The Ministry of Finance announced in late January 2022 that the United Arab Emirates (UAE) will be introducing a federal corporate income tax (CIT) regime as well as transfer pricing requirements. Historically a no-tax jurisdiction, this monumental announcement has the tax world buzzing as UAE structures may need to be re-assessed – but what does the introduction of the federal CIT regime entail, and what should you be considering?

What?
  • The standard statutory tax rate will be 9%, with an exemption applicable on taxable profits up to AED 375 000 (in support of small businesses and start-ups).
  • MNEs falling within the scope of ‘Pillar Two’ of the OECD BEPS project will be subject to different tax rates.
  • UAE Free Zone exemptions will apply where all regulatory requirements are complied with, and where the entity conducts no business with mainland UAE.
  • There will be no withholding tax on domestic and cross-border payments.
  • The following categories of income will be exempt from CIT:
    • Capital gains.

    • Dividends received by UAE businesses from qualifying shareholding.

    • Qualifying intragroup transactions and restructurings

    • Income from the extraction of natural resources, which income will remain subject to Emirate level corporate taxation.

  • Foreign tax credits may be applied against UAE corporate tax payable, and there will be a beneficial transfer of losses and utilisation rules.
  • UAE businesses will need to comply with OECD transfer pricing rules and documentation requirements.
Why?
  • The UAE has been through a series of tax reforms over the last few years to align itself with international markets and diversify its revenue. The CIT regime (and TP requirements) have been implemented by the UAE to meet international standards for tax transparency and to prevent harmful tax practices, in line with BEPS initiatives.
When?
  • The UAE CIT regime will become effective for financial years starting on or after 1 June 2023.
When?
  • Businesses that are subject to UAE CIT will be required to file a CIT return electronically.

  • UAE companies will be able to form a “fiscal unity” for UAE CIT purposes, effectively submitting a consolidated return.

  • The Federal Tax Authority will be responsible for the administration, collection, and enforcement of the new CIT regime, and businesses will be subject to penalties for non-compliance with the CIT regime.
Our thoughts
Whilst the new regime may have come as a shock, it has been necessary for the UAE to implement these changes over the years, culminating in this most recent introduction of CIT and transfer pricing requirements, given the international arena’s focus on BEPS and leveling of the playing field.

Whilst CIT may apply to your business, the rate is low which still makes the UAE an attractive destination for business. The exemptions from CIT available may also result in certain businesses (not carrying on business in the UAE or those qualifying for exemption by virtue of taxable profits being below the threshold stipulated) not being subject to corporate income tax at all.  An important next step is to determine whether the CIT will impact your business, and it is our view that many entities will escape the CIT consequences pursuant to the introduction of this regime.

We await clarity from the minister of finance on the regulatory requirements which are to be complied with for UAE Free Zone exemptions, as well as the criteria to qualify for the exemption from CIT on dividends and intragroup transactions and restructurings.

Your next steps
Before the implementation of the CIT regime, effective for years of assessment ending post 1 June 2023, businesses in the UAE need to bear the following in mind and ask themselves the following questions:

Associated enterprises

How can we help?

How you structure your business is a critical question as you expand globally.  The right structure will protect your assets, improve your currency position, support your business operations, facilitate future business expansion and changes, and optimise your overall tax rate. Trying to unscramble a sub-optimal structure entered into in haste or without full consideration of relevant facts is complex and expensive, so it’s important to plan upfront.

Structuring an international business is both a science and an art – this is our specialist area of expertise. Regan van Rooy is an international tax and structuring advisory firm focussing on Africa. We have offices in South Africa, Mauritius and Ireland and we can help you with any international tax or structuring query.

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