Overview of UAE Corporate Tax

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Overview

The United Arab Emirates is a federation of seven Emirates with autonomous federal and local governments. The UAE has historically  been  a low-tax jurisdiction. Until the introduction of the Foreign Direct Investment Law in late 2018, it was a federal requirement for at least 51% of the shares of a company to be held by a UAE national. As a result, free zones were established to attract foreign businesses to the region wishing to have full control of their business. And such free zones offered 100% ownership by expatriates and 100% tax-free regime promotions. However, the federal and local governments are entitled to levy taxes on citizens and companies. Currently, UAE levies  value-added and excise taxes were introduced in 2018, and corporate tax was introduced on 1st June 2023; other forms of taxes currently in some emirates are on property  transfer and tourism taxes. Some emirates also charge corporate taxes on oil companies and foreign banks.

The United Arab Emirates has a well- established infrastructure, a stable political system, and one of the most liberal trade regimes in the Gulf region. It continues to be increasingly important, relevant, and attractive to businesses worldwide as a place to do business and as a hub for the region and beyond. The United Arab Emirates is also one of the best examples of an economy that has successfully moved away from reliance on the energy sector. A significant proportion of the gross domestic product (GDP) is derived from non-oil revenues. Over the past few years, the UAE has taken significant steps to enhance tax transparency and to facilitate the exchange of information for tax purposes by bringing its domestic tax rules into line with international standards.

The OECD work on Action 1 is based on two pillars and has  become known as the BEPS 2.0 project. Pillar 1 deals with allocating taxing rights between jurisdictions and  nexus rules, whereas Pillar 2 deals with the proposal for a global minimum tax regime. Recently OECD issued a blueprint on Pillar 2, which deals with the development of global minimum tax rules to ensure that the worldwide income of businesses is subject to an agreed minimum rate of tax regardless of where they are headquartered or operate, thereby limiting the incentives for businesses to locate functions, activities, and profits in low-tax jurisdictions.

Currently, most jurisdictions tax income if the entity generating the income is a resident or has a permanent establishment in the country; otherwise, the entity derives local source income. A consequence of Pillar 2 is that subject to any minimum threshold (currently, a EUR 750 million annual group consolidated revenue threshold is proposed for the rules to apply to a multinational enterprise), overseas jurisdictions will be granted additional taxing rights where other jurisdictions, such as the UAE have not exercised their taxing rights or income is subject to low rates of tax.

Federal Decree-Law No. 47 of 2022 on the taxation of Corporations and Businesses was published in the official Gazette of the United Arab Emirates (“UAE”) on 10th October 2022. It provides a legislative basis for imposing a federal tax on corporations and business profits (“Corporate Tax”) in the UAE. It comprises 20 chapters and 70 articles, covering, inter alia, the scope of Corporate Tax, its application, and rules about compliance and the administration of the Corporate Tax regimes.

Next Steps

As a business, you should evaluate the impact of the above-mentioned provisions on your operations and take an informed decision on the applicability of the Corporate Tax in the UAE for your business.

The 20 Chapters of Law are as follows:

Sr No.  Chapters

1.         General provision

2.         Imposition of corporate tax and rates

3          Exempt Personas

4          Taxable Person and Corporate Tax Base

5          Free zone person

6          Taxable Income

7          Exempt Income

8          Reliefs

9          Deductions

10        Transactions with related parties and connected persons

11        Tax Loss Provisions

12        Tax Group Provisions

13        Calculation of Corporate tax payable

14        Payment and Refund of Corporate tax

15        Anti-Abuse Rules

16        Tax registration and De-registration

17        Tax returns and clarifications

18        Violations and Penalties

19        Transitional Rules

20        Closing Provisions