By Ghulam Haider
Businesses will become subject to UAE Corporate Tax from the beginning of their first financial year that starts on or after 1 June 2023 with a standard levy rate of 9 per cent for taxable profits exceeding Dhs375,000.
However, the profits up to and including that threshold will be taxed at a 0 per cent rate to support small businesses and start-ups.
The Ministry of Finance (the “Ministry”) confirmed the Federal Decree-Law on Taxation of Corporations and Businesses is an important milestone in building an integrated tax regime that supports the strategic objectives of the UAE and enhances its global economic competitiveness, as well as provides the national economy with sufficient flexibility to deal with and support international financial systems within the framework of the UAE’s established partnerships.
The Ministry noted that the Corporate Tax regime has been designed in line with global best practice to both promote investment and ensure the principles included in the law are widely accepted and understood. Importantly, the principles of fairness and equity across sectors were at the forefront of the design of the Corporate Tax regime, given the UAE’s diverse economy and the importance of driving sustainable development.
To this end, the Ministry involved relevant stakeholders through public consultation and took into account feedback and views in the final design of the Corporate Tax regime. The Ministry added that the 0 per cent threshold for taxable profits up to and including Dhs375,000 has been included in recognition of the vital role of start-ups and small businesses in the UAE’s economy, and the 9 per cent standard rate ensures that the Corporate Tax regime is amongst the most competitive in the world and will strengthen the UAE’s position as a global business and financial centre.
The Corporate Tax Law reflects the UAE’s support for the OECD Inclusive Framework on Base Erosion and Profit Shifting in its commitments to introducing a global minimum tax for multinationals, enhancing tax transparency and preventing harmful tax practices. Exemptions Exemptions from Corporate Tax are highly targeted. Natural resource extraction activities in the country are exempt from Corporate Tax; however, they remain subject to existing local emirate-level taxation.
Other exemptions are available to organisations such as government entities, pension funds, investment funds and public benefit organisations due to their vital importance and contribution to the social fabric and economy of the UAE. In recognition of the fundamental role of free trade zones in driving the nation’s economic transformation, the existing free zone entities will be eligible to benefit from a 0 percent Corporate Tax rate on qualifying income.
Corporate Tax compliance and administration requirements have been tailored to suit different categories of taxpayers, in recognition of the diversity of businesses which will come within the scope of the new Corporate Tax regime. Additionally, the Corporate Tax regime provides generous relief for intra-group transfers and restructurings, and allows group companies to use each other’s available tax losses.
Under the provisions of the Corporate Tax Law, Corporate Tax will not be applied to salaries or other personal income from employment, whether it is earned from work in the government, semi-governmental or private sector. Interest and other personal income earned from bank deposits or savings programmes are also not subject to Corporate Tax, as well as investment in real estate by individuals in their personal capacity. The Ministry will remain the ‘competent authority’ for purposes of bilateral and multilateral agreements and the international exchange of information for tax purposes.
The Federal Tax Authority will be responsible for the administration, collection, and enforcement of the Corporate Tax Law. More information on Corporate Tax in the UAE is available at the Corporate Tax page on the Ministry’s website: https://mof.gov.ae/corporate-tax/ A copy of the Corporate Tax Law is available in its full form on the following page on the Ministry of Finance’s website: https://mof.gov.ae/corporate-tax-faq/
The UAE’s 9% corporate tax one of the lowest in the world
The UAE’s decision to levy a nine per cent tax on corporate profits from June 2023 is highly attractive as well very competitive at the same time as it’s one of the lowest in the world as the new tax regime will bring more transparency and also make the corporate balance sheets stronger.
According to Tax Foundation, three countries — Bangladesh, Argentina and Gibraltar – increased their corporate income tax rates while 17 countries reduced their corporate tax rates in 2021. Comoros, Puerto Rico and Suriname have the highest corporate tax rates in the world at 50 per cent, 37.5 per cent and 36 per cent, respectively. While Barbados, Uzbekistan and Turkmenistan levy the lowest corporate tax at 5.5 per cent, 7.5 per cent and 8.0 per cent, respectively.
Globally, the worldwide average statutory corporate income tax rate, measured across 180 jurisdictions by Tax Foundation, is 23.54 per cent.
Ayman Youssef, Vice President, Coldwell Banker, UAE, said the corporate tax rate is an attractive rate on a global scale and there will be no taxes levied on personal real estate investment.
“This will require businesses to file only one corporate tax each financial year. Also, the government has given full consideration to start-ups and SMEs by not imposing any tax on profits up to Dh375,000. There will be no compliance burden and will continue to encourage new investments in the country,” said Youssef.
Anis Sajan, Vice-Chairman, Danube Group, said by exempting taxes on profits up to Dh375,000 and keeping the headline rate at just nine per cent, the UAE has ensured that the small businesses continue to flourish and at the same time while mid and large-sized businesses operate in one of most competitive taxation frameworks globally.
“I’m confident the Federal Tax Authority and the Ministry of Finance will facilitate an easy and a smooth implementation of the new tax framework, just like they did when value-added tax (VAT) was introduced in the UAE,” he said.
Dhaval Jasani, founder, CEO of ZTI Global Consulting, said 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.
“Similar to VAT, corporate tax will also have Group Taxation regime, as clarified by Ministry of Finance, while we await to interpret provisions in the legislation, once the legislation is published. UAE entities will have to comply with Transfer Pricing rules and requirements, in reference to the regulations to be published and OECD transfer pricing guidelines. As of now, we do not see any exemptions for startups apart from taxable income of Dh375,000 that would not be subjected to corporate tax. We will have to wait for the legislation to evaluate if any exemptions are being granted to startups,” said Jasani.
Bal Krishen, chairman and CEO, Century Financial, said the UAE corporate tax regime has been designed to minimise the compliance burden on businesses.
“In addition to the UAE’s extensive network of double tax treaties, the new regime will strengthen the UAE’s status as a world-leading hub for business and investment. As a result of the new corporate tax, the UAE has reaffirmed its commitment to complying with international standards for tax transparency and preventing harmful tax practices,” he said.
Sunder Nurani, chairman of The Institute of Chartered Accountants of India (ICAI), Dubai Chapter, said the new tax regime will further boost the Transfer Pricing as the businesses will be required to comply with transfer pricing rules and documentation requirements with reference to OECD Transfer Pricing Guidelines.
“One of the most prominent questions which come to once mind is the applicability of corporate tax to free zones in the UAE. As one can observe from the Frequently Asked Questions section of the Ministry of Finance, free zone businesses will be subject to corporate income tax, but the UAE Corporate Income Tax regime will continue to honour the Corporate Income Tax incentives currently being offered to Free Zone businesses that comply with all regulatory requirements and that do not conduct business with mainland UAE. Another matter which is of interest to UAE businesses is the corporate tax will not apply on qualifying intragroup transactions and restructuring,” he said.
Vinayak Mahtani, CEO of bnbme holiday homes, said the corporate tax announcement has been expected over the past few months.
“With Golden Visa’s and Nationalities being issued to residents, the UAE has given all the right signals to attract long-term investments. This will, in the future, require large investments in the infrastructure to support this growth and corporate tax will go towards helping this investment.”
“This is a significant boost to the ease of doing business for SMEs and startups like ours. Given the exemption to domestic and cross border payments, UAE will maintain its position as a global financial centre and international business hub, attracting cross-border global startups from the region and beyond,” said Jamil Ahmad, Co-founder and CBO at Fashinza.
Pankaj Mundra, Cofounder 360tf Nimai, said UAEs introduction of corporate tax is a much-awaited move after the introduction of Pillar 1 and pillar 2 OECD inclusive framework.
“This will make UAE more competitive in terms of Global Taxation best practice. The introduction of corporate taxes will make the corporates balance sheet stronger as this will have more transparency, more concrete procedure and policies for the maintenance of books of accounts and financials. Global banks and private equity funds will have more reliance and confidence on UAE corporate financials thereby injecting more capital into the region, especially UAE,” he said.
Ismail Marfani, director, Iman Developers, stressed that it’s promising that the government is not taxing investments. “There is no corporate tax on capital gains and real estate. This is an excellent decision by the government as Dubai is one of the most attractive places for real estate investment. The real estate market in the country is undervalued compared to other global cities like Miami and New York and there is great potential to get a return on short term rentals and property appreciation. Given that supply is finally catching up to the demand, it is a wise decision to not put up any roadblocks for people looking to invest in real estate.”
Soham Chokshi, CEO and co-founder, Shipsy, a smart logistics management platform, believes that the corporate tax regime of nine per cent is designed to support the strategic ambitions of the government which will drive growth for businesses in the longer run.
“With the exemption in place, the move is likely to cover high-profit industries and companies more than SME’s. The impact on industries such as manufacturing, logistics and supply chain might be lesser as compared to the financial and technology industries. It is possible that this is part of a series of strategic announcements that help UAE be positioned as an integral part of the global system but still a relative tax haven.”
Mayank Sawhney, managing director, MaxGrowth Consulting, said the announcement to introduce Corporate Taxation for Businesses in UAE (which includes Companies incorporated in UAE as well as Individual Freelancers carrying out business in UAE) effective from financial year commencing from June 1, 2023 onwards has come very much on anticipated lines, with a very few surprises, as the background work for introduction of corporate taxation in the UAE was being carried out by the Ministry of Finance of UAE over the past few years and it was only a matter of time before the formal announcement for the same is made by them.”
Sawhney added: “However, the timing of making this formal announcement on January 31, 2022 in the middle of Expo 2020 currently going on in Dubai is a little surprising as most of us established tax professionals in UAE were expecting this formal announcement for introduction of corporate taxes to be made after end of Expo 2020 Dubai after March 31, 2022, keeping in view the psychological impact such announcement could have on foreign investors looking to invest in UAE.”