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MOF UAE to introduce federal corporate tax from June 2023 - Key Features

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The UAE Ministry of Finance recently announced on 31st January 2022 that it will be introducing a new federal corporate tax regime for the very first time in the UAE. The Federal Corporate Tax law will soon be issued along with executive regulations.

It is likely that the corporate tax will be effective on or after 1st June 2023 and will be applicable to profits made during financial years on or after 1st June 2023. The UAE Federal Tax Authority will be handling administering, collecting and enforcing Corporate Tax (CT) as per the rules and regulations laid down by the Ministry.

UAE MOF will introduce a federal Corporate Tax

Scope of Application

All UAE businesses and commercial activities conducted by legal entities or people across the seven emirates will be subject to the corporate tax. Natural resource extraction will continue to contribute to the emirate-level corporation tax.

All operations carried out by a legal entity are considered "business activities" and are subject to corporate tax regime. On the other hand, an individual will be considered to have a “business” that falls under the CT law if he/she has a business license/permit to conduct the relevant activities in the UAE.

Companies in the UAE’s free zones or financial free zones will also need to pay federal corporate tax. However, they will be allowed to enjoy specific tax breaks and incentives as per the legal framework set by the relevant free zone authority.

For example, the Dubai International Finance Centre (DIFC) law and the Abu Dhabi Global Market (ADGM) law both state that a DIFC- or ADGM-incorporated company pays no tax for the first 50 years after the law takes effect. As a result, companies formed in the DIFC and ADGM can expect to pay 0% tax until 2071 and 2063, respectively.

It is unclear if the tax treatment differs based on whether free zone companies conduct their activities within or outside the free zone.

RATES

The Corporate Tax rates will be as follows:

0% tax rate for taxable income up to AED 375,000.
9% tax rate for taxable income above AED 375,000.
A different tax rate for big multinationals that fulfil specific criteria based on the Global Anti-Base Erosion Model Rules (Pillar Two) of the OECD Base Erosion and Profit Shifting project.

NON-TAXABLE INCOME

The following companies will be exempt from corporate taxes:

An individual’s salary or income is gained through work. But, if an individual's income is earned through activities conducted under a freelance license, he or she will be subject to corporate tax.
Individuals can invest in real estate in their personal capacity if they do not need a commercial permit or license to do so in the UAE.
Dividends, capital gains, and other income are received through personal ownership of stocks and other securities.
Interest and other income are earned by individuals through bank deposits or any savings schemes.

EXEMPT INCOME

The MoF states that the following items will be excluded from corporate tax:

Dividends and capital gains received by a UAE business from "qualified shareholdings" (i.e., ownership interest in a UAE or foreign company that meets certain conditions to be specified under the CT Law).
Intra-group transactions and mergers that meet specific criteria and conditions and comply as per the CT Law.

Final thoughts

The introduction of a corporate tax in the UAE will likely affect business operations, structures, and potential mergers & acquisitions in the UAE. We encourage businesses to examine their current structures and activities in order to implement the most efficient business structures and strategies once the CT Law is issued and in effect.