Corporate TAX: UAE Aligning Its Strategies With Global Trends

The landmark corporate tax regime, which came into effect on June 1, 2023, marks a game-changing reform for the UAE in aligning with global trends towards a minimum corporate tax regime, while positioning the emirate as a more attractive location for businesses to expand into or establish headquarters.

Rolled out by the Federal Tax Authority in the aftermath of the introduction of value-added tax (VAT) back in 2018, the corporate tax regime also seeks to further reduce the second-largest Arab economy’s dependence on oil revenue, while keeping the country competitive.

The reform, which has far-reaching implications for the business ecosystem and the economic growth, applies to all businesses and commercial activities in the UAE, excluding the extraction and non-extraction of natural resources, which will continue to be subject to Emirate-level corporation tax.

Global best practices

Designed to incorporate best practices globally and minimise the compliance burden on businesses, the new tax is the lowest barring Bahrain. The tax rate for UAE businesses is nine per cent — and is calculated on the taxable profits, not the gross revenue of the business. Profits up to the sum of Dh375,000 ($102,112) will not be taxed, in a bid to support small enterprises. Economists argue that while this major reform will affect a large number of businesses operating across most sectors, it is unlikely to have a negative impact on the UAE’s standing as a competitive business hub and a sought-after investor destination.

Tax transparency

Experts argue that the new tax regime reaffirms UAE’s commitment to meeting international standards for tax transparency and preventing harmful tax practices. However, this law is only subject to businesses with a turnover or gross income which exceeds Dh1 million per year, which is equivalent to about $270,00. By creating a simplified corporate tax system, the UAE will continue to foster an attractive business environment that supports the growth of small businesses, startups, and the overall economy.

While the introduction of nine per cent corporate tax rate marks a significant shift in the UAE’s tax-free haven status, it still is significantly lower than the global average. According to data, as of 2022, the worldwide average corporate tax rate stood at around 23 per cent.

Medium-sized firms

The tax reform has implications for medium-sized companies as it can considerably affect their profitability and available funds for expansion, investment, or other business activities, tax pundits said. It imposes an “administrative burden" for medium-sized companies given they must establish internal systems and processes to track taxable activities, maintain accurate records, and file tax returns with the appropriate authorities in the UAE. This potentially requires additional resources and expertise and the incurrence of additional costs.”

The UAE Ministry of Finance recently announced that businesses and individuals that generate annual revenues of up to Dh3 million will be eligible to benefit from small business tax relief, which will be available for financial years beginning on or after 1 June 2023. The aim behind small business relief is to support small businesses that provide goods and services and operate within the UAE. If the business’s revenue exceeded Dh3 million in a prior tax period, then small business relief will not be available. Therefore, it is likely that medium-sized companies will not profit from such relief.

“Adhering to corporate tax compliance is a responsibility of all taxable persons to support the implementation of the corporate tax system in the UAE, which is in line with the highest global standards,” according to Younis Haji Al Khoori, Under-secretary of the Ministry of Finance.

Optimising tax liabilities

They contend that it is crucial for medium-sized companies to seek expert advice to assist with incorporating tax planning strategies to optimise their tax liabilities and ensure sustainable growth.

“This may mean that businesses need to adjust their pricing models, increase revenue streams, or identify cost-saving measures to offset the impact of the tax. This could involve passing on some of the tax burden to customers through price adjustments or exploring alternative markets to maintain profitability,” accordingh to a tax expert.

Mahar Afzal, Managing Partner at Kress Cooper Management Consultants, said corporate tax policies are good for emerging businesses and SMEs in the UAE as they will streamline operations, ensure compliance on tax laws and foster transparency in their day-to-day operations.

“The nine per cent corporate tax is one of the lowests in the world and it reaffirms the UAE's openness to trade and supportive ecosystem positioning the emirate as the premier hub for business and investment,” he said.

Scope of Corporate tax

The tax system is applicable to all businesses and commercial activities operating within the seven emirates. There are certain exceptions:

• Businesses operating in the extraction of natural resources. These will continue to be subject to the tax decrees issued by the respective Emirate

• Individuals earning income in their personal capacity (i.e. salary, investment income) as long as the income generating activity does not require a commercial license

• Businesses registered in Free Trade Zones, provided they comply with all the regulatory requirements, and that do not conduct business with Mainland UAE

Exempt income

The following income in general is exempt from income Tax:

• Dividend income earned by UAE company from its qualifying shareholdings (to be defined in the law)

• Capital gains

• Profits from group reorganization

• Profits from Intra-group transactions

There will be no UAE withholding tax on domestic and cross-border payments. Considering the exempt income scheme, it can be anticipated that the law shall include a participation exemption or similar principles commonly seen in international markets and businesses would need to evaluate if they will be able to meet the prescribed conditions (if any) to avail the exempt income scheme.

The corporate tax is applicable for financial years starting on or after June 1, 2023. This means that any company whose fiscal year starts on June 1, 2023 should expect to file its first tax return towards the end of 2024.

Firms operating on a calendar-year basis will be subject to corporate tax starting on Jan. 1, 2024 with the filing likely due towards mid-2025, which provides a generous period to prepare for the change.

Roberto d’Ambrosio, Chief Executive Officer at Axiory Global, said the nine per cent standard tax rate to be applied to the accounting net profits of taxable entities/persons, though being one of the lowest in the world.

“The new corporate tax is not to be underestimated in terms of the impact on the profitability of the businesses it will be applied on, but I do think that this move by the UAE leadership was timely and, as highlighted above, wisely taken, besides being no further deferrable,” he said.

Non-taxable businesses

The federal tax system is applicable to all businesses and commercial activities operating within the country’s seven emirates, with several exceptions. For example, businesses operating in the extraction of natural resources, predominantly upstream oil and gas companies, will continue to be subject to the tax decrees issued by the respective emirate, rather than to the new corporate tax.

Charities and other public benefit organisations will also be exempt, provided that an exemption application is made to the finance ministry and approved by the cabinet.

Another exemption will apply to wholly government-owned UAE companies that carry out specified activities, provided that they are approved by the cabinet. Public and regulated private social security and retirement pension funds; and investment funds that are organised as flow-through limited partnerships are also exempt.

Regulated investment funds and real estate investment trusts (REITs) can apply for exemption if they meet certain requirements.

The corporate tax will also not be levied on individuals earning income on a personal capacity, such as salary or investment income, as long as the income-generating activity does not require a commercial licence.

Another exemption applies to businesses registered in the country’s many Free Trade Zones, provided they comply with all the regulatory requirements and do not conduct business with mainland UAE. Dividend income earned by a UAE-based company from qualifying shareholdings, capital gains, profits from a group reorganisation and intra-group transactions will be exempt from the corporate tax.There will also be no withholding tax on domestic and cross-border payments.

In a significant shift, foreign banks, which have been operating under Emirate-level banking tax decrees, will now be subject to the Federal Tax Law, according to KPMG. Local banks, like other businesses, will be subject to the new corporate tax.

The new corporate tax regime introduces a tiered system with three rates.

All annual taxable profits that fall under a threshold of Dh375,000 will be subject to zero rate, while all taxable profits above that threshold will be taxed at 9 percent.

At the same time, all multinational enterprises with a consolidated global revenue over Dh3.15 billion ($857.7 million) will be subject to different rates based on the OECD’s Base Erosion and Profit-Shifting rules.

Accumulated taxable losses will be allowed to offset future taxable profits and taxable entities will be allowed to take the foreign corporate tax paid on UAE taxable income as a credit against annual tax liability.

Zero rate for Free zones

In line with its commitment to companies registered in Free Trade Zones, the UAE will levy a zero per cent corporate tax rate or award an exemption for periods of up to 50 years with exemptions varying across different free zones provided that such entities do not conduct business with the mainland.

However, all free zone entities will be required to register and file an annual corporate tax return. According to tax experts, businesses with presence in both the mainland UAE and Free Trade Zones as well as those operating under the dual license scheme should consider the impact on their operating model. They said a number of points remain unanswered such as what constitutes Qualifying Income, the treatment of transactions between Free Zone entities and group entities located in mainland UAE, and whether the election to become subject to regular CT in the UAE is irrevocable

As four of the six GCC countries already levy corporate taxes at higher rates, the UAE’s move is not likely to have an adverse impact on its attractiveness as a business destination in the region.

Saudi Arabia taxes resident capital companies and non-residents carrying out business activities in the kingdom at 20 per cent. Kuwait and Oman apply a 15 per cent rate on corporate profits, while Qatar levies a 10 per cent tax. Bahrain limits its 46 per cent corporate tax to activities such as exploration, production or refining of hydrocarbons, while all other companies enjoy a zero per cent rate.

ALL YOU NEED TO KNOW ABOUT CORPORATE TAX

How to register for corporate tax?

Businesses subject to corporate tax are required to register and obtain a tax registration number through EmaraTax digital tax services platform. The registration application must be submitted to the Federal Tax Authority (FTA).

The corporate tax regime is based on a self-assessment principle, which means businesses are required to ensure that the documents submitted to the FTA are correct and comply with the law. Taxable businesses must file a tax return to the FTA no later than nine months after the end of the financial year. The parent companies of tax groups should file one tax return to the authority on behalf of the whole group. Entities that intend to form a corporate tax group are required to register individually first, and then, at a later date, they will be able to apply to form a corporate tax group. The tax is applicable for financial years starting on or after June 1, 2023.

Who are exempt?

As per the UAE Ministry of Finance, several exemptions are offered for businesses operating in strategic sectors.

Under the new CT regime, businesses are categorised as Taxable, Exempt or Qualifying Free Zone Persons (QFZP) and must assess if they fall under these categories and register accordingly. Certain exempt entities must still apply and receive approval.

How are the three categories affected by the CT regime:

Taxable person

A taxable person shall be either a resident or non-resident person:

— issacjohn@khaleejtimes.com