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Corporate tax new milestone in diversification drive

The new competitive and best in class corporate tax regime, long anticipated since the Emirates rolled out five per cent value-added tax (Vat) on 1 January 2018, has kept a low base to maintain the country’s attractiveness for businesses.

The UAE will be marking a milestone its diversification drive with the introduction of a 9.0 per cent federal corporate tax on business profits starting from June 1, 2023, the Finance Ministry announced on Monday.

For the UAE, which has already set its target for its next 50 years of growth, the move marks a critical shift from its long-held status as a tax-free haven for business and commerce.

The new competitive and best in class corporate tax regime, long anticipated since the Emirates rolled out five per cent value-added tax (Vat) on 1 January 2018, has kept a low base to maintain the country’s attractiveness for businesses.

“Corporate tax will be payable on the profits of UAE businesses as reported in their financial statements prepared in accordance with internationally acceptable accounting standards, with minimal exceptions and adjustments,” the Finance Ministry announced on Monday.

The upcoming tax regime will be amongst the most competitive in the world with a standard statutory tax rate of nine per cent for taxable profits exceeding Dh375,000, and zero per cent tax rate for taxable income up to that level to support small businesses and startups, a ministry said.

Business analysts hailed the new tax regime as a loud and clear message from the UAE about nurturing a transparent and fair financial ecosystem. Nine per cent tax is classified as the lower end of corporate taxes worldwide, they pointed out.

The tax will be levied on all corporations and commercial activities in the country, except for the “extraction of natural resources” which will remain subject to taxation at the emirate level. Businesses will be given ample time to prepare for the introduction of corporate tax, said the ministry.

The new tax regime has been designed to incorporate best practices globally and minimise the compliance burden on businesses, the ministry said.

The corporate tax will apply to all businesses and commercial activities alike, except for the extraction of natural resources which will remain subject to Emirate level corporate taxation.

Under the new corporate tax regime, individuals will not be subject taxation on their personal income from employment, real estate and equity investments or other personal income unrelated to a UAE trade or business.

The tax will not be applied to foreign investors who do not conduct business in the UAE. “Given the position of the UAE as a global financial centre and an international business hub, the UAE will not impose withholding taxes on domestic and cross border payments, or subject foreign investors who do not carry on business in the UAE to corporate tax.

As an international corporate hub, businesses will be exempt from paying tax on capital gains and dividends received from its qualifying shareholdings, and foreign taxes will be allowed to be credited against UAE corporate tax payable.

The impending tax regime will continue to honour the corporate tax incentives currently being offered to free zone businesses that comply with all regulatory requirements and that do not conduct business with mainland UAE.

“As a leading jurisdiction for innovation and investment, the UAE plays a pivotal role in helping businesses grow, locally and globally. The certainty of a competitive and best in class corporate tax regime, together with the UAE’s extensive double tax treaty network, will cement the UAE’s position as a world-leading hub for business and investment,” said Younis Haji Al Khoori, Undersecretary of the Ministry of Finance.

Al Khoori said with the introduction of corporate tax, the UAE reaffirms its commitment to meeting international standards for tax transparency and preventing harmful tax practices.

“The regime will pave the way for the UAE to address the challenges arising from the digitalisation of the global economy and the other remaining BEPS [Base Erosion and Profit Shifting] concerns, and execute its support for the introduction of a global minimum tax rate by applying a different corporate tax rate to large multinationals that meet specific criteria set with reference to the above initiative.”

Recognising the contribution of free zones to the UAE’s economy and competitiveness, the UAE corporate tax regime will continue to honour the corporate tax 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 corporate tax regime will have generous loss utilisation rules and will allow UAE groups to be taxed as a single entity or to apply group relief in respect of losses and intragroup transactions and restructurings.

The UAE corporate tax regime will ensure the compliance burden is kept to a minimum for businesses that prepare and maintain adequate financial statements. Businesses will only need to file one corporate tax return each financial year and will not be required to make advance tax payments or prepare provisional tax returns. Transfer pricing and documentation requirements will apply to UAE businesses with reference to the OECD Transfer Pricing Guidelines.

“The introduction of a corporate tax regime will help the UAE achieve its strategic ambitions and incentivise businesses to establish and expand their activities in the UAE,” said Al Khoori.

He said businesses will be given ample time to prepare for the introduction of corporate tax in the UAE. The UAE Ministry of Finance plans to issue further information on the UAE corporate tax regime toward the middle of the year to help businesses get ready and be fully compliant.

— issacjohn@khaleejtimes.com