A new corporate tax regime in the UAE
The United Arab Emirates (UAE) has a long-established reputation as a low tax jurisdiction attracting foreign investors. This is set to change with the introduction of a new corporate income tax (Corporate Tax) regime announced on 31 January 2022 by the Ministry of Finance.
The new regime is set to apply to any financial years commencing after June 2023 and will impose a standard Corporate Tax rate of 9%. This tax rate will only be levied on any taxable profits over AED 375,000 with anything below that still benefiting from tax free status. Meanwhile, multinational companies earning more than €750 million in global revenues will be subject to a higher corporation tax rate of 15%.
This significant change in the UAE's tax regime follows the introduction of 5% VAT paid on goods and services on 1 January 2018 under Federal Decree Law Number 8 of 2017. The latest update to the UAE's tax regime stems from the country's desire to align itself with new international standards after it signed up to a global minimum tax of 15% for multinational corporations in 2021, along with 135 other countries. The new corporate tax regime will also introduce more stringent corporate regulations, including requirements for companies to register for corporate tax purposes and file a corporate tax return for each financial period.
Further details of the corporate tax regime are expected once the draft law and implementing regulations are finalised. The Ministry of Finance's announcement on 31 January 2022 stated that corporate tax will be payable on the profits of UAE businesses as reported in their financial statements, except for companies engaged in the extraction of natural resources who will be exempt from the new regime. The Ministry of Finance also announced that UAE businesses will be exempt from paying corporate tax on capital gains and dividends received from qualifying shareholdings. These will consist of shareholdings in a UAE or foreign company which meets certain conditions, as will be specified in the pending legislation. The announcement also reported that group companies will benefit from relief if they suffer losses or make intragroup transactions by allowing them to be taxed as a single entity.
The introduction of Corporate Tax in the UAE highlights the benefits of the UAE's many free zones, such as the ADGM and DIFC, which international companies have traditionally used to establish fully owned Limited Liability Companies (LLCs) without the need for a local shareholder. Prior to the amendment of the Commercial Companies Law 2015 by Federal Law Decree Number 26 of 2020, LLCs were required have at least one UAE national shareholder owning a minimum of 51% of the company's shares. Most free zones in the UAE provide tax incentives to companies established there, which are usually valid for a set number of years. For example, the ADGM offers a 50-year zero percent corporate tax holiday. The Ministry of Finance has highlighted that companies established within the UAE's free zones will be subject to the new Corporate Tax regime. However, the corporate tax regime will honour the corporate tax holiday offered to free zone companies, provided that they comply with the regulatory requirements and do not conduct business in mainland UAE.
Ultimately, the new standard corporate tax rate of 9% remains lower than the corporate tax rates of the majority of other countries, with the average corporate tax worldwide set at an average of 23.54%. The UAE's proposed new corporate tax rate is also lower than most of its GCC neighbours, but more far reaching by applying to local businesses as well. By comparison, Oman sets a corporation tax of 15%, but this does not apply to local Omani establishments and LLC's that fulfil the conditions of being classified as a small or medium enterprise.
Whilst the full details of the corporate tax regime are awaited through the new law and implementing regulations, it is too early to determine whether the regime may have an impact on investors' appetite for investments in the UAE. Nevertheless, the UAE remains a compelling proposition for investors due to its strategic location, investor friendly climate and economic stability. However, companies who already operate within mainland UAE will continue to monitor the position and eagerly await the details of the new corporate tax regime to determine how it will impact their returns on investment going forward.
The latest summary information following the tax law of December 2022 can be found here.