When it comes to taxes, the UAE has been a business owner’s paradise! Small business owners and entrepreneurs from all over the world travel to Dubai and other Emirates to follow their dreams because of the welcoming environment, lack of corporate taxes, and opportunities for growth. As time goes on, the corporate environment evolves. International obligations and law are always changing. Such of a change has also now happened in the UAE’s corporate environment. A new tax routine has been introduced in UAE with the name of ‘Corporate Tax’ which will take effect from June 1st 2023 and will apply to all kinds of businesses operating inside UAE with certain terms and conditions.
WHAT IS THE CORPORATE TAX LAW IN UAE?
As far as the UAE Corporate Law is concerned, there are certain things which are still due to be revealed by the Ministry of Finance and the Federal Tax Authority. Once the law gets officially published, more guidance on this will be cleared.
Given that the UAE CT regime will go into effect on June 1, 2023, and that the UAE Ministry of Finance has stated a desire to give UAE companies enough time to prepare, it seems likely that the UAE CT law and pertinent recommendations will be released starting in June 2022.
WHAT IS THE BASIS BEHIND THE RATE OF CORPORATE TAX IN UAE?
The UAE has implemented a competitive corporate tax (CT) system as part of recent changes in international tax as part of its goal to be a prominent global hub for business and investment. The 9% CT rate, one of the lowest CT rates in the world, was probably chosen to keep the UAE appealing to foreign investors. The 9% CT rate should also guarantee that certain income streams will continue to be taxable in the UAE without causing tax revenues to be lost to other countries.
By setting the UAE CT rate at 9%, it should be possible to prevent the STTR (Subject to tax rule under Pillar Two) from increasing source taxation on interest and royalties received by UAE firms.
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HOW DOES THE CORPORATE TAX WORK FOR FREE ZONES IN UAE?
The new federal tax framework will apply to businesses operating in the free zones of the UAE, and they will need to register and submit a UAE Corporate Tax return.
However, they will still be qualified for the free zone CT “holiday” or 0% CT rate as long as they continue to adhere to all zone regulations and refrain from doing business with the mainland (indirect or secondary income such as royalties, interests, dividends, and capital gains from mainland company shares are not included).
WHAT WILL BE THE EFFECT OF TAX HOLIDAYS ON FREE ZONE ENTITIES UNDER THE NEW CORPORATE TAX REGIME?
In the United Arab Emirates, many free zones provide a range of benefits, such as tax exemptions lasting up to 50 years. The UAE CT regime will continue to recognize these tax incentives for free zone firms that comply with the pertinent regulatory criteria and do not do business with mainland UAE, according to information released by the UAEs’ Ministry of Finance.
What “conducting business with mainland UAE” implies is not yet known. It is unclear if the following hypothetical situations would qualify as “conducting business with mainland UAE.” Any type of contracting with onshore clients and obtaining income from the mainland UAE would probably be regarded as doing business with the mainland UAE.
The Ministry of Finance FAQs indicated that a uniform treatment will be applied to all free zones for Ministry of Finance Corporate Tax reasons, despite the fact that free zones are treated differently for Value Added Tax (VAT) purposes under the concept of Designated Zones. In due course, more information about how free zone entities are handled is anticipated. It is uncertain whether free zones will extend tax benefits once they expire in the future.
WILL FREE ZONE ENTITIES THAT OPERATE IN BOTH THE FREE ZONE AND THE UAE MAINLAND HAVE THEIR INCOME TAXED IN THE NEW CT REGIME?
Uncertainty exists on whether or whether such free zone entities will be liable to UAE CT on all of their income, including income derived from free zones or from sources outside of the UAE, or just on the income from doing business with mainland UAE. It’s probable that firms located in free zones will only be subject to taxation on income earned from transactions with the UAE’s mainland because the UAE plans to honor tax benefits offered in free zones.
It is anticipated that the UAE CT law will only permit CT deductions for expenses that were made in connection with this income if free zone entities are only taxed on their income from the mainland UAE. Businesses should anticipate allocating or apportioning their expenses appropriately if this were the case.
WHAT WILL BE THE EFFECT OF CORPORATE TAX ON FREE ZONE ENTITIES OF LARGE MULTINATIONALS?
Pillar Two free zone entities that are a member of a big multinational organization may be subject to the 15% Global Minimum Tax (GMT), even though qualifying free zone entities may not be subject to the UAE CT. In essence, multinational groups may be subject to a top-up tax that must be paid outside of the UAE if their ETR in the UAE is less than 15% (as determined by Pillar Two).
Whether the UAE Corporate Tax Law will provide a system to guarantee that any top-up tax is paid in the UAE rather than in another country is not yet known. It is likely that such a mechanism will be in place, given the UAE’s possible revenue loss.
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