United Arab Emirates have announced the introduction of Corporate Income from mid-2023. The finance ministry said on Monday that the new announcement is in a major change of course as the country seeks to diversify its income.

What is Corporate Tax?

Corporate Tax (CT) is a form of direct tax as compared to Value Added Tax (VAT) which is considered as an indirect tax.

Direct Taxes like CT are levied and recovered directly from the businesses on which it is imposed. Indirect taxes like VAT are also levied on businesses. However, the businesses can recover it from their customers. Accordingly, it is the customers who incur the burden of indirect taxes. Businesses cannot pass on the burden of direct taxes to their customers.

Key features of corporate tax

• Individuals will not be subject to corporate tax from employment, real estate, investment in shares or other personal income not related to a UAE trade or business
• No corporate tax will apply on foreign investors who do not carry-on business in the UAE
• Corporate tax will apply on the adjusted accounting net profit of the business
• Free zone businesses that meet all necessary requirements can continue to benefit from corporate tax incentives
• The extraction of natural resources will remain subject to Emirate level corporate taxation
• No withholding tax will apply on capital gains and dividends received by a UAE business from its qualifying shareholdings
• No corporate tax will apply on qualifying intragroup transactions and restructuring
• Foreign tax will be allowed to be credited against UAE corporate tax payable
• Generous loss transfer utilisation rules will be available to businesses

Applicability of Corporate Tax

• applicable to all UAE businesses and commercial activities.
• effective for financial years starting on or after 1 June 2023.
• will be applied across all emirates.
• Free zone businesses subject to UAE CT - CT regime will honour the CT incentives currently offered to free zone businesses that comply with all regulatory requirements and that do not conduct business with mainland UAE.

Rates and Taxation slabs

• 0% for taxable income up to AED 375,000);
• 9% for taxable income above AED 375,000; 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 (BEPS) project.

Exemptions/Exceptions

• Business engaged in extraction of natural resources. However, they will continue to be subject to the tax decrees issued by the respective Emirate.
• Individual's salary or other income (except business income carried under commercial license).
• Dividend and capital gains income earned by UAE entity from its qualifying investments.
• Qualifying intragroup transaction and re-organizations subject to certain conditions.
• Foreign investor's income derived from dividends, capital gains, interest, royalties and other investment returns.

Who is impacted?

Companies based in UAE need to be geared up to adapt to these new changes. The companies need to evaluate the applicability of the provisions, align structure to make it tax efficient in UAE, align policies for related party transactions, book-keeping, etc.

Applicability to foreign persons

Foreign entities and foreign individuals will be subject to CT only if they conduct a trade or business in the UAE in an ongoing or regular manner. Moreover, CT will generally not be levied on a foreign investor's income derived from dividends, capital gains, interest, royalties and other investment returns.

"With the introduction of corporate tax, the UAE reaffirms its commitment to meeting international standards for tax transparency and preventing harmful tax practices," Younis Haji Al Khoori, Undersecretary of the Ministry of Finance, said in the statement.

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