The introduction of the UAE Corporate Tax Law represents a significant shift in the taxation landscape of the United Arab Emirates. Following the government's announcement on January 31, 2022, and the subsequent release of the Public Consultation Document in April 2022, the UAE Corporate Tax Law (Federal Decree-Law No. 47 of 2022) came into force on December 9, 2022. This law, which applies to businesses starting their financial years on or after June 1, 2023, marks a major move towards regulating corporate taxation in the country. In this article, we will explore the key features of the UAE Corporate Tax Law, including its scope, exemptions, rates, and other important aspects that businesses need to understand.

The UAE Corporate Tax Law: An Overview

The UAE has traditionally been known for its tax-friendly environment, attracting businesses from all over the globe. However, the introduction of corporate tax aims to align the country with international tax standards, particularly under the OECD’s Base Erosion and Profit Shifting (BEPS) framework. Enacted on October 3, 2022, and effective for financial years beginning June 1, 2023, the UAE Corporate Tax Law introduces a set of rules to regulate taxation on corporate profits.

The law applies to both domestic and international businesses operating in the UAE, with specific provisions for Free Zone businesses, foreign entities, and multinational corporations. The Ministry of Finance (MoF) and the Federal Tax Authority (FTA) have outlined the key provisions, and while some areas remain subject to further Cabinet and Tax Authority decisions, the fundamental structure of the law is now in place.

Corporate Tax Rates in the UAE: What Businesses Need to Know

One of the most significant aspects of the new law is the tax rate structure. The UAE Corporate Tax Law outlines two primary tax rates:

1. Tax-Free Threshold: Businesses with taxable earnings up to a specified threshold (likely around AED 375,000) will be exempt from paying corporate tax. This tax-free threshold is aimed at easing the burden on small businesses and startups.

2. Standard Tax Rate: The statutory corporate tax rate is set at 9% for profits exceeding the threshold. This rate is relatively low compared to global standards, ensuring that the UAE remains an attractive destination for businesses looking to maintain competitive tax positions.

For multinational enterprises (MNEs) subject to the OECD’s BEPS Pillar 2 framework, there is an additional consideration regarding a global minimum tax rate of 15%. This applies to MNEs with consolidated worldwide revenues exceeding EUR 750 million (approximately AED 3.15 billion) in at least two of the last four years.

Scope of the UAE Corporate Tax

The UAE Corporate Tax applies to profits derived from business activities, whether they are local or international. It will be levied on the adjusted net profit of a company’s worldwide operations, meaning that all business activities, including foreign income, will be subject to taxation.

Free Zones and Corporate Taxation

The UAE is home to several Free Zones that offer favorable tax conditions to attract foreign investment. Under the new Corporate Tax Law, businesses operating within these Free Zones are subject to specific rules. While the law provides a broad framework, additional guidance will be issued by the Cabinet regarding the precise conditions for Free Zone businesses. Key factors include:

• Substance Requirements: Businesses must maintain sufficient economic substance within the Free Zone to qualify for tax benefits. This could mean maintaining a physical office or employing staff within the zone.

• Qualifying Income: Free Zone companies must earn income that qualifies under the law, which may be clarified further by future decisions.

Free Zone businesses have the option to be taxed at the 9% corporate tax rate, provided they meet the required conditions. However, companies that do business with mainland UAE or fail to meet substance requirements may lose their tax exemptions.

Withholding Tax in the UAE

One of the attractive features of the UAE tax system is the potential for zero withholding tax on specific categories of income. Foreign investors receiving UAE-sourced income who do not have a permanent establishment (PE) in the UAE will not be subject to withholding tax.

This policy is part of the UAE’s broader strategy to attract foreign investment by offering a tax-efficient environment for cross-border transactions.

Exemptions from Corporate Tax

The UAE Corporate Tax Law offers several exemptions to ensure that specific sectors and activities are not unduly burdened by the new tax rules. These exemptions include:

• Government Entities and Controlled Entities: Governmental and government-controlled entities, including qualifying public benefit entities, are exempt from corporate tax.

• Investment Managers: Investment managers, as outlined in the Public Consultation Document, are also exempt from corporate tax.

• Extractive Industries: Upstream oil and gas companies involved in the extraction of natural resources will be exempt from corporate tax on income derived from their operations.

• Certain Financial Institutions: Banks operating in Free Zones may be exempt from corporate tax, depending on their location and activities.

Additionally, the law outlines exemptions for capital gains, dividends, and other profits distributions from qualifying shareholdings, provided certain conditions, such as holding a minimum of 5% of the shares for at least 12 months, are met.

Corporate Tax Compliance and Documentation

Under the new law, all businesses in the UAE, unless included in a Corporate Tax Group, must maintain comprehensive financial records to support their tax filings. The key requirements include:

• Financial Statements: Taxpayers must prepare annual financial statements that reflect the company’s earnings and expenditures.

• Record Retention: These records must be maintained for a minimum of seven years, ensuring transparency and compliance.

While not all companies will be required to undergo an audit, certain entities will be mandated to keep audited or certified accounts. The specifics of these requirements will be clarified in subsequent Cabinet decisions.

Small Business Tax Relief and Simplified Compliance

To support small businesses and startups, the UAE Corporate Tax Law provides potential relief for businesses with gross revenue below a specified threshold. Qualifying small businesses will benefit from simplified compliance requirements, such as:

• Exemption from Corporate Tax: Businesses with revenue below the threshold may not need to pay corporate tax.

• Simplified Reporting Requirements: Qualifying small businesses will follow a simplified set of requirements to meet tax obligations.

The exact revenue threshold and additional details regarding this relief will be confirmed through future Cabinet decisions.

Deductible and Non-Deductible Expenses

The new law defines what constitutes deductible and non-deductible expenses for tax purposes. Businesses can deduct expenses that are incurred solely for the purpose of generating taxable income. However, expenses related to tax-free income are not deductible. Some key points include:

• Interest Expense: Interest expenses can be deducted, but they are capped at 30% of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).

• Non-Deductible Expenses: Contributions to non-qualifying public benefit entities, bribes, fines, and dividends are not deductible. Furthermore, amounts taken by individuals from the business are not deductible.

Exempt Income and Relief for Restructuring

Certain income types are exempt from the UAE Corporate Tax Law, including capital gains, dividends, and income from foreign permanent establishments, provided certain conditions are met. Additionally, restructuring transactions involving qualifying entities may qualify for relief, offering opportunities for tax efficiency during corporate reorganizations.

Conclusion

The introduction of the UAE Corporate Tax Law marks a significant development in the country’s tax framework, aligning it with global standards while maintaining a competitive tax environment. Businesses operating in the UAE need to familiarize themselves with the key provisions of the law, including tax rates, exemptions, and compliance requirements. As more details are released through Cabinet decisions and official guidance, businesses will have a clearer understanding of how to navigate the new corporate tax landscape.