The Ministry of Finance of the United Arab Emirates has announced the introduction of a new federal tax on corporations’ business profits. Until recently, this tax has been applied only to banks and insurance companies, and the UAE remained one of the most convenient jurisdictions for international tax planning. Previously, the UAE introduced a value-added tax (with the rate of 5%) on certain goods and services.
The introduction of new taxes is due to the need to diversify state revenues, which today is dependent on the global oil market. According to the UAE Ministry of Finance representatives, introducing a federal corporate tax into the tax system also contributes to countering money laundering and financing terrorism. The Financial Action Task Force (FATF) earlier had discussed the possibility of adding the UAE to the “grey list” as a state taking insufficient anti-money laundering measures.
The new corporate tax rate will be 9 per cent and will affect all companies doing business in the UAE. The exception will remain for companies that receive profit from the extraction of natural resources (it is taxed at the emirate level), as well as companies registered in free zones and not operating in the “onshore” territory of the UAE (i.e., the territories without tax exemptions). The UAE Ministry of Finance intends to keep the 0% rate on taxable income up to AED 375,000 (around $102,000) to support small businesses and start-ups. The 9 per cent rate will therefore apply to income exceeding this amount.
Such income as dividends and interest will not be subject to withholding tax in the UAE. Businesses in the UAE will continue to be exempt from paying taxes on capital gains and dividends received from shareholdings. The new rules also do not affect the income tax exemption for individuals, capital gains tax on real estate and other investments, and other non-commercial income. Taxes of similar nature paid in other jurisdictions may be credited against UAE corporation tax to avoid double taxation. The UAE tax payment system will allow groups of companies to be taxed as single entities.
According to the intention of the UAE authorities, the introduction of a corporate tax will bring the jurisdiction closer to the standards adopted by international organizations (OECD, G20). It is expected that the rate may subsequently be increased to 15 per cent since this is the rate laid down in the global tax reform project. Thus, by raising the corporate tax rate from 0 to 9 per cent for onshore companies, the UAE seeks to find the optimal balance of meeting international standards while maintaining its attractiveness as a regional business centre.
The new corporate taxation rules will apply to financial periods beginning on or after 1 June 2023. 2024 will, therefore, become the first reporting year for corporations. The first federal corporate tax return is to be submitted in 2025.
Businesses will only need to file one corporate tax return each financial year and will not need to make advance tax payments or prepare provisional tax returns. Transfer pricing and documentation requirements will apply to UAE entities in accordance with the OECD Transfer Pricing Guidelines. Further details and conditions of collecting the UAE federal corporate tax will be available in the coming months.