On 31 January 2022, the tax landscape of the region shifted yet again with the United Arab Emirates (UAE), Ministry of Finance (MoF) making the breakthrough announcement that a new federal corporate income tax (CIT) system will be implemented in the UAE, effective financial years commencing on or after 1 June 2023. Barring Bahrain, the UAE has introduced the lowest corporate income tax rate within the GCC region at a standard rate of 9%.
The UAE CIT regime has been designed to incorporate best practices globally and minimize the compliance burden on businesses.
In the past few years, the UAE experienced significant tax changes with a view to streamline its tax system and bring it in line with international best practices, whilst also diversifying its state revenue. Starting with the implementation of Value Added Tax (VAT) in January 2018, followed by the introduction of economic substance rules (ESR) as well as Country-by-Country Reporting (CbCR) regulations in April 2019, the UAE has been through a series of tax reforms in the last few years to align itself with international markets and diversify its revenue.
The new CIT law will levy corporate income tax on business profits made by UAE businesses, over the course of a tax accounting period.
The Law and details of the regulation are expected to be issued in mid-2022, and the natural question that arises is: do businesses have sufficient information to assess the impact of this announcement?
In this alert, we share our insight based on the FAQ issued by the MoF.
The CIT will be applicable for financial years starting on or after 1 June 2023.
Any company that adopts a fiscal year starting on 1 June 2023 and ending 31 May 2024 will be subject to CIT starting 1 June 2023. The first tax return filing is likely to be due towards the end of 2024.
Any company that adopts a calendar year starting 1 January 2023 and ending 31 December 2023 will be subject to CIT starting 1 January 2024 and filing is likely to be due towards mid-2025.
Scope of the CIT
The UAE has introduced a federal tax system that is applicable to all businesses and commercial activities operating within the seven emirates. However, there are certain exceptions:
- Businesses operating in the extraction of natural resources. These will continue to be subject to the tax decrees issued by the respective Emirate
- Individuals earning income in their personal capacity (i.e. salary, investment income) as long as the income generating activity does not require a commercial license
- Businesses registered in Free Trade Zones, provided they comply with all the regulatory requirements, and that do not conduct business with Mainland UAE
It is interesting to note that the foreign banking sector, which has been operating under the Emirate level bank tax decree, will now be subject to the UAE Federal Tax Law. The impact of CIT on the Emirate level banking tax decree will be communicated in due course. This will be a significant shift for both branches of foreign banks, which will need to switch to the new law, and for local banks, which, similar to other businesses, will now be subject to corporate tax.
The announced UAE CIT regime introduces a tier system with three rates:
- All annual taxable profits that fall under AED 375,000 shall be subject to the zero rate.
- All annual taxable profits above AED 375,000 shall be subject to 9% rate.
- All MNEs that fall under the scope of Pillar 2 of the BEPS 2.0 framework (i.e. consolidated global revenues in excess of AED 3.15 billion) shall be subject to different rates as per the OECD Base Erosion and Profit-Sharing rules.
Taxable profits are the accounting profits subject to certain adjustments.
The following income shall be in general exempt from income Tax:
- Dividend income earned by UAE company from its qualifying shareholdings (to be defined in the law)
- Capital gains
- Profits from group reorganization
- Profits from Intra-group transactions
There will be no UAE withholding tax on domestic and cross-border payments.
Considering the exempt income scheme, it may be anticipated that the law shall include a participation exemption or similar principles commonly seen in international markets, and businesses would need to evaluate if they will be able to meet the prescribed conditions (if any) to avail the exempt income scheme.
Free Trade Zones
The UAE intends to honor its commitment to businesses registered in Free Trade Zones to the extent that such businesses do not conduct business with mainland entities shall be subject to zero percent tax (or be exempt as the case may be) until the end of the holiday period. All free zones have to file an annual CIT return.
Businesses with presence in both Mainland UAE and Free Trade Zones as well as those operating under the dual license scheme should consider the impact on their operating model.
Transfer Pricing rules
The OECD Transfer Pricing Rules shall now be applicable in the UAE. All companies have to comply with the Transfer Pricing rules and documentation requirements. These transfer pricing rules will now become mandatory and may also be applicable to domestic transactions.
While intercompany sales and financing services are common practice amongst UAE groups, previously remuneration for these activities has not been on the forefront given the transactions would likely be eliminated upon financial consolidation.
This is a game changer as intercompany transactions would need to be undertaken at arm’s length and generally should be supported by appropriate documentation. Businesses would need to evaluate their current arrangements and assess the impact on both cross-border as well as domestic transactions.
Accumulated taxable losses shall be allowed to offset future taxable profits.
Tax grouping and group relief provisions are allowed. UAE Groups should be able to file consolidated tax returns. Offsetting tax losses among groups might be allowed.
Foreign Tax Credits
Taxable entities will be allowed to take as a credit against its annual tax liability the foreign corporate tax paid on UAE taxable income.
Doing business in the UAE has historically been synonymous with a business friendly tax regime, and businesses have adapted to various reforms over the past few years.
Considering the FAQs and press releases, the UAE corporate tax law appears to be aligned to global corporate tax systems bringing in concepts such as consolidating filings, participation exemptions, foreign tax credits and transfer pricing.
As businesses await further guidance expected in mid-2022, the FAQs released by the MoF should offer organizations food for thought about the impact on their businesses and whether they are operationally ready.
KPMG has a team of experienced cross functional tax specialists that can help you navigate the path to corporate income tax readiness and assist you with:
— Assess the impact of the corporate income tax law on your business;
— Identify opportunities to rationalize and optimize your corporate structure and business operating model;
— Formulate policies and procedures to build robust internal controls around corporate tax accounting and compliance
— Review intercompany transactions and arrangements and assist businesses to comply with transfer pricing rules
— Assist in implementing changes to systems, policies and procedures.
— Support communication with key stakeholders on the impact of their returns
We are happy to discuss your specific circumstances with you and determine the way forward should you have any questions or concerns in this regard. Please get in touch with your usual KPMG contact or any of the tax professionals below.