Skip to content

Understanding UAE Federal Corporate Tax: A Comprehensive Guide

In response to the recent announcement regarding the introduction of the UAE Federal Corporate Tax (CT), the UAE Ministry of Finance (MoF) has issued a consultation document outlining the proposed CT regime. The consultation period, which ended on 19 May 2022, gathered valuable feedback, with the final legislation expected to be announced shortly.

Impact of UAE CT on Businesses and Individuals

The UAE CT is designed to tax the income of legal entities (companies) and, in certain cases, natural persons (individuals). For individuals, the CT will apply to income earned under a commercial license, such as a sole establishment. However, there are various sources of income that are exempt from UAE CT, including salary and employment income, rental receipts from UAE real estate, dividends, capital gains, and interest from bank deposits or savings.

 

Exemptions from UAE CT

Several entities are exempt from UAE CT, including the UAE Government, Emirate Governments, their departments, authorities, and other public institutions. Wholly Government-owned UAE companies engaged in sovereign or mandated activities, businesses involved in the extraction and exploitation of UAE natural resources, listed charities, public benefit organizations, public and regulated private social security and retirement pension funds, as well as certain investment funds, regulated investment funds, and Real Estate Investment Trusts, may also qualify for exemption (subject to meeting specific requirements).

 

Impact on Free Zone Companies

Contrary to popular belief, businesses established in Free Zones are not exempt from UAE CT. Free Zone companies will be required to register and file a CT return. The exact impact on Free Zone businesses is still unclear, but income earned by Free Zone companies may be subject to a 0% tax rate or exempt based on certain conditions and the source of income.

 

Exempt Income Categories

Under specific conditions, the following types of income will be exempt from UAE CT: dividend income earned by UAE companies, capital gains, and income received by individuals and exempt entities as mentioned above. Similar to other jurisdictions, a “participation exemption” for dividend income and capital gains is expected. This exemption is likely to involve holding a specific shareholding of the subsidiary company and the subsidiary being subject to CT or an equivalent tax for foreign shareholdings.

 

Calculation of UAE CT

UAE CT will be calculated based on the taxable profits reported in a business’s financial statements, with minimal exceptions and adjustments. Accurate and comprehensive financial statements are crucial, and audits may be required as per company law, including all Free Zone entities.

 

CT Rates and Effective Date

The CT rates for businesses in the UAE are as follows: 0% for taxable profits not exceeding AED 375,000, 9% for taxable profits exceeding AED 375,000, and a different tax rate, likely 15% (yet to be specified), for large multinationals.

The UAE CT regime will take effect for financial years starting on or after 1 June 2023. Businesses will be required to register online and file their tax returns electronically. Non-compliance may lead to fines, penalties, and other consequences in certain circumstances.

 

What Should You Do Now?

At IRIS GROUP, we recommend a comprehensive 3-stage approach to dealing with UAE CT:

Stage 1: UAE CT Impact Assessment – Understand the impact of UAE CT on your business and receive expert recommendations to ensure compliance and optimal positioning.

Stage 2: Implementation Support – Receive assistance in implementing the necessary measures, including transfer pricing considerations, entity structure adjustments, and compliance with the new Corporate Tax requirements.

Stage 3: Ongoing Support and Compliance – Benefit from continuous support and guidance to maintain compliance with UAE CT regulations and stay up-to-date with any changes that may arise.

 

Please contact us using the information, if you would like to sign up for an impact assessment or obtain further information.