income tax

UAE's New Corporate Tax: Key Changes and Impacts for Businesses

Introduction

The United Arab Emirates (UAE), known for its opulent lifestyle and stunning skylines, is moving toward the implementation of a corporate tax on business earnings generated within its jurisdiction. This initiative signifies a notable change for a nation historically recognized as a tax-free haven.

Factors Leading to the Corporate Tax Introduction

As a participant in the Organization for Economic Co-operation and Development (OECD) Inclusive Framework, the UAE is advancing towards establishing a federal tax system. This initiative aims to:

  • Align with global minimum effective tax standards.
  • Increase overall budget revenues, predominantly derived from taxes on natural resource extraction.

The upcoming tax regulations will adhere to international standards, facilitating integration into the global tax framework.

Announcement of Federal Corporate Tax

In January 2022, the Ministry of Finance declared the introduction of a Federal Corporate Tax (CT) on the net profits of businesses. This tax will take effect on either 1 July 2023 or 1 January 2024, subject to the finalization of the proposed regulations. Key points from the consultation draft include:

Application of Corporate Tax

The Corporate Tax will be applicable to:

  • All businesses and individuals operating under a commercial license in the UAE.
  • Businesses in free zones will retain current incentives, maintaining a 0% corporate tax rate.
  • Income sourced from mainland UAE, excluding passive income such as interest, royalties, dividends, and capital gains from holdings in mainland companies.
  • Banking operations.
  • Companies engaged in real estate management, construction, development, agency, and brokerage.

Corporate Tax will not apply to:

  • Income earned by individuals that does not qualify as business income.
  • Passive income including dividends, capital gains, interest, and royalties received by foreign investors.
  • Dividends and capital gains from selling shares in foreign and UAE companies will be exempt under specific conditions, mainly requiring that the UAE shareholder owns at least 5% of the shares.
  • Businesses involved in natural resource extraction, which remain subject to existing emirate-level corporate taxation.

Corporate Tax Rate Structure

The corporate tax rates are established as follows:

  • Taxable income up to AED 375,000: 0%
  • Taxable income exceeding AED 375,000: 9%

Important Note: Cross-border income taxable in the UAE will also adhere to Double Taxation Avoidance Agreements (DTAA).

Overview of UAE Free Zones

The UAE has established numerous free zones across various emirates to foster economic growth, contributing roughly 30% to the nation’s Gross Domestic Product (GDP). These 45 free zones have significantly facilitated the growth of non-oil external trade, creating job opportunities and enhancing knowledge development. Notable features of these free zones include:

  • 100% foreign ownership (in contrast to mainland companies, which require 51% UAE national ownership).
  • Total repatriation of profits.
  • Complete exemption from corporate and import/export taxes.
  • Access to vibrant business communities and modern infrastructure.
  • Independent regulatory frameworks.

While all Free Zone entities are subject to the CT law, Qualified Free Zone Persons (QFZPs) can benefit from a 0% rate on qualifying income. Any non-qualifying income, which generally includes most mainland transactions (apart from select warehousing and distribution activities), is taxed at 9%.

It is essential to recognize that transactions within UAE free zones are limited to intra-zone activities and external trade, with dealings in the mainland UAE prohibited.

Conclusion

The UAE government is actively seeking feedback from the public and stakeholders on the draft consultations regarding the federal corporate tax rate. At a proposed rate of 9%, this remains highly competitive compared to other jurisdictions, while still offering tax incentives for businesses in free zones. Consequently, companies may need to reevaluate their corporate structures to optimize potential tax benefits.