UAE to introduce federal corporate tax from June 2023

Standard tax rate of 9% with minimum profit threshold. There will be no personal income tax, ministry says

The UAE issued its federal corporate tax law that will levy a headline 9 per cent rate on taxable income exceeding Dh375,000. Silvia Razgova / The National

Taxable income below the aforementioned threshold will be subject to a 0 per cent rate of corporate tax. Chris Whiteoak/ The National

No corporate tax will apply on salaries or other personal income from employment — be it in the government, semi-governmental, or private sector, the Ministry of Finance said. Chris Whiteoak/ The National

Businesses will become subject to the UAE corporate tax from the beginning of their first financial year that starts on or after June 1, 2023. Victor Besa / The National

The UAE corporate tax regime builds from best practices globally and incorporates principles that are internationally known and accepted. Victor Besa / The National

The UAE will introduce a federal corporate tax on the profit of businesses from the financial year starting on or after June 1, 2023, the Ministry of Finance said on Monday.

A standard statutory tax rate of 9 per cent applies for companies, positioning the UAE competitively when compared with other financial centres and developed economies globally. The average top corporate tax rate among EU27 countries is 21.3 per cent, 23.04 per cent among OECD countries, and 69 per cent in the G7, according to the Tax Foundation based in Washington DC.

Foreign taxes paid will be credited against any payable UAE corporate tax, meaning there will be no double taxation.

To support small and medium size enterprises there will be a zero tax rate for taxable profits up to Dh375,000 ($102,000). The legislation has yet to be issued and the details for the corporate tax regime are subject to finalisation.

“The tax regime will be among the most competitive in the world,” the ministry said. It will be in line with World Trade Organisation rules.

There will be no tax on personal incomes “from employment, real estate and other investments, or on any other income earned by individuals that does not arise from a business or other form of commercial activity licensed or otherwise permitted to be undertaken in the UAE".

Businesses involved in the “extraction of natural resources” — oil and gas production — will be exempt, as they are subject to emirate-level taxation already, the ministry said.

Corporate tax incentives offered to free zone businesses that do not conduct business onshore are unaffected.

Withholding taxes on domestic and cross border payments will not be imposed. Foreign investors who do not carry on business in the UAE will not be subject to corporate tax.

UAE businesses will be exempt from paying tax on capital gains and dividends received from its qualifying shareholdings.

There will be “generous loss utilisation rules” and “UAE groups can be taxed as a single entity or can apply group relief in respect of losses and intragroup transactions and restructurings".

“As a leading jurisdiction for innovation and investment, the UAE plays a pivotal role in helping businesses grow, locally and globally," said Younis Haji Al Khoori, Undersecretary of the Ministry of Finance.

"The certainty of a competitive and best in class corporate tax regime, together with the UAE’s extensive double tax treaty network, will cement the UAE’s position as a world-leading hub for business and investment.”

One corporate tax return will be filed each financial year. Advance tax payments or the preparation of provisional tax returns will not be required.

“The introduction of a corporate tax regime will help the UAE achieve its strategic ambitions and incentivise businesses to establish and expand their activities in the UAE,” said Mr Al Khoori.

The ministry said it would give businesses “ample time” to prepare for the introduction of corporate tax.

More details are expected to be announced in the coming weeks and months.

“I think 11 months is an acceptable time frame for listed companies and even non-listed private companies to adjust for a tax regime,” Ali El Adou, head of asset management at Dubai-based Daman Investments, said.

Although it is not something that “everyone has been talking about” or that the market has been expecting, there have been UAE talks with different parties around the subject of corporate tax, he said.

“In the international tax treaties the UAE has done, you will see that,” Mr El Adou said.

The new tax will support government finances and will add to its revenue sources and there will “definitely be more income” at federal level to reinvest back into the economy, he said. The government has already done that extensively during the pandemic to support the economic recovery, he said.

“I think the initial announcement is in line with the broader view to diversify the income by increasing the tax base and implement changes in different parts of the economic structure,” said Faisal Hasan, chief investment officer at Al Mal Capital in Dubai.

The corporate sector will await further details to “gauge the full impact”, especially the implementations related to compliance and reporting, he said.

“Also, the other parts of taxation such as personal income tax, withholding tax, capital gains taxes have not been affected, which will help in the continuity of the processes,” Mr Hasan said.

Corporate tax rates have continuously declined over the past 40 years, with the worldwide average declining from more than 40 per cent to between 25 and 30 per cent, according to Tax Foundation data.

The worldwide weighted average of corporate taxation has dropped from close to 50 per cent in the 1980s to about 25 per cent in 2021, according to the organisation.

The Federal Tax Authority website: https://tax.gov.ae/en