- The United Arab Emirates (UAE) is a leading business hub and a global financial center, offering various incentives and benefits to attract foreign investment. In December 2022, the UAE government introduced a federal law decree for the implementation of federal corporate tax. The region had previously been a tax haven for businesses, with a “nil” tax on profits and gains earned in the UAE except for the tax on profits earned from oil exploration.
The Corporate Tax Law will now come into effect from 1 June 2023, and its implementation is expected to support the UAE’s strategic objectives, accelerate its development and transformation, and enhance its competitive position as a business destination.
The law incorporates principles that are widely accepted and understood globally, making it clear and predictable for taxpayers. Furthermore, the UAE seeks to align itself with new international standards, particularly the move towards a global minimum tax on multinational corporations endorsed by the G20.
The UAE corporate tax will be implemented on 1 June 2023 and apply from the beginning of the first financial year starting on or after that date. Businesses will be liable to pay tax of 9% on taxable profits of more than AED 375,000 (1.000 AED is the equivalent of around USD 272). There will be zero taxation on taxable incomes less than or equal to AED 375,000. There are also some reliefs and exemptions in the UAE corporate tax regime, such as for small businesses whose total revenue in the previous and current fiscal year does not exceed AED 3 million.
Artificial fragmentation of business operations to obtain the benefit of the minimum threshold is squarely covered under the GAAR provision of Article 50 of the CT Law and such arrangement shall be disregarded. Thus, the maximum income chargeable at zero percent tax will be only AED 375,000.
Exemptions From the Corporate Tax
Non-resident persons that do not have a permanent establishment (PE) in the UAE or earn UAE-sourced income not related to their PE may be subject to withholding Tax (WHT) at 0%. This implies that only non-residents with a PE in the UAE will be required to pay taxes.
In addition, a non-resident person who is earning only state-sourced income will not be taxed in the UAE in the absence of a WHT. However, as WHT rates are expected to rise from 0% in the future, the WHT could become the final liability for non-residents.
The followings are exempt from registration under corporate tax law:
- A government entity.
- A government controlled entity.
- A person engaged in an extractive business.
- A person engaged in a non-extractive natural resource business.
- A non-resident person that derives only state-sourced income and does not have a PE in the UAE.
Revenue Threshold and Small Business Regulation
- The revenue threshold for the purpose of small business relief as per Article 21 is set at AED 3,000,000.
- This threshold applies from 1 June 2023 to 31 December 2026.
- The threshold must be checked for any of the applicable tax years.
- A qualifying free zone person and a constituent entity of an MNE group (revenue > AED 3.15 billion) are not eligible for small business relief.
From the text of the decision, it can reasonably be concluded that the taxpayer is free to opt in or out of this relief at their choice for each year. This relief is aimed at encouraging small businesses and start-ups and it keeps small businesses outside the ambit of preparing transfer-pricing documentation, which can be a costly affair.
The UAE’s move towards a global minimum tax on multinational corporations, endorsed by the G20, highlights its commitment to international tax reform and the readiness to work collaboratively with other countries to ensure a level playing field for all businesses.
Overall, the introduction of corporate tax in the UAE is a significant milestone in the country’s economic development, and its successful implementation will have positive implications for the country’s future economic growth and prosperity. Nevertheless, the tax rates remain very moderate and are among the lowest of any double taxation avoidance agreements with India.
