The United Arab Emirates (UAE) is a popular destination for businesses and investors, thanks to its strategic location, diversified economy, stable political system, and attractive tax regime. However, the tax landscape of the UAE is about to change with the introduction of a federal corporate tax (CT) system, effective for financial years starting on or after 1 June 2023.
The new CT system will apply a standard rate of 9% on the net income or profit of corporations and other entities from their business, except for certain exempt sectors and activities. The CT system is intended to help the UAE achieve its strategic objectives and accelerate its development and transformation, while maintaining its competitiveness and attractiveness as a business hub.
In this blog post, we will provide an overview of the key features and implications of the CT system, based on the Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses (the CT Law) issued by the UAE on 09 December 2022.
Who is subject to CT?
The CT system will apply to all UAE businesses, except for the following categories that are exempt from CT:
- Government Entities
- Government Controlled Entities that are specified in a Cabinet Decision
- Extractive Businesses (i.e., businesses engaged in the extraction of oil, gas, or other natural resources)
- Non-Extractive Natural Resource Businesses (i.e., businesses engaged in the production or distribution of water, electricity, or other public utilities)
- Qualifying Public Benefit Entities (i.e., entities that are established for charitable, humanitarian, educational, cultural, scientific, or social purposes and that meet certain conditions)
- Public or private pension and social security funds
- Qualifying Investment Funds (i.e., funds that are regulated by the Securities and Commodities Authority or the Central Bank of the UAE and that meet certain conditions)
- Wholly-owned and controlled UAE subsidiaries of a Government Entity, a Government Controlled Entity, a Qualifying Investment Fund, or a public or private pension or social security fund
Some of these categories are automatically exempt from CT, while others need to notify the Ministry of Finance (MoF) or apply to and obtain approval from the Federal Tax Authority (FTA) to claim the exemption.
The CT system will also apply to non-resident persons who have a permanent establishment (PE) in the UAE. A PE is defined as a fixed place of business through which a non-resident person carries on all or part of their business in the UAE. This includes branches, offices, factories, workshops, mines, oil or gas wells, quarries, farms, plantations, warehouses, agencies, representative offices, and any other place where natural resources are extracted or exploited.
What is CT imposed on?
The CT system will impose tax on the net income or profit derived by a taxable person from their business in the UAE. The net income or profit is calculated by deducting allowable expenses from gross income.
Gross income includes any income derived from any source in connection with a business carried on by a taxable person in the UAE. This includes income from trading, manufacturing, services, investments, royalties, rents, fees, commissions, dividends, interest, and any other income of a similar nature.
However, some types of income are exempt from CT, such as:
- Capital gains from the disposal of shares or other equity interests in UAE entities
- Income derived from qualifying activities carried out in free zones that are specified in a Cabinet Decision
- Income derived from qualifying activities carried out under special economic agreements that are specified in a Cabinet Decision
- Income derived from qualifying activities carried out under special licenses that are specified in a Cabinet Decision
- Income derived from qualifying activities carried out under special incentives that are specified in a Cabinet Decision
- Income derived from qualifying activities carried out under special arrangements that are specified in a Cabinet Decision
Allowable expenses include any expenses that are incurred wholly and exclusively for the purposes of the taxable person’s business and that are not specifically disallowed by the CT Law. Some types of expenses are disallowed for CT purposes, such as:
- Bribes
- Fines and penalties (other than amounts awarded as compensation for damages or breach of contract)
- Donations, grants or gifts made to an entity that is not a Qualifying Public Benefit Entity
- Dividends and other profits distributions
- CT imposed under the CT Law
- Expenditure not incurred wholly and exclusively for the purposes of the taxable person’s business
- Expenditure incurred in deriving income that is exempt from CT
Some types of expenses are subject to limitations for CT purposes, such as:
- Client entertainment expenditure: only 50% of the amount of the expenditure is deductible
- Interest expenditure: only the net interest expenditure exceeding a certain de minimis threshold is deductible
- Depreciation and amortization: only the amount calculated using the straight-line method over the useful life of the asset is deductible
How is CT administered?
The CT system will be administered by the FTA, which is the federal authority responsible for collecting and managing taxes in the UAE. The FTA will issue regulations, guidelines, and forms to implement the CT system and provide clarity and guidance to taxpayers.
The CT system will require taxable persons to register with the FTA, file CT returns, pay CT due, and maintain records and documents related to their business and tax affairs. The FTA will also have the power to conduct audits, assessments, and investigations on taxable persons and impose penalties for non-compliance with the CT system.
The CT system will also provide mechanisms for dispute resolution, appeals, and refunds for taxable persons who disagree with the FTA’s decisions or who have overpaid their CT.
What are the implications of the CT system?
The introduction of the CT system will have significant implications for businesses operating in the UAE, both resident and non-resident. Businesses will need to assess the impact of the CT system on their operations, profitability, cash flow, compliance obligations, and tax planning strategies. Businesses will also need to prepare for the implementation of the CT system by reviewing their existing structures, contracts, transactions, accounting systems, policies, and procedures.
The CT system will also affect the competitiveness and attractiveness of the UAE as a business destination. On one hand, the CT system will enhance the reputation and credibility of the UAE as a transparent and compliant jurisdiction that adheres to international standards and best practices. On the other hand, the CT system will increase the cost of doing business in the UAE and reduce the tax advantage that the UAE has enjoyed over other jurisdictions.
However, despite the introduction of the CT system, the UAE will still remain one of the most attractive locations to conduct business in the world, for several reasons:
- The UAE has a low and competitive CT rate of 9%, compared to other countries that have much higher rates (e.g., India has a rate of 25%, China has a rate of 25%, UK has a rate of 19%, US has a rate of 21%)
- The UAE has a wide range of sectors and activities that are exempt from CT, such as extractive businesses, public benefit entities, investment funds, pension funds, and free zone activities
- The UAE has an extensive network of double tax treaties with more than 100 countries that provide relief from double taxation and facilitate cross-border trade and investment
- The UAE has a diversified and resilient economy that offers opportunities for growth and innovation in various sectors such as tourism, trade, logistics, finance, technology, renewable energy, healthcare, education, and entertainment
- The UAE has a stable and supportive political system that provides security and stability for businesses and investors
- The UAE has a modern and efficient infrastructure that facilitates connectivity and accessibility for businesses and customers
- The UAE has a diverse and skilled workforce that provides talent and expertise for businesses
- The UAE has a vibrant and cosmopolitan culture that attracts people from different backgrounds and lifestyles
Conclusion
The CT system is a major development in the tax landscape of the UAE that will affect all businesses operating in the country. Businesses should familiarize themselves with the key features and implications of the CT system and take proactive steps to prepare for its implementation. Businesses should also seek professional advice from tax experts to ensure compliance with the CT system and optimize their tax position.
The CT system is also an opportunity for businesses to reassess their strategies and objectives in light of the changing environment. Businesses should leverage on the strengths and advantages of the UAE as a business destination and explore new avenues for growth and innovation.
Corporate Finance 