CORPORATE TAX UAE: INTRODUCTION
Company profits of the businesses in UAE will now be subject to a federal corporate tax of 9% with an AED 375,000 minimum, according to the Ministry of Finance. This takes effect on June 1, 2023, the first day of the next fiscal year. The corporation tax rate in the UAE is among the lowest in the GCC, as Bahrain is presently the only member state without a CT scheme, and among the most competitive worldwide.
For the time being, it is apparent that the corporate tax regime in the UAE will adhere to best practices around the world and that it will be implemented with simple corporate tax compliance requirements.
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CORPORATE TAX UAE: THE RATE AND ITS LOGIC
For an income that is taxable for businesses in UAE the rate for Corporate Tax is proposed to be 0% if the amount of taxable income is between AED 0 and AED 375,000. While for an amount of taxable income exceeding AED 375,000 the proposed rate for Corporate Tax is 9%. For multinational companies in UAE, there will be a different rate for Corporate Tax, predicted to be 15% as it is the global minimum effective rate for tax proposed by the OCED. The corporate tax rate for large multinational groups in UAE will be subject to the BEPS Pillar Two which means that the accumulated glob al earning of the companies is more than AED 3.15 billion.
As an outcome of recent amendments in the international tax system, UAE has introduced the Corporate Tax Regime in the country, to give the economy an even more fruitful business environment with a low tax rate in order to remain as a global hub for businesses and investment. Imposition of one of the lowest rates for Corporate Tax is UAE’s idea to attract foreign businesses and investors. Additionally, the 9% CT rate should ensure that certain sources of income will continue to be subject to UAE taxation without resulting in tax revenues being diverted to other nations.
For UAE entities of major multinational companies with an effective tax rate below 15% under a Qualified Domestic Minimum Tax in accordance with Pillar Two, a domestic top-up tax may be implemented in order to ensure that tax revenues stay in the UAE. This effectively raises the effective tax rate for UAE firms under Pillar Two to 15% and ensures that no top-up taxes are due from sources outside of the UAE.
CORPORATE TAX UAE: EXEMPTED ENTITIES
The following organizations will not be subject to UAE CT:
- entities involved in the exploitation of natural resources in the UAE. These entities will continue to be subject to Emirate level corporate taxation.
- charities and other non-profit organizations, as long as a request for an exemption is submitted to the minister of finance and granted by a Cabinet resolution.
- The ministries and authorities of the federal UAE government and the governments of the Emirate
- Companies in the UAE with 100 percent government ownership that engage in specific activities and have been given Cabinet approval.
- Social Security and retiree pension funds that are both public and regulated privately.
- investment funds that are structured as limited partnerships with a flow-through structure. If they meet certain criteria, regulated investment funds and REITs may petition for exemption.
WHAT IS MEANT BY HOLDING COMPANIES IN UAE?
A holding company is a type of corporate entity that controls one or more subsidiary businesses as well as assets (like real estate). A holding company’s main function is to own the companies or assets that make up the group. If a company wants to restrict its liability and holds a variety of assets, this is a tax-efficient strategy to organize the company. A holding company can be compared to a parent corporation that owns a controlling interest in all of its assets and subsidiaries (up to 100%). This indicates that while it has overall control over the group, it is not involved in the day-to-day operations of those businesses or the asset management.
WILL UAE HOLDING COMPANIES BE EXEMPTED FROM CORPORATE TAX?
In general, holding firms will be subject to the Ministry of Finance Corporate Tax. However, holding firms may be exempt from some income streams. According to the Ministry of Finance FAQs, certain qualifying shareholdings should result in corporate tax exemptions for dividends and capital gains.
Exactly what counts as a qualifying stake is currently unknown. We anticipate that there will be minimum shareholding requirements, possibly at least 10% in accordance with Pillar Two criteria as well as time requirements for qualifying shareholdings.
For comparison, we observe that the following items are not subject to the 15% GMT under the Pillar Two regulations (additional information is provided on page 14):
• Dividends, excluding those pertaining to ownership of less than 10% of the shares.
• Capital gains, excluding those from the sale of shares with a less-than-10% ownership.
It’s possible that the Pillar Two regulations will be mirrored by the Ministry of Finance’s Corporate Tax regime in this regard. In addition to the aforementioned, holding firms who only do business with foreign entities may profit from free zone benefits.