UAE: UAE Corporate Tax: It’s time to wake up and smell the coffee!

The United Arab Emirates (UAE) has been known for its tax-friendly policies, amiable compliances and hassle-free residency laws, attracting businesses and individuals from all over the world. The economy has boomed considerably in the past two decades, from a GDP of just USD 42.8 Million in 1983, to USD 503 Million by 2022¹. Much of the credit for this stellar achievement is attributed to its strong leadership and ease of doing business.

However, in response to changing times and relentless push from global organizations for tax transparency, on 31 January 2022, the Ministry of Finance (“MoF”) announced that the UAE will introduce a Federal Corporate Income Tax (“CIT”) on business profits that will be effective for financial years starting on or after 01 June 2023. This was followed by the release of a Public Consultation Document (“PCD”) in April of 2022 before the publication of the CIT legislation on 9 December 2022².

The law stipulates that businesses operating in the UAE must pay a tax rate of 9% on their profits. The tax applies to all entities, with some exceptions such as Government and Government controlled companies, those engaged in extractive and non-extractive natural resources business, investment funds, qualifying public benefit entities and public pension funds. The CIT is updated with current changes in the global tax framework and has graciously accepted the efforts of OECD by including many of the provisions of BEPS Action Plans and the 2 pillar framework. It will be one of the ultra-modern CIT laws, which gives way for many new changes in international taxation, at the same time keeping the inherent compliances and complexity in check. The new law appreciates,

• The nexus rule for taxation of non-residents

• A permanent establishment rule, borrowing the best from both OECD and UN Model Conventions.

• A generous participation exemption for boosting equity investments.

• Specific exemption for non-resident operators of ships and aircrafts in international transportation

• A fixed ratio rule and group ratio rule on interest payments to prevent thin capitalization.

• Transfer pricing (TP) and arm’s length principles inline with OECD TP guidelines

• Foreign Tax Credits and

• General and Specific Anti-Avoidance Rules.

Many businesses operating in the UAE are still coming to terms with the new tax law. However, they are less concerned on its effect on profitability since this is one of the lowest effective tax rates in the world. While 01 June 2023 is just days away, majority of the businesses will have their applicability commencing from 01 January 2024 by virtue of their accounting period. This gives cushion for the ample amount of clarifications and resolutions waited for various aspects of the CIT, especially the one relating to applicability of this tax to free zones.

The general trend is that businesses have hit snooze on key CIT impact study till all the clarifications are released. But since many of the rules are clear, and available publicly, it is high time the businesses wake up and smell the coffee.

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Reference/ Citation

1. World bank, macrotrends.net

2. Federal decree Law No. 47 of 2022 on Taxation of Corporations and Businesses