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Following the largest legal reform in the country’s history, the UAE government announced the introduction of a federal corporate income tax. In this article, we will explore how structures and transactions will be affected by corporate tax, and what UAE businesses should be aware of.
Impact on foreign direct investment
The UAE’s corporate tax rate will be one of the lowest in the world and remains attractive to foreign investment. The Ministry of Finance also confirmed that the UAE does not impose withholding tax on dividends, interest, royalties and similar payments. The UAE government has decided to introduce a corporate tax to ensure that the UAE will remain an attractive destination for foreign direct investment in the years to come.
The UAE will also continue to attract high-quality individuals into the country as it will maintain tax exemptions on employment income (whether from the public or private sector) and will not be taxed on income or gains from personal investments.
free zone
The Ministry of Finance announced that free zone businesses will pay corporate tax – in particular they will be required to file corporate tax returns. However, the Ministry of Finance said that the new regime will honour the tax benefits currently offered to free zone institutions if they comply with applicable regulatory requirements and do not conduct business within the UAE.
It is not uncommon for companies to operate in free zones, where a portion of their income comes from the supply of goods or services onshore. On the face of the announcement, they may be subject to corporate tax on this part of their income. This makes sense, otherwise creating a free zone would be an obvious tax-cut option.
Although we have yet to see the impact of the law or implementing regulations on free zone businesses in greater detail, it is likely that administrative requirements will be added to account for their onshore income. With the relaxation of foreign ownership restrictions and more onshore real estate options, companies located in free zones may assess whether they should establish operations onshore.
The implementation of corporate tax in the UAE will have a fundamental impact on decisions around market access and corporate structure. Businesses operating in the UAE will need to consider the impact of corporate tax on their existing structures, shareholding arrangements, agreements between group companies, ability to maximise losses or other corporate tax relief and whether any proposed restructuring or disposition will be eligible Obtaining corporate tax relief (for example, with respect to qualifying intra-group transactions or the sale of qualifying holdings) or potentially giving rise to unexpected corporate tax liabilities. International companies with marketing or so-called “representative offices” in the UAE will also need to consider whether these will now be considered taxable permanent establishments, and whether the FTA will seek to attribute substantial taxable profits to the operation of such offices.
corporate transactions
The M&A market will be affected by the introduction of the corporate tax. Investors will welcome the fact that dividends and capital gains on qualifying equity are exempt. However, due diligence may be more costly to ensure a full understanding of the acquired company’s tax liability. We may see an increase in asset flows rather than stock sales, so that buyers have more control over the tax liabilities they acquire. The agreement needs to be strengthened to include wider tax guarantees and compensation. We may also see greater interest in warranty and indemnity insurance to provide protection against accidental tax liability and insufficient protection from penalties. This is especially true in the early years of the new corporate tax regime, where there may be a greater risk of error as the system and its requirements are embedded in organizational processes.
Summary
- Corporation tax will apply for financial years beginning on or after 1 June 2023
- federal tax
- Applicable to all UAE businesses and business activities (including sole proprietorships and freelancers)
- The exception is for companies involved in the extraction of natural resources, which are still subject to emirate-level corporate tax
- price:
- 0% on taxable income up to AED 375,000;
- 9% on taxable income above AED 375,000
- Higher tax rates for large international multinational corporations (over AED 3.15 billion in global revenue)
- The taxable income will be the accounting net profit of the business (as determined by the IAS), adjusted in due course for certain items specified in the UAE CT law
- Tax grouping will be possible
- Certain income will be exempt from corporate tax, such as dividends and capital gains received by UAE businesses from their “qualified equity” and “qualified” intra-group transactions
- Allows to offset losses against taxable income in subsequent fiscal periods
- Foreign corporate tax paid on UAE taxable income will be allowed as a tax credit for UAE corporate tax liability
Next step
All UAE businesses should start planning ahead to introduce corporate tax. However, as ever, the devil will be in the details. There is a need for a comprehensive review of the Corporations Tax Act and regulations, for example to understand how tax exemptions will apply and to clarify how free zone businesses will be treated. Some legal restructuring may be desirable to optimize the company’s tax position.
If you would like to know more about any of the questions raised in this article, please contact Ben Smith, Phil O’Riordan, Ray Smith or Justin Reeves.
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