The New Corporate Tax Regime in the United Arab Emirates

• UAE

• Corporate

22-12-2022

The United Arab Emirates (UAE) Ministry of Finance has issued Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (the CT Law), which provides the legislative basis for a new corporate tax (CT) regime. The CT will have a headline rate of 9% and the regime will apply to financial years starting on or after 1 June 2023.

The CT Law follows Cabinet Resolution No. (85) of 2022, issued in September 2022, which set out the rules determining tax residence in the UAE and which will enter into force on 1 March 2023.

In this briefing, we summarise some of the key features of the CT Law and outline the next steps for affected businesses.

Who will pay the new Corporate Tax?

CT will apply to taxable persons, which may be either resident or non-resident persons.

A resident person (which is a taxable person) is defined in the CT Law as:

(i)  a legal person incorporated or otherwise established or recognised in the UAE (including free zones, see below);

(ii)  a legal person incorporated or otherwise established or recognised in a foreign jurisdiction, which is effectively managed and controlled in the UAE;

(iii)  a natural person conducting a business or business activity in the UAE; or

(iv)  any other person as may be determined in a relevant governmental decision.

A non-resident person (which is a taxable person) is defined in the CT Law as a person which is not a resident person (as defined above) and that either:

(i)   has a permanent establishment (PE) in the UAE;

(ii)   derives UAE-sourced income; or

(iii)  has a nexus in the UAE (as specified in a relevant governmental decision).

What is the rate of the new Corporate Tax?

The standard CT rate is 9%. This is one of the lowest CT rates within the Gulf Cooperation Council (GCC) region.

A CT rate of 0% will apply to taxable income up to AED 375,000 (around USD 100,000).

The CT Law defines a “Qualifying Free Zone Person” as a legal person incorporated, established or otherwise registered in one of the free zones in the UAE (including a branch of a non-resident person registered in a free zone), which meets certain conditions, including maintaining an adequate substance in the UAE and complying with certain transfer pricing requirements. A Qualifying Free Zone Person may be subject to a CT rate of 0% on its qualifying income, unless it elects otherwise.

Key features of the new Corporate Tax

Resident legal persons are subject to CT on their taxable worldwide income.

The taxable income of a resident natural person is the income derived from the UAE, or from outside the UAE insofar as it relates to a business or business activity in the UAE.

A non-resident person is subject to CT on the taxable income that is attributable to its PE or nexus in the UAE, or its UAE-sourced income that is not attributable to the non-resident person’s PE in the UAE.

The taxable income for a tax period is the appropriately adjusted accounting income for that period; “accounting income” is the accounting net profit or loss for the relevant tax period, as set out in the appropriate financial statements.

The CT law provides for various exemptions, including that the following income and related expenditure shall not be taken into account in determining taxable income:

• dividends and other profit distributions received from a resident legal person;
• dividends and other profit distributions received from a participating interest in a foreign legal person (a participating interest is a 5% or greater ownership interest in the shares or capital of a legal person where certain conditions are met, including that the participation is subject to CT or any other similar overseas tax at a rate of not less than 9%);
• any other income from a participating interest; and
• income of a foreign PE (where the relevant resident person has made the required election).

Withholding tax at a rate of 0% (or any other rate as specified in a relevant governmental decision) applies to prescribed categories of UAE-sourced income derived by a non-resident person, to the extent it is not attributable to a PE of the non-resident person in the UAE.

Further CT provisions are expected to be made in relation to Pillar Two of the Organisation for Economic Co-operation and Development (OECD) Inclusive Framework on Base Erosion and Profit Shifting (BEPS), including an additional tax rate for large multinationals with global revenue in excess of EUR 750 million. The CT Law does not override the terms of existing international agreements in force in the UAE, including the UAE’s commitment to implement the minimum standards under the OECD’s Inclusive Framework on BEPS.

Next steps for businesses

Although further detail is awaited regarding certain provisions of the CT Law, businesses which operate in the UAE should now review their existing structures and contractual provisions in light of the new rules.

Eversheds Sutherland has lawyers based in the UAE and other global jurisdictions and can advise on all aspects of the new UAE CT regime and how it will affect your business.

If you have any questions, please do not hesitate to get in touch with one of the Eversheds Sutherland contacts listed below.