The UAE Corporate Tax

On 9 December 2022, the United Arab Emirates (UAE) issued Federal Decree No. (47) of 2022 on the taxation of companies and corporations. This article presents the main provisions of this new tax.

At a glance

Starting from June 1st, 2023, UAE introduces a Corporate Tax with a 9 % standard tax rate on taxable income exceeding AED 375,000 (ca. EUR 94.000).
Certain businesses and incomes are exempt from the Corporate Tax, including capital gains, dividends, and interests.
Free Zone businesses can benefit from a 0 % preferential tax rate if they meet specific criteria.
Small businesses with revenue below AED 3 million (ca. EUR 750,000) may receive relief until December 31st, 2026.

Background

The UAEs international reputation as a tax haven for businesses is due to its traditional tax-free regime. In fact, during many years, regional corporate taxes of a maximum rate of 55 % were only levied on oil companies and foreign banks incorporated in Mainland UAE. In contrast, the UAE offers (foreign) businesses more than 40 multidisciplinary Free Zones (FZ), such as Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM), in which they have full ownership of their companies as well as full exemption from import/export taxes for goods within the FZ area. Many FZ also offer guarantees of exemption from income and corporate taxes. However, in recent years, the UAE government intended to align the tax regime with international markets and diversify revenue streams in order to reduce its reliance on oil and gas revenues. This vision is part of a wider trend in the region, with other Gulf Cooperation Council (GCC) countries also introducing new taxes and reforming their tax systems. Therefore, the UAE government introduced a Value Added Tax (VAT) of 5 % in January 2018, followed by the implementation of Economic Substance Rules (ESR) as well as Country-by-Country Reporting (CbCR) regulations in April 2019. The new CT completes the tax reforms of the last years.

Who is subject to the coporate tax?

Starting from June 1st, 2023, the CT will be applicable to all businesses and commercial activities operating within the seven Emirates. This means that companies adopting a financial year starting on June 1st, 2023, and ending on May 31st, 2024, will be subject to CT starting from June 1st, 2023, whereas companies adopting a financial year starting on January 1st, 2023, and ending on December 31st, 2023, will be subject to CT starting from January 1st, 2024. For businesses operating in Mainland UAE, all annual taxable profits that fall under AED 375,000 (ca. EUR 94,000) shall be subject to a 0 % tax rate and all those above AED 375,000 (ca. EUR 94,000) shall be subject to a 9 % tax rate. Please note that large multinational enterprises (MNEs) whose consolidated global revenues are above EUR 750 million are exempted from CT but will be subject to a minimum Effective Tax Rate of 15 % according to Pillar Two Model Rules of the OECD Base Erosion and Profit Shifting Project (BEPS).

Who is exempt from corporate tax?

Certain types of businesses and organisations are exempted given their importance and contribution to the social fabric and economy of the UAE (see schema). Certain incomes such as capital gains and dividends earned from qualifying shareholdings as well as profits from qualifying intra-group transactions and restructurings are exempted to avoid double taxation. Also, there will be no UAE withholding tax on domestic and cross-border payments of interests, dividends or royalties.

How does corporate tax affect free zones?

In principle, just as Mainland UAE businesses, all FZ businesses are subject to a 9 % tax rate. However, FZ businesses that meet the conditions of a “Qualifying Free Zone Person” benefit from a preferential CT rate of 0 % on their “Qualifying Income”. To benefit from this exemption, the business needs to maintain adequate substance in the UAE. This means that the business is directed and managed in the UAE, has adequate employees, possesses physical assets, and incurs adequate and appropriate expenditures. Moreover, the business must derive “Qualifying Income”. This term has yet to be defined by a ministerial decision but could be limited to income sourced from the same or other FZ or from outside the UAE. If FZ businesses have both qualifying and non-qualifying income, the non-qualifying income will be potentially subject to a 9 % tax rate. In addition, the organisation is not allowed to conduct business with Mainland UAE, should comply with the transfer pricing requirements and not have made an election to be subject to the CT standard rates. FZ businesses that fulfil all these conditions benefit from the preferential CT but are nonetheless required to register and file an annual CT return.

Special case: "Small Business Relief" for start-ups and small companies

On April 6th, 2023, the Ministry of Finance has issued the Ministerial Decision No. (73) of 2023 on Small Business Relief in accordance with article 21 of the CT law. The Small Business Relief, that will not be available for Qualifying Free Zone Persons and MNEs, is intended to support startups and other small or micro businesses with a revenue in the relevant tax period and previous tax periods below AED 3 million (ca. EUR 750,000). The revenue threshold will apply to tax periods starting on or after June 1st, 2023, and will only continue to apply to subsequent tax periods that end before or on December 31st, 2026. This means that as of January 1st, 2027, the general provisions and exemption rules will also apply to small businesses. Finally, it is important to note that owners of multiple businesses cannot split them into separate licences to artificially claim the Small Business Relief for each business.

Conclusion and outlook

The impact of the new CT is considerable. Therefore, Swiss businesses operating in UAE should check in a first step whether they are subject to the new tax regime and in a second step whether one of the exemptions applies to them. Swiss businesses operating in both Mainland UAE and FZs might consider restructuring options to maximize the benefits of the new tax regime. Please note that foreign banks, which have been operating under regional corporate taxes, will now also be subject to UAE CT law.

Are you planning to move your Swiss business to UAE or to restructure your existing UAE business? We at Pontinova operate at the interface of both countries and will be happy to support you in your venture!