The United Arab Emirates (UAE) is set to introduce Federal Corporate Income Tax (CIT) starting from June 1, 2023.
This significant development will bring changes to the tax landscape in the country, impacting businesses that have been enjoying tax exemptions on their profits. The implementation of CIT has attracted great interest and attention from both local and foreign businesses operating in the UAE.
Financial Sector Implications:
With the Ministry of Finance announcing the introduction of CIT for the upcoming financial year, UAE’s financial sector is preparing for the changes that lie ahead. The Government aims to create economic sustainability by protecting businesses, particularly small businesses and Start-ups. This move aligns with International tax norms and follows similar steps taken by neighbouring Gulf countries. The UAE Ministry of Finance assures that even with the implementation of CIT, the country will maintain one of the lowest corporate tax rates globally.
Key Features of Corporate Income Tax (CIT):
1. Applicability: The proposed CIT will apply to all business activities in the UAE, including commercial, industrial, and professional sectors, except for natural resource extraction, which is already taxed at the emirate level.
2. Individuals: Individuals holding a business licence or permit for commercial and industrial-professional activities, including freelance professionals, will also be subject to CIT.
3. Banking Activities: CIT will apply to banking activities in the UAE, including branches of foreign banks, which are already subject to CIT at the emirate level.
4. Free Zone Businesses: Free zone businesses will continue to benefit from existing corporate tax incentives. However, they must comply with regulatory requirements and refrain from conducting business outside the free zones. This may affect businesses operating under the dual licensing scheme in the UAE and Free Zones.
Prescribed Rates:
The proposed CIT introduces three different tax rates:
- Exemption: Income up to AED 375,000 ($102,000 or INR 84 lakh) will be exempt from corporate tax.
- 9% Tax Rate: Income above AED 375,000 will be subject to a 9% tax rate, equivalent to around Rs 84 lakh.
- Large Multinationals: Large multinationals with consolidated global revenues exceeding EUR 750m (AED 3.15 bn) will be subject to a different tax rate, yet to be announced by the Ministry of Finance, in line with the Base Erosion and Profit Shifting (BEPS) scheme.
Exclusions from CIT:
Certain sources of income will be exempted from CIT, including income derived from the extraction of natural resources, dividends and capital gains from qualifying shareholdings, intra-group transactions and reorganisations meeting specific conditions, foreign entities and individuals not regularly engaged in trade or business in the UAE, and income of foreign investors from various investment sources.
Other Features:
1. Foreign Tax Credits: Businesses will be allowed to offset foreign CIT paid against the CIT payable in the UAE. The UAE has entered into over 130 double tax treaties to facilitate the functioning of the tax system.
2. Tax Grouping: Subject to specified conditions, UAE group companies can form a tax group and be treated as a single entity for tax purposes, filing a single tax return for the entire group.
3. Transfer Pricing: UAE businesses must comply with transfer pricing rules and documentation requirements based on the Organization for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines.
Attention to Indian Businessmen:
Indian businessmen considering business relocation to the UAE need to closely monitor the developments regarding qualifying income within the Qualifying Free Zone (QFZ). While a significant portion of business in the UAE operates within the QFZ, only qualifying income will be subject to corporate tax.
