The UAE’s tax jurisdiction is extremely friendly and is a source of attraction for multinationals and large investors worldwide. However, the UAE has recently introduced certain tax reforms to minimise its dependence on hydrocarbon revenues and align with global tax policies developed within the scope of the OECD’s Base Erosion and Profit Shifting (BEPS) project. In 2023, in line with the country’s diversification strategy and its commitment to aligning with global tax standards, including transparency, the corporate tax was implemented at the federal level, marking a paradigm shift.

Here’s an overview of the current corporate tax landscape with key tax considerations.

Corporate Tax History

Both individuals and corporations were exempt from taxes under the UAE’s tax system. However, foreign banks and companies involved in oil and gas exploration are still subject to Emirate-level taxation. Establishments in the free zones were also granted tax incentives, including long-term tax holidays, unlimited repatriation of earnings, and 100% foreign ownership. These have undoubtedly aided in the UAE’s development as a major international business centre, drawing in investors and multinational corporations.

The VAT, or Value-Added Tax, implemented in 2018 was a milestone, as a standard rate of 5% was imposed on the supply of goods and services. The Economic Substance Regulations were introduced for relevant activities, reflecting the UAE’s commitment to the BEPS Inclusive Framework and its shift away from hydrocarbon revenue.

Current Corporate Tax Landscape

In an attempt to align the UAE with international tax standards, the federal corporate tax has been introduced. Under the Corporate Tax Law, or Federal Decree Law No. 47 of 2022 on the Taxation of Corporations and Businesses, businesses with taxable income exceeding AED 375,000 will be subject to 9% corporate tax. There are exemptions for certain categories, such as non-extractive and extractive natural resource industries, government entities and others who qualify for public benefits.

Those in free zones across the UAE must meet certain conditions to be eligible for a 0% tax rate on their qualifying income. Some key conditions would be:

• To maintain adequate substance in the UAE
• Comply with transfer pricing requirements
• Ensure to meet the de minimis rule
• Derive the adequate qualifying income
• Submit financial statements duly audited

It is all based on how complex or narrow the qualifying revenue is, which in turn depends on the sort of activity conducted in the free zone and the nature of the income. In this manner, the UAE can balance compliance, preserve attractive economic conditions, and conform to international tax standards. It can thus allow strategic business activities in the free zones, such as trading commodities (that qualify), hosting headquartered businesses, manufacturing, reinsurance and more.

If you are an individual doing business in the UAE with a total turnover exceeding AED 1 million during a Gregorian calendar year, you will be subject to corporate tax.

Small businesses with limited resources get various reliefs from the Corporate Tax Law, provided they meet their tax obligations. Under certain conditions, a small business with revenue (annual) not exceeding AED 3 million may elect not to be taxed until the period ending 31 December 2026.

Imposition of Withholding Tax

The Withholding Tax is obligatory on certain types of income generated in the UAE by non-residents without a permanent establishment in the UAE. While the precise UAE-source income categories have yet to be established, the current withholding tax rate is 0%, with the possibility of an increase in the future. Non-residents, however, can leverage the UAE’s network of double tax treaties, which allow companies to strengthen their positions and reduce withholding tax exposure.

Bottomline

There have been several international tax developments, including the BEPS Pillar Two, which is a critical step taken by the UAE to align with global standards. The recent Corporate Tax Law has also been amended to include an internal top-up tax system with an effective tax rate of 15% imposed on large MNEs. Transfer pricing is also significant for businesses operating in the UAE, with its inclusion in the Corporate Tax Law. The requirements are well aligned with the OECD model. Transactions must be conducted using preferred transfer pricing methodologies, and multinationals must maintain all key documentation demonstrating compliance.

The UAE is a tax-friendly jurisdiction that is constantly evolving and is on its way to achieving a diversified strategy that aligns with international tax standards. With the implementation of the new Corporate Tax regime, the country has demonstrated its agility and adaptability in responding to new global tax challenges.