implementation of the Value Added Tax (VAT). However, in 2016, the UAE creates the Federal Tax Authority, to manage taxes. From that moment on, this government institution handles special aspects and VAT.

Following IMF recommendations to improve the income of the GCC governments and manage fiscal deficits, the countries of the bloc introduce VAT. In this way, countries could potentially obtain between 1.5 and 2% of GDP with a VAT of 5%. In addition, the GCC countries established a joint legal framework for the creation of special taxes.

These would apply to goods considered harmful to health and the Value Added Tax for the importation and supply of goods and services. In this way, the United Arab Emirates established 2 federal taxes:

• A 100% tax on tobacco products and energy drinks.
• A 50% tax on carbonated drinks.

This would take effect from October 2017 but in December 2019 it was extended as follows:

• Tax for electronic devices for smoking and drinks of 100%.
• Tax for sweetened beverages of 50%.

In addition, from a UAE income tax 2018 of 5%, as per IMF recommendations.

4. Corporate tax UAE today

Currently, there is no Corporate tax UAE at the federal level, although there is a limited direct tax in some emirates. This is commonly applied to oil and gas companies, 55%. Also, as mentioned above, foreign bank branches must declare a 20% tax.

There are also free zones, in which companies enjoy tax exemption.

4.1 The modernization of tax rules in the UAE

The UAE is in a constant effort to align its tax rules with international standards. To this end, it has been taking the necessary measures, improving fiscal transparency, and facilitating access to said information. In this sense, the changes began through the BEPS (Base Erosion Profit Shifting) project.

This project belongs to the Organization for Economic Cooperation and Development (OECD) and seeks to curb tax avoidance. In addition, another objective is to reformulate fiscal rules to avoid ambiguities and legal loopholes. Thus, it tries to minimize or avoid the transfer of profits of multinationals from environments with high tax rates to low or zero taxes.

4.1.1 Implementation of tax policies in the UAE

The UAE has tax treaties with several countries in the world, in which double taxation treaties stand out. Thanks to this type of treaty, eliminates double taxation and allows the exchange of tax information.

In the same way, the country participates in a reporting standard that allows the exchange of information on foreign accounts with the respective authorities. Furthermore, the UAE ratified in 2018 the agreement on Mutual Administrative Assistance in Tax Matters with the OECD. In addition, the country has been part of the BEPS since May 2018, a project in which more than 130 countries participate.

In this way, they acquired the commitment to establish 4 standards for this project. These standards are the following:

• Improve mechanisms for conflict resolution.
• Neutralize harmful practices.
• Fight against treaty abuse.
• Transfer pricing documentation and reporting.

Likewise, in the same 2018, they sign and then ratify the Multilateral Competent Authority Agreement. In this way, they reinforce the Common Reporting Standard and comply with several of the measures established by BEPS. In that same year, to comply with the commitments with the OECD, they sign the “bilateral instrument”.

Thus, through this agreement, the UAE is committed to fighting base erosion and profit shifting. In addition, thanks to this, the UAE can modify double taxation treaties without having to reach bilateral agreements. In addition, the country formulated initial substance measures and a cabinet resolution on country-by-country reporting in 2019.

5. How can we help you understand the Corporate tax UAE application?

As of January 1, 2023, the application of the federal corporate tax UAE will begin throughout the territory. Therefore, both companies and individuals must be attentive to the criteria that define taxpayers. In this way, they will be able to ensure that from that date, they must begin to comply with this process.

In addition, you must be aware of new information that may arise, as there are still points to be clarified. However, with the assistance of our professional lawyers, you may receive the answer to your concerns. In addition to this, we offer assistance in the following legal areas:

• Commercial Corporate Law
• Family Law
• Commercial Properties
• Criminal Laws
• Divorces
• Construction Laws
• Labor Laws
• Financial Laws
• Immigration Laws

If you want to know more about the corporate tax in UAE that will be implemented, we can help you. Simply contact us through our telephone number +971 433 16 688, during our office hours. In the same way, you have at your disposal the email [email protected].

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