In financial years starting on or after June 1, 2023, the UAE Ministry of Finance will impose a corporate tax on business profits. In a move that will benefit small businesses, the Ministry confirmed that profits up to Dh375,000 will not be taxed.
There will be no corporate tax on personal income from employment, real estate, other investments, or any other income earned by individuals that do not result from business or other commercial activities.
- In addition, as an international headquarters location, a UAE company will not be liable to pay tax on capital gains and dividends received from its qualifying shares. Moreover, foreign taxes will be allowed to be credited against UAE corporate tax due.
- UAE corporate tax rules will have “generous” loss utilization rules and will permit UAE groups to either be taxed as a single entity or to benefit from group relief in respect of losses and intra-group transactions and restructurings.
- For businesses that prepare and maintain adequate financial statements, the UAE corporate tax regime will ensure compliance burdens are kept to a minimum.
- Companies will only need to file one corporate tax return per financial year and will not be required to make advance tax payments or prepare provisional tax returns. According to the OECD Transfer Pricing Guidelines, UAE businesses will be subject to transfer pricing and documentation requirements.
“The UAE is moving gradually from a non-tax environment to a tax environment – that will give the UAE Government additional income to fund the country’s development activities,” said Rizwan Sajan, Chairman of Danube Group. “This comes about four years after the introduction of VAT – on January 1, 2018.
Across the board tax
Until now, UAE’s corporate taxes have only applied to banks and insurance companies. They are taxed at 20 percent. Each emirate has imposed a limited corporate tax on enterprises engaged in the exploration and production of oil and gas at rates up to 55 percent.
Despite the lack of personal income tax in the Gulf, many countries have in recent years implemented VAT (value-added tax) on individuals and businesses, with Saudi Arabia tripling its rate to 15% last year.
UAE’s latest announcement is nothing more than a natural progression of leading economies of the world wanting to set a minimum corporate tax rate. These regulations are intended to prevent corporations – especially those in the technology sector – from having low-tax operations abroad and then paying little in taxes in their home countries.
The effort to reduce corporate tax rates across jurisdictions gained traction after the pandemic broke out and nations suffered severe economic disruptions. The UAE’s move to introduce across-the-board capital gains tax “brings the UAE’s corporate tax regime to be in sync with the global moves,” said a tax consultant.
The GCC remains an attractive jurisdiction for foreign investment because most of the countries in the region have favorable tax regimes. There have been a number of reforms underway in the region to create new revenue streams and reduce dependence on mainstream sources of revenue. Value-added taxes have already been announced in some countries, while other countries use different types of taxes.
According to Jonathan Davidson, founding Partner at the DIFC law firm Davidson & Co., “As the UAE grows as an economy and takes a larger role on the international stage, it makes sense for the authorities to take steps to put in place a transparent system of corporate taxation.
“It is interesting to note that companies trading in free zones and not conducting business in onshore UAE will continue to be exempt. With the digitalisation of government services over the last few years, the administrative burden to businesses to file corporate tax returns will be significantly less than would have been the case in the past. This, seemingly, makes this the right time in the economy’s maturity to take a step that has already been done by other GCC countries.”