By Mourad Chatar and Sarah Bahous, Partners at Value Square, Dubai
On January 31, the United Arab Emirates’ Ministry of Finance announced the implementation of a federal corporate tax regime at a standard nine percent rate, which will apply to relevant businesses from June 2023.
While complying with international standards, UAE has very carefully balanced its obligations and interests to remain a location of choice for foreign direct investments in the Middle East.
The competition for being a regional business hub is fierce given that giant neighbor Saudi Arabia also has set up initiatives to own a large portion of the market.
With a corporate tax at nine percent, large deduction and tax losses rules, and generous foreign tax credits, UAE is increasing its attractiveness as a compliant yet friendly tax country. In comparison, Saudi Arabia’s corporate tax rate is 20%; Egypt’s is 22.5%, Oman and Kuwait offer a 15% rate, and Qatar’s is 10%.
When will UAE’s corporate tax regime become effective?
The new corporate tax regime will become effective for financial years starting on or after June 1, 2023.
In other words, for a business with a financial year starting on January 1 (calendar year), the first-year subject to corporate tax will be 2024 to be declared in 2025 via a single corporate tax return, which should be filed electronically with prior registration. Similar to other taxes in UAE, businesses will be subject to penalties for non-compliance. The penalty regime will be released later on.
Although there is plenty of time to prepare, depending on the size and business activities of the MNE, the assessment, implementation, and post-implementation of corporate tax processes and procedures is not always a walk in the park. It is recommended to plan for it as early as possible. Additional guidance and clarifications will be released later.
What is the scope of UAE corporate tax regime?
All UAE businesses will be subject to corporate tax except those in the extraction of natural resources i.e., oil and gas. The banking, as well as the real estate sector, will be subject to UAE corporate tax.
Based on the initial MoF guidance published, the UAE corporate tax regime would be residence-based with taxation of worldwide profits of UAE resident businesses. Nonresidents would be taxed on their UAE-sourced business income.
In UAE, most business activities require a business license or permit to carry out commercial, industrial, or professional activity. A business would be deemed resident in UAE for corporate tax purposes based on the place of incorporation or registration, or the place of effective management and control.
In terms of base, the corporate tax would be applied on the accounting net profit of a business after adjusting for certain items, which will be specified later in the corporate tax law. We could typically think about tax-deductible versus accounting depreciation or provisions.
The tax return will hence be based on the amount of business profits reported in the financial statements in accordance with internationally acceptable accounting standards.
The corporate tax rates will be progressive with 0% for taxable income up to AED 375,000 and nine percent above AED 375,000. A different tax rate of most probably 15 percent would be applied for large multinationals that have consolidated global revenues above EUR 750m (c. AED 3.15bn).
The corporate tax base would exclude dividends and capital gains earned by UAE businesses under certain conditions, yet to be specified in the law.
Finally for all payments such as dividends, interest, royalties, UAE withholding tax will not be applicable on domestic and cross-border payments of any nature under the UAE corporate tax regime.
UAE has opted for a simple corporate tax regime that would be easy for taxpayers to manage but also the federal tax authority, which will oversee the administration, collection, and UAE corporate tax law enforcement.
Tax consolidation, losses, and credits
The UAE corporate tax regime will foresee broad usage of tax losses carried forward against taxable income under certain conditions.
In addition, a UAE group of companies would have the option to form a tax unity and be treated as a single taxable entity bringing de facto tax consolidation in the country.
In case of foreign corporate tax paid on UAE taxable income, it would be allowed as tax credit against the UAE corporate tax liability.
Transfer pricing requirements
It was anticipated that UAE would also include the transfer pricing reporting obligations within its corporate tax regime like most neighboring countries did.
UAE has kept it simple and straightforward. Transfer pricing rules and documentation requirements will be fully aligned with OECD transfer pricing guidelines i.e., master file and local file.
More details are needed on the potential exemption of qualifying intra-group transactions.
Concluding remarks
Once again, the UAE demonstrates its ability to wisely balance its desire to comply with international standards while maintaining attractiveness as a regional business hub. A corporate tax rate at nine percent is a single-digit rate that most operators would find perfectly acceptable. Though, the jump from 0% to 9% is significant and MNEs must factor that into strategic business plans.
The information shared by the UAE finance ministry is an initial introduction in advance of legislation, which is being finalised and could be subject to change. Additional technical details and other specifics of the UAE corporate tax regime will be made available in the following months.
It is recommended to perform initial high-level impact assessments followed by detailed analysis once additional guidance is released. Subsequently, MNEs operating in UAE would be able to make the appropriate decisions for a tailored implementation and post-implementation plan for their organizations.
The corporate tax return filing is just the tip of the iceberg for a smooth compliance season. The real battle is finding the right talent to help make the transition, given corporate tax and transfer pricing specialists are a scarce resource in the region.
Be the first to comment