Corporate tax (CT) is a form of direct tax levied on the net income or profit of corporations and other entities from their business. Corporate Tax is sometimes also referred to as “Corporate Income Tax (CIT)” or “Business Profits Tax” in other jurisdictions.
- Brief: Over the past few years, the UAE has undergone significant tax changes aimed at modernizing its tax system, adhering to international best practices, and expanding its revenue sources. These changes include the introduction of Value Added Tax (VAT) in January 2018, followed by the implementation of economic substance rules (ESR) and Country-by-Country Reporting (CbCR) regulations in April 2019. The UAE has been through a series of tax reforms in the last few years to align itself with international markets and diversify its revenue.
- Scope of the CT: The UAE has introduced a federal tax system that is applicable to all businesses and commercial activities operating within the seven emirates. However, there are certain exceptions:
- Businesses operating in the extraction of natural resources. These will continue to be subject to the tax decrees issued by the respective Emirate
- Individuals earning income in their personal capacity (i.e. salary, investment income) as long as the income generating activity does not require a commercial license
- Businesses registered in Free Trade Zones, provided they comply with all the regulatory requirements, and that do not conduct business with Mainland UAE
It is interesting to note that the foreign Banking sector, which has been operating under the Emirate level Bank tax decree will now be subject to the UAE Federal Tax Law. The impact of CT on the Emirate level banking tax decree will be communicated in due course. This will be a significant shift for both branches of foreign Banks, that will need to switch to the new Law and for local banks who similar to other businesses will now be subject to corporate tax.
- Rates: The announced UAE CT regime introduces a tier system with 3 rates:
- All annual taxable profits that fall under AED 375,000 shall be subject to zero rate.
- All annual taxable profits above AED 375,000 shall be subject to 9% rate.
- ALL MNEs that fall under the scope of Pillar 2 of the BEPS 2.0 framework (i.e. consolidated global revenues in excess of AED 3.15 billion) shall be subject to different rates as per OECD Base Erosion and Profit-Sharing rules.Taxable profits are the accounting profits subject to certain adjustments.
Taxable profits are the accounting profits subject to certain adjustments.
- Exempt Income: The following income shall be in general exempt from income Tax:
- Dividend income earned by UAE company from its qualifying shareholdings (to be defined in the law)
- Capital gains
- Profits from group reorganization
- Profits from Intra-group transactions
There will be no UAE withholding tax on domestic and cross-border payments.
Considering the exempt income scheme it can be anticipated that the Law shall include a participation exemption or similar principles commonly seen in international markets and businesses would need to evaluate if they will be able to meet the prescribed conditions (if any) to avail the exempt income scheme.
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