|The UAE Corporate Tax|
In January 2022, the United Arab Emirates announced it would start imposing a federal corporate tax in the UAE. The tax would apply to all UAE businesses beginning on their first financial year on or after 1 June 2023.
The UAE introduced the new federal corporate income tax scheme to comply with internationally established fiscal standards that ensure tax transparency and prevent harmful tax practices. Corporate income taxes can also help the UAE economy. The activation of non-oil-related income is not only in line with the country's vision; it also means more resources the UAE can use on infrastructure development.
The implementation of the new corporate tax regime in the UAE has left many enterprises wondering about its impact on their businesses. Read on for a summary of the corporate tax provisions and how corporate tax can potentially affect UAE businesses.
The UAE Corporate Tax Rate
The UAE corporate tax has the following rates:
- 0%: Levied on taxable income up to AED 375,000
- 9%: Levied on taxable income above the AED 375,000 corporate income tax threshold
- Special rate: A special yet still-to-be-determined corporate tax rate shall be levied on multinational enterprises (MNEs) with consolidated global revenues that exceed AED 3.15 billion. The MNE corporate tax will likely follow the Pillar Two model of the Organization for Economic Cooperation and Development; this recommends a minimum tax rate of 15%.
The Scope of the Corporate Tax
The UAE federal government levies a tax on the business income of the following taxable entities:
1. Any Business With a Commercial License
As a general rule, the corporate tax applies to all businesses engaged in economic activities under a commercial license issued anywhere in the UAE. Contractors, freelancers and other individuals with business licenses are liable for corporate taxes on their business income.
Do you own a business or conduct a licensed economic activity in the UAE? Unless your business qualifies for a specific exemption, you can assume that you must pay corporate income tax.
2. Free Zone Businesses
In the past, it was common for free zone companies to pay nothing in corporate income taxes. Free zones typically offer their resident businesses a renewable, 50-year, 0% corporate tax incentive.
Under the new UAE corporate tax scheme, free zone entities must pay corporate income tax. The 0% and 9% rates apply to free zone companies.
- 0%: The 0% rate applies to qualifying income for free zone entities.
- 9%: The 9% rate applies to any non-qualifying income.
What Does Qualifying Income Mean for Free Zone Businesses?
A free zone entity that earns only qualifying income is essentially an income tax-free company. Qualifying income includes all income:
- Earned from conducting qualifying activities with other free zone entities
- Earned domestically or internationally from business transactions with non-free zone entities, as long as these transactions involve qualifying activities that do not fall under specific exclusions (i.e., excluded activities)
- Up to the de minimis threshold or whichever is lower of AED 5 million or 5% of the company's total revenue, even if such income has been derived from excluded activities
Takeaway: If you want your free zone company to continue enjoying a 0% corporate income tax rate, engage only in qualified activities and avoid excluded activities. Additionally, you should maintain adequate substance and comply with financial reporting requirements.
3. Foreign Entities and Individuals
Any foreign entity or individual that conducts business or trade in the UAE regularly or on an ongoing basis is subject to corporate tax.
4. Banking Sector
All banking operations are subject to the new federal corporate tax scheme. In the past, banks were subject to emirate-level corporate income taxes.
5. Real Estate and Construction
All income from real estate management, development, construction, and brokerage activities are subject to federal corporate tax.
Corporate Tax Exemptions
The following are exempt from the UAE federal corporate tax:
- UAE government entities
- Entities controlled by the UAE government
- Businesses in the extraction of natural resources (e.g., upstream oil and gas enterprises)
- Businesses in the natural resources industry, even those in a non-extractive capacity
- Public-benefit entities and investment funds that satisfy certain qualifying conditions
- Pension and social security funds (public or private) that are subject to government oversight and meet qualifying conditions
- Entities wholly owned and controlled by corporate tax-exempt entities
- All other entities exempted by the government through a special decision
The following incomes are generally exempt from corporate tax:
- Dividends, capital gains and profits realized from group reorganization and intra-group transactions, as long as they or their sources meet certain qualifying conditions
- Employment income, including salaries, wages and other compensation earned from employment in the public or private sector
- Interest income from savings and bank deposits
- Income by foreign investors, including dividends, capital gains, interest, royalties, and other investment returns
- Income by individuals, including dividends, capital gains, returns derived from personal shareholdings and security investments, and real estate investments
Transfer Pricing Rules
In line with the UAE government's thrust to comply with international taxation standards, the new federal corporate tax regime adopts the OECD transfer pricing rules. These OECD transfer pricing guidelines prescribe the arm's length principle to multinational enterprises (MNEs) or organizations that operate in multiple territories or jurisdictions.
Under the new transfer pricing rules in the UAE, intercompany transactions (e.g., the sale of goods and services between two subsidiaries of the same company) must be conducted with unimpeachable independence and according to prevailing fair market valuations.
This helps prevent MNEs from artificially shifting out taxable income from the UAE, a ploy used to evade taxes. It also ensures their tax base in the UAE will reflect the actual scope of their in-country/in-territory economic activity.
In the UAE, OECD transfer pricing rules are mandated for cross-border inter-company transactions. However, they may also apply to domestic transactions.
The UAE Corporate Tax: Business Implications
If you have a commercial license to conduct economic activities in the UAE, you must register for corporate tax through your account on the EmaraTax platform. This is the most crucial first step in complying with the new federal tax rules.
The new transfer pricing rules will affect you if you have multiple subsidiaries that do business with one another. For instance, if you are a plastic pipe company, and your plastic pipe welding subsidiary procures supplies from your pipe manufacturing subsidiary, you must reassess your intercompany arrangements.
You may have to enforce new standard operating procedures and documentation requirements to ensure transfer pricing compliance.
The imposition of the corporate tax itself can make doing business more expensive. Thus, it's critical to ensure your business is classified correctly and can take advantage of all applicable exemptions.
For these reasons, you're encouraged to consult a UAE tax consultant company.