The Ministry of Finance has announced that the UAE will introduce a federal corporate tax on business profits that will be effective for financial years starting on or after 1st June 2023. This announcement follows confirmation by the MOF that the UAE would support the global minimum effective tax rate under the Organization for Economic Co-operation and Development (OECD)/G20 Base Erosion and Profit Shifting (BEPS) 2.0 project.
Effective Date :
The corporate will be effective for financial years starting on or after 1st June 2023. For all companies with a financial year corresponding to the calendar year, corporate tax will be applicable on profit from 1st January 2024 onward. This will give enough time for restructuring if eventually helpful. A business that has a financial year starting on 1 July 2023 and ending on 30 June 2024 will become subject to UAE CT from 1 July 2023 (which is the beginning of the first financial year that starts on or after 1 June 2023).
The standard statutory tax rate on profits will be 9%. However, the tax rate for taxable profits up to AED 375,000 will be 0%. This move is designed to encourage small businesses and startups in the region, and a different tax rate for large multinationals that meet specific criteria set with reference to ‘Pillar Two’ of the OECD Base Erosion and Profit Shifting project.
Slabs rates have not been defined yet. However, this can change in the future. That being said, the UAE corporate tax rate will start as one of the most globally competitive.
If a business has earned taxable income of AED 400,000 in a given financial year, The CT liability will be calculated as follows:
Taxable income of AED 0 – AED 375,000 at 0% = AED 0
Portion of taxable income exceeding AED 375,000 (i.e. AED 400,000 – AED 375,000 = AED 25,000) at 9% = AED 2,250
The UAE CT liability for the year will be AED 0 + AED 2,250 = AED 2,250
Scope and exemptions:
CT will apply to all persons (individual and corporate) carrying out business activities under a commercial business license in the UAE. Businesses engaged in the extraction of natural resources will remain subject to the current Emirate level tax rules and will be outside the scope of CT. Banking operations, including those currently taxed at the Emirate level, will be subject to CT. Dividends and capital gains earned by a UAE business from its qualifying shareholdings, as well as qualifying intra-group transactions and reorganizations subject to certain conditions being met, will be exempt from CT. Information on other CT exemptions and exclusions will be provided in due course.
There will be no withholding tax applicable on domestic and cross-border payments of any nature.
Free zone businesses will be subject to UAE CT, but the UAE CT regime will continue to honour the CT incentives currently being offered to free zone businesses that comply with all regulatory requirements and that do not conduct business with mainland UAE.
The UAE does not currently intend to introduce personal tax and the remit of the CT framework will not apply to individuals and their personal income unless the individual holds (or is required to hold) a commercial license or permit (e.g., freelancers).
A UAE group of companies can elect to form a tax group and be treated as a single taxable person, provided certain conditions are met
A UAE tax group will only be required to file a single tax return for the entire group.
To speak to us in relation to the new Corporate Tax, please feel free to contact one of our Consultants.