Main features of the UAE Corporate Income Tax regime

The United Arab Emirates (UAE) has implemented the Corporate Tax Law as Federal Decree-Law No. 47 of 2022 (CT Law) effective June 1, 2023. This blog summarizes the new CT regime and highlights key points. We will cover financial records and audited statements, tax rates, and exemptions. Additionally, the CT Law will not cover all matters, as further guidance will be issued by the Cabinet and Tax Authority to complete the Corporate Tax Legislation. This will include areas such as Transfer Pricing, Free Zone taxation, and Director remuneration rules.

In order to comply with the CT Law, UAE taxpayers must prepare and maintain financial statements with all the documents and records that support their Corporate Tax Returns. Furthermore, it introduces two different tax rates. The 0% tax rate will apply for taxable profits up to a specified threshold and to “Qualified Free Zone Persons,”. The standard statutory tax rate will be 9%. The CT Law didn’t prescribe a higher tax rate for multinational corporations (MNCs) falling under the OECD BEPS Pillar 2 scope. However, this remains possible if the UAE adopts BEPS Pillar 2.

The CT Law exempts specific types of entities such as Investment Managers, Partnerships, Family Foundations, and extractive businesses. Additionally, there will be a 0% withholding tax on categories of UAE Sourced Income generated by a Non-resident, where foreign investors with subsidiaries in the UAE, in principle, will not be subject to tax on income distributed to their parent companies.

CT Law defines that the following categories of income will be exempt from Corporate Tax in the UAE:

1. Capital Gains,
2. Dividends, and other profit distributions from a Resident Person;
3. Capital Gains, Dividends, and other profit distributions from a Qualifying shareholding in a foreign legal person, subject to a holding period of 12 months, minimum participation of 5%, at a minimum subject to 9% CIT in the country of source;
4. Income from a Foreign PE, subject to conditions and an election to apply the exemption (rather than credit);
5. Income of a non-resident Person derived from operating aircraft or ships in international transportation.

Lastly, the CT Law provides relief for small businesses with revenue/gross income below AED 3 million. Qualifying businesses will be treated as having no taxable income and simplified compliance obligations.

The CT Law defines limitations on deductible expenses, such as, for example, expenses incurred to obtain exempt income, limiting interest expenses to 30% of EBITDA, and only 50% of entertainment expenses. Related party transactions on the expense side above arm’s length (Transfer Pricing), amounts withdrawn from the Business by a natural person, and similar.

In conclusion, the UAE’s Corporate Tax Law will have significant implications for companies operating in the UAE. Do reach out if you need a tax professional to assist your businesses in planning for and complying with these new tax rules.