UAE Federal Corporate Tax: Post Consultation Document

Overview

On 31 January 2022, The UAE Ministry of Finance (MoF) announced the introduction of a 9% Federal Corporate Tax (CT) in the UAE. This was followed on 22 April 2022 when the MoF released a consultation document, outlining the proposed CT regime. Responses to the consultation document were required by 19 May 2022, with final legislation expected imminently.

How does UAE CT impact me?

UAE CT is proposed to tax income of legal persons (companies) and, in some instances, natural persons (individuals).  Such instances include an individual’s income earned under a commercial licence (i.e. sole establishment).

Who is exempt from UAE CT?

Individuals will not be subject to UAE CT on various income sources, such as:

·   Salary and other employment income;

·   Rental receipts from UAE real estate;

·   Dividends, capital gains and other income earned from owning shares; and

·   Interest from bank deposits or other savings.

Certain entities will also be exempt from UAE CT, including:

·   UAE Government and Emirate Governments and their departments, authorities and other public institutions;

·   Wholly Government-owned UAE companies that carry out a sovereign or mandated activity;

·   Businesses engaged in the extraction and exploitation of UAE natural resources;

·   Listed charities and other public benefit organisations;

·   Public and regulated private social security and retirement pension funds; and

·   Certain Investment funds, regulated investment funds and Real Estate Investment Trusts (subject to meeting certain requirements on application).

Are Free Zone companies exempt?

Simply put, no. Businesses established in a Free Zone will be required to register and file a CT return. It is currently unclear exactly how Free Zone business will be impacted. However, subject to certain conditions, income earned by a Free Zone company may be subject to a 0% tax rate (or be exempt), depending on how and where the income is sourced.

Will any income be exempt?

Subject to certain conditions, the following income will be exempt from UAE CT:

·   Dividend income earned by UAE company;

·   Capital gains; and

·   Income received by individuals and exempt entities as described above.

As with other jurisdictions, there will be a ‘participation exemption’ for dividend income and capital gains. Although this is to be clarified, it will likely include holding a certain shareholding of the subsidiary company and that company being subject to CT (or equivalent tax for foreign shareholdings).

How will UAE CT be calculated?

CT will be payable on the taxable profits of a business as reported in their financial statements with minimal exceptions and adjustments. This therefore highlights the importance of complete and accurate financial statements, which will also need to be audited where required by company law, and for all Free Zone entities.

The CT rates 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%, but not yet specified) for large multinationals.

When will the UAE CT regime become effective?

The UAE CT regime will become effective for financial years starting on or after 1 June 2023. Business will be required to register online and file their tax return electronically. Any non-compliance will see businesses subject to fines/penalties and other implications likely in certain circumstances. 

What should I do now?

At Sanctuary, we are recommending a 3-stage approach to CT:

·   Stage 1: UAE CT Impact Assessment

·   Stage 2: Implementation Support

·   Stage 3: Ongoing Support and Compliance

Businesses with activities in the UAE (Offshore, Free Zone and Mainland) will need to consider the implications of Company Tax. This can include transfer pricing, entity structure and ensuring compliance with the new Corporate Tax requirements.

Our Stage 1 offering will assess the impact UAE CT will have on your business, together with recommendations that we can assist in implementing to ensure you are best positioned for UAE CT’s introduction.

Please contact us today for an impact assessment business or for further information.