Corporate Tax Laws in The UAE

The UAE is gearing up to adapt to a new tax regime proposed by the Ministry of Finance and is set to be effective from the financial year that starts from June 1, 2023. The UAE Corporate Law Tax aims to standardize the tax rates for businesses within the UAE and has been introduced to further the commitment made by the UAE to enforce the global minimum effective rate of tax. Let us understand what enforcing the Corporate Tax Regime in the UAE would imply nationally and globally. Taxpayers must be aware of the tax rates enforced by the CT Law and to who it applies.

Why did MoF enforce the Corporate Tax Law in the UAE?

The corporate tax law, as stated earlier, has been introduced to further the UAE's progress in enforcing the global minimum effective tax rate. It also serves to diversify the budget revenue of the UAE government, as it mainly depends upon the hydrocarbon industries for now. According to the announcements by the MoF of UAE, the Corporate Tax rate for businesses with a taxable income below AED 375,000 is 0%. However, the tax rate for businesses with a taxable income exceeding AED 375,000 is 9%. Guidelines for large multinational enterprises that meet particular criteria are yet to be released. The Federal Tax Authority has been entrusted with corporate tax administration, collection, and enforcement and is expected to provide more information regarding the registration and filing procedures. Therefore, the Corporate Tax Law in UAE was established to bring a uniform tax regime and promote UAE as a suitable hub for investment and businesses around the globe.

Who does it apply to, and who is exempted

The Corporate Tax Laws in UAE are to be effective from June 1, 2023, or January 1, 2024, based on the financial year followed by an organization function within the UAE. Although the new tax regime will continue to honor the tax-free zones with the provisions that have been in effect till now, it applies to the following parties:

1. Companies that are UAE-Incorporated, such as LLCs, PSCs, and PJSCs.
2. Legal entities based in countries other than the UAE generate revenues within the UAE, having a permanent establishment within the Emirates.
3. Legal Entities based out of the UAE that exercise management and control activities from the country and are tax residents of the UAE.
4. Branches of UAE and foreign companies that generate revenues within UAE.
5. Taxable individuals that have a sole establishment, as well as individuals that act as partners within an unincorporated business functioning within the UAE.

However, the UAE Corporate Tax Laws also exempt several entities from the regular tax laws, including the following:

1. Businesses that depend upon the extraction of natural resources within the UAE will not enjoy the benefits of the UAE Corporate Tax Laws and will have to pay taxes based on the Emirate Level Corporate tax strategies. These businesses mainly include oil and gas companies.
2. Charitable organizations and organizations that aim to provide public benefits are exempt from this tax law. However, these organizations must apply for an exemption to the MOF, and the cabinet must approve the application for the organization to enjoy the tax exemption benefits.
3. All departments and authorities that fall under the Federal UAE government or the Emirate government, as well as companies wholly owned by the UAE government.
4. The Corporate Tax Laws of the UAE also exempt social security and retirement pension funds that are public or privately regulated.

To save companies from being taxed on multiple occasions, companies that are UAE residents but have foreign branches can either avail of a Foreign Tax Credit or apply for an irrevocable exemption of profits made by all of their foreign branches. Income earned from UAE companies through domestic dividends is also exempted from the tax regime. One must also remember that the payments made by entities based in the UAE mainland to entities based in free zones are not deductible. 

Grouping of entities for CT purposes and VAT Grouping

The relationship between the UAE CT grouping and VAT Grouping is yet to be established. However, the links between these two seem to be nonexistent. All entities are expected to file their CT returns. However, the new CT Law allows several entities to create a tax group with several benefits. According to the new tax grouping rules, the tax losses incurred by one company can be used to offset the taxable income of another company within the same tax group. This allows all the companies in the conglomerate to be taxed for their businesses on a consolidated basis by letting the whole tax group file a single CT return for all the companies. The conditions for forming an influential tax group are as follows:

1. The parent company should own 95% shares of the subsidiaries and have voting rights within the same. However, if the 95% ownership is out of the picture, subsidiaries are still allowed to transfer losses between different companies in the group, as long as the ownership of the parent company over these subsidiaries stands at 75%.
2. The parent company and its subsidiaries should not be exempt from Corporate Taxes, and they must not operate in a free zone, allowing them to enjoy the 0% Corporate Tax Law.
3. It is also essential for all companies in a tax group to have the same tax financial year cycle. Companies with different tax cycles make it impossible for the tax group to file one CT return for all the companies.

Pillar Two

A Two-pillar solution was suggested by the OECD (Organization for Economic Cooperation and Development, to tackle the issues stemming from economic digitalization. Pillar Two is of concern, and it directs multinational groups with a consolidated revenue of over EU 750 million, or AED 3.15 billion, to pay taxes at a rate of 15% within all the jurisdictions they operate. However, companies that depend upon natural resource extraction within the UAE are not in the scope of Corporate Taxes. Therefore, pillar two does not apply to natural resource extraction.

How the new CT Law affects the economic scenario of the Emirates

The Corporate Tax Law regime established in the UAE will lower the dependency of the UAE government on Hydrocarbon companies for revenue generation. The new tax regime also establishes strict tax brackets and tax rates that all companies within its scope must obey to avoid fines and severe repercussions. It has made tax filing and calculations easier for the masses. Several provisions made for multinational organizations are predicted to generate higher tax revenues for the UAE government. Therefore, introducing the CT Law within the UAE is poised to bolster the already efficient taxation system. This, in turn, strengthens the national economy as well!

However, the new tax regime might appear overwhelming to some entities. An entity must know the CT Laws and how they work to make the best out of their CT returns. This is where NSKT Global comes into the picture, as the company's well-trained and efficient Tax professionals are well aware of the provisions and drawbacks of the new tax regime. Let the professionals handle your tax affairs, and deliver the most efficient tax filing strategies. Head over to the official NSKT Global website, and book a free consultation session for your business. Find out how you can get the most out of the employees' services and expertise!