UAE Corporate Income Tax

The Headline News

On 9 December 2022, the United Arab Emirates Ministry of Finance (“MoF”) released UAE Federal Decree-Law No. 47 of 2022 on taxation of corporations and businesses (the “Corporate Tax Law”), which introduces federal corporate income tax (“CIT”) for the first time in the UAE.

In recent years, the UAE introduced Value Added Tax (“VAT”), but the implementation of CIT marks a more profound commitment by the UAE to meet international standards for tax transparency, whilst still maintaining a highly completive tax rate in comparison to other jurisdictions.

The release of the Corporate Tax Law comes after a public consultation document released in early 2022. The initial consultation document provided an insight into the new regime but this was reliant on supplemental ministerial and cabinet decisions being released to clarify certain key aspects. Various decisions have been released since the 1 June 2023 which assist with the interpretation and analysis of the Corporate Tax Law.

Key Features of the Corporate Tax Law

Effective Date

The CIT will be applicable from the beginning of the first financial year that starts on or after 1 June 2023.

Scope

CIT applies to the following “Taxable Persons” across all Emirates within the UAE:

• UAE companies and other juridical persons that are incorporated or effectively managed and controlled in the UAE;
• Individuals that conduct business activities under a commercial licence in the UAE; and
• Non-resident juridical persons that have a ‘permanent establishment’ in the UAE.

Note that the definition of permanent establishment in the Corporate Tax Law has been drafted on the basis of the Organisation for Economic Co-operation and Development (“OECD”) Model Tax Convention on Income and Capital and determines the factors that should be taken into account when considering if a foreign legal entity has established sufficient presence in the UAE to warrant profits being subject to CIT.

Exempt Entities

The Corporate Tax Law provides an exemption to the regime for businesses that operate in strategic sectors such as government and government-controlled entities, natural resources businesses, qualifying public benefit entities (i.e. those established for, amongst others, religious, charitable, educational and humanitarian purposes), qualifying investment funds, social security funds and private pensions.

Applicable CIT Rates

CTI is applied to Taxable Persons at the following rates:

• 0% on taxable income up to and including AED 375,000; and
• 9% on taxable income exceeding AED 370,000.

The above thresholds and associated rates are reflective of the Ministry of Finance acknowledging support for small businesses and start-ups in the UAE.

Qualifying Free Zones

Many free zones in the UAE offer a 50 year tax holiday, therefore the effect of the CIT was keenly anticipated by free zone companies. In recognition of the importance that free zone companies have in driving economic growth in the region, as well as the commitments that were made at the time of establishment of such entities, the Corporate Tax Law states that a Qualifying Free Zone Person (“QFZP”) will be taxed at the following rates:

• 0% on ‘Qualifying Income’; and
• 9% on incoming that is not ‘Qualifying Income’.

On 1 June 2023, the MoF released two decisions to clarify the intent of the QFZP regime in that it should apply only to income derived from activities that are performed exclusively in or from within a free zone. This is reflected in the definition of ‘Qualifying Income’ which includes income derived from transactions with other Free Zone Persons, as well as domestic and foreign sourced income derived from conducting any of the ‘Qualifying Activities’ listed in Article 2 of Ministerial Decision No. 139 of 2023 such as manufacturing and processing goods or materials; holding of shares and other securities; ownership, management and operation of ships; regulated reinsurance and fund/wealth management, financing and leasing of aircraft and the distribution of goods in or from a designated zone and logistic services.

Article 3 of Ministerial Decision No. 139 of 2023 indicates that income from certain ‘Excluded Activities’ will not be treated as Qualifying Income regardless of whether the income is part of a Qualifying Activity. This includes income derived from transactions with natural persons, certain regulated financial services activities, intangible assets and immovable property.

Subject to de minimis requirements, earning income from ‘Excluded Activities’ or earning any other income that is not ‘Qualifying Income’ will disqualify the free zone entity from the regime and the regular CIT rates will apply. To satisfy the de minimis requirements, the non-qualifying income earned by a Free Zone entity must not exceed either 5% of their total revenue or AED 5,000,000, whichever is lower.

Groups

A group of UAE entities can elect to form a tax group and to be treated as a single entity for taxation purposes, filing a single return for the entire group.

Practicalities

Within 9 months of the end of the financial period, a tax return must be filed, and the payment of corporate tax must be paid. All documentation related to CIT is required to be kept for 7 years from the end of the financial period to which they relate.

Global Comparison

Whilst the imposition of CIT marks a significant development in the UAE, it should be understood within the context of the global regime. The OECD Pillar One and Two Project, which has been signed by 138 signatories including the UAE, encourages countries to move away from no and low tax systems, and to adopt tax of at least 15% on corporate income. Whilst the CIT rate in the UAE is set at 9% for the time being, the shift is illustrative of the UAE market becoming more integrated within the global economy, whilst still remaining attractive for businesses looking to expand their operations.

Questions

If you have any questions or would like to know how the Corporate Tax Law may affect your business, transactions and potential restructurings, please email the key contacts listed below. 

Imtiaz Shah - Imtiaz.Shah@hoganlovells.com

Isabelle Forrest - isabelle.forrest@hoganlovells.com

Authored by Imtiaz Shah and Isabelle Forrest.