Background and Introduction

The Ministry of Finance (‘MOF’) of the United Arab Emirates (‘UAE’) announced on 31 January 2022 that the UAE will introduce Federal Corporate Tax (‘UAE CT’) (applicable across all Emirates) on accounting net profits (after certain adjustments) that will be effective for Financial Years Starting on or after 1 June 2023. UAE CT is planned to be introduced as most competitive in the world and is also the lowest amongst the other GCC countries.

This is only an initial introduction to the Proposed Uae CT law while the UAE CT legislation is being finalised. Details about the proposed UAE CT regime are set out in the press release and the Frequently Asked Questions (‘FAQs’) published on the website of MOF and Federal Tax Authority (‘FTA’).

Broad objectives for introducing CT in UAE

• To cement the UAE’s position as a world-leading hub for business and investment. This is supported by the UAE’s extensive double tax treaty network
• To achieve UAE’s strategic ambitions and incentivise businesses / multinationals to establish, invest and expand their activities in the UAE
• Confirm UAE’s commitment to meeting international standards for tax transparency and preventing harmful tax practices

Key aspects of the CT regime in UAE

Tax Rate

A progressive UAE CT regime to support small businesses and start-ups, is proposed as follows:

These UAE CT rates would be different for large multinational entities that are covered by Organisation for Economic Development (‘OCED’) Base Erosion and Profit Shifting 2.0, as part of Pillar Two initiative.

Tax Base for applicability of UAE CT

UAE CT rate to be applied on accounting net profits reported in the financial statements which are prepared in accordance with internationally acceptable accounting standards, after making the specified adjustments that will be prescribed in the UAE CT law.

Exempt income

• Dividends and capital gains earned by a UAE business from its qualifying shareholdings *
• Qualifying intra group transactions and reorganisations *

* Subject to fulfilment of certain conditions which are yet to be announced

Effective from:

UAE CT will be effective for financial years starting on or after 1 June 2023. MOF as part of its FAQs has further explained it by way of following examples:

• Businesses having financial year starting 1 July 2023 and ending on 30 June 2024 will become subject to UAE CT from 1 July 2023
• Business having financial year starting on 1 January 2023 and ending on 31 December 2023 will be subject to UAE CT from 1 January 2024

Applicable to:

• All UAE businesses and commercial activities of legal entities (except those undertaking extraction of natural resources which will be subject to respective Emirate level corporate taxation).
• All individuals having a business license (or are otherwise required to obtain one) to carry out the commercial / professional activity in the UAE. However, UAE CT shall not apply on individual’s income from employment, real estate, investments in shares, interest and other incomes earned from bank deposits or saving schemes or other personal income not related to a UAE trade or business.
• Foreign entities and individuals, on their trade or business conducted in the UAE in an ongoing or a regular manner. However, UAE CT may not apply on foreign investor’s income from dividends, capital gains, interest, royalties and other investment returns.

Introduction of Transfer Pricing (‘TP’) rules

UAE businesses will be required to comply with transfer pricing rules and documentation requirements as set out in the OECD TP Guidelines.

OECD TP Guidelines provide guidance on the application of the ‘arm’s length principle’, which represents international consensus on the valuation, for income tax purposes, of cross-border transactions between associated enterprises / related parties.

Administration and Compliance

• FTA will be responsible for the administration, collection and enforcement of UAE CT. MOF to remain the competent authority.
• An electronic annual UAE CT return per financial period is proposed (further guidance awaited). No provisional or advance UAE CT filings required.
• No requirement to make advance UAE CT payments.
• Penalties shall be imposed on non-compliance.
• Registration process and on-going compliances procedures and obligations guidelines are awaited.

Other points

• Foreign tax credit on UAE taxable income against UAE CT liability to be allowed.
• Carry forward and set off of prior years’ losses to be allowed (relevant for losses incurred from the effective date of UAE CT) *. UAE CT loss carry-forward rules awaited.
• Free Zone businesses seem to be within the scope of UAE CT and will be required to register and file a UAE CT return. However, they will continue to benefit from incentives already promised under specific free zones regulations / decrees if they comply with all regulatory requirements and do not conduct business with mainland UAE. Financial free zones to be treated at par with other free zones for UAE CT purposes.
• Banking sector to be subject to UAE CT regime (further details awaited).
• ‘Fiscal unity’ concept to be introduced for UAE CT purposes. Taxpayers to be provided with an option to form a ‘tax group’ and file a single CT return for entire group *. Option to set off losses within the group companies (group loss utilization rules awaited) *.
• Withholding tax on domestic as well as cross border payments / transactions currently not applicable under the proposed UAE CT regime

* Subject to fulfilment of certain conditions which are not yet announced

[Source: https://www.tax.gov.ae/en and https://www.mof.gov.ae/en/resourcesAndBudget/Pages/FAQ.aspx]

How can PKF help?

PKF UAE is a leading firm that provides professional financial advisory, assurance, VAT, ESR and international tax services in the UAE. PKF UAE brings world-class capabilities and high-quality service to clients helping them to align their working model to government reporting and compliance requirements.

Our role as tax advisers could include:

• PKF UAE can assist in getting a clear understanding of the proposed UAE CT regime. As part of this, PKF can conduct technical trainings and workshops for tax and finance teams of the UAE businesses.
• Carrying out initial qualitative impact assessment of the proposed introduction of the UAE CT and TP regime on the current / proposed businesses, on a high-level basis.
• Identifying structuring / restructuring opportunities.
• Performing gap analysis to identify required changes and implementation support post the promulgation and implementation of the final UAE CT legislation.
• Providing regular support concerning reporting and compliance requirements and related advisory services including retainerships.

Contacts

You may email us or can contact any of our team members relating to your queries on this subject: