Starting from June 2023, the anticipated introduction of corporate taxes in the UAE will finally come into effect.
Read below how this will affect businesses operating in the country, including those in Free Zones like Ras al Khaimah (RAK).
The new corporate tax regime in the UAE will subject businesses to a 9% tax rate on their profits. Large multinational companies with profits exceeding EUR 750 million will be subject to a 15% tax rate. However, businesses with taxable income not exceeding a threshold (expected to be AED 375,000) will continue to enjoy a 0% rate.
To diversify its economy and also to avoid being sanctioned or penalised by organisations such as the EU, OECD and even the USA, the United Arab Emirates (UAE) has announced the introduction of corporate taxes starting with effect from June 2023. The new tax regime is set to have far-reaching implications for businesses operating in the UAE, including those based in free zones such as the Ras al Khaimah (RAK) free zone. This comprehensive guide will discuss the UAE’s new corporate tax regime, its key features, exemptions, and the potential implications for businesses operating in the country.
Historically, the UAE has been a zero-tax jurisdiction, with no income tax levied on citizens and minimal corporate taxes imposed on businesses. Most of the state’s revenues came from the petroleum industry, with nationalised and private companies paying up to 50% tax on their revenues. Foreign banks, hotels, and restaurants in Dubai also paid certain taxes.
However, with a growing focus on diversifying its economy away from petroleum, the UAE has gradually introduced new taxes to generate additional revenue. The first significant change came in 2018 when the UAE introduced a 5% VAT tax on consumer purchases. In January 2022, the government announced the new corporate tax regime, effective from the financial year starting on or after 1st June 2023.
The new corporate tax regime in the UAE will subject businesses to a 9% tax rate on their profits. Large multinational companies with profits exceeding EUR 750 million will be subject to a 15% tax rate, in line with the Global Minimum Corporate Tax Rate agreement. However, businesses with taxable income not exceeding a threshold (expected to be AED 375,000) will continue to enjoy a 0% tax rate.
The new tax regime will apply to residents and non-residents in the UAE. Residents include juridical persons incorporated or otherwise established in the UAE (including free zones), those effectively managed and controlled in the UAE, and natural persons conducting business activities there. Non-resident persons may be subject to corporate tax if they have a permanent establishment (PE) in the UAE, derive UAE-sourced income, or have a nexus in the UAE.
Under the new tax regime, certain persons will be exempt from corporate tax, provided they meet specific conditions. These exemptions include the following:
- Persons engaged in the exploitation of UAE natural resources
- Government and government-controlled entities
- Qualifying public benefit entities
- Charities and public benefit organisations
- Pension or social security funds
- Qualifying investment funds
The new tax regime introduces the concept of a “Qualifying Free Zone Person” (QFZP), which is broadly defined as a company or branch registered in a free zone, maintaining adequate substance in the UAE, deriving qualifying income, satisfying transfer pricing requirements, and meeting any other conditions prescribed through a Ministerial Decision. QFZPs will still be subject to corporate tax but may benefit from a 0% rate on their qualifying income.
UAE businesses will be subject to corporate tax on their worldwide income, with exemptions for dividend income and capital gains subject to the participation exemption. Non-residents will be considered to have a PE in the UAE if they have a fixed place of business or a dependent agent in the country. A Ministerial Decision will determine other forms of nexus that could create a PE.
As reported in standalone financial statements, the accounting income will be the basis for determining taxable income, subject to adjustments. Businesses will be able to carry forward tax losses indefinitely, subject to certain conditions, and offset up to 75% of taxable income in future tax periods.
As reported in standalone financial statements, the accounting income will be the basis for determining taxable income, subject to adjustments. Businesses will be able to carry forward tax losses indefinitely, subject to certain conditions, and offset up to 75% of taxable income in future tax periods.
A parent entity of a group can apply to the Federal Tax Authority (FTA) to form a tax group with its UAE subsidiaries, subject to certain conditions. Losses can also be transferred between entities outside of a group, provided a 75% ownership relationship exists, and other conditions are met.
Payments made by UAE businesses to non-residents earning UAE-sourced income will be subject to withholding tax at a 0% rate unless the income is attributable to a branch or PE located in the UAE. The Cabinet may specify other rates.
Transfer Pricing
Transactions with related parties and connected persons must comply with the arm’s-length principle. UAE businesses must maintain transfer pricing documentation and submit it to the FTA within 30 days of a request.
General Anti-Avoidance and Transitional Rules
The new tax regime includes general anti-abuse rules (GAAR) intended to disregard transactions or arrangements undertaken to obtain a corporate tax advantage. Transitional rules also apply from the date the law is published in the Official Gazette.
The introduction of corporate taxes in the UAE will have implications for businesses operating in free zones, including those in Ras al Khaimah (RAK) and other international companies. While free zone companies may continue to enjoy a 0% tax rate, subject to meeting specific conditions, they will still need to register and file a corporate tax return. Furthermore, free zone companies doing business with mainland businesses may have to pay corporate tax on revenues generated from such transactions.
The introduction of corporate taxes in the UAE marks a significant shift in the country’s taxation landscape. Businesses and natural persons operating in the UAE must assess the implications of the new tax regime and prepare for compliance ahead of the effective date. As further details are released through a series of Ministerial Decisions, businesses should monitor these developments, ensuring they are well-prepared for the changes ahead.
FAQs relevant to our clients
RAK international companies operating in free zones may continue to enjoy a 0% tax rate, subject to meeting specific conditions. However, they will need to register and file a corporate tax return and may have to pay corporate tax on revenues generated from transactions with onshore Emirates businesses.
The new UAE tax regime introduces the concept of a “Qualifying Free Zone Person” (QFZP), which may apply to RAK international companies. QFZPs will still be subject to corporate tax but may benefit from a 0% rate on their qualifying income.
RAK international companies should assess the new tax regime’s implications, including applying the rules, modelling cash flow implications, considering exemption regimes, and developing processes and procedures to manage compliance. As further details are released through a series of Ministerial Decisions, businesses should continue monitoring these developments and preparing for compliance before the effective date.
