On 31 January 2022, the Ministry of Finance of the United Arab Emirates (UAE) announced the introduction of a Federal Corporate Income Tax (CIT) on business profits. The new corporate tax regime will be applicable for financial years starting on or after 1 June 2023.
The CIT will apply across all Emirates and to all business and commercial activities, except for those involved in the extraction of natural resources (oil & gas industry), which will continue to be subject to a taxation at Emirate level.
This implementation comes as the UAE aligns itself with the new global standards, in particular the transition to a Global Minimum Corporate Tax (GMCT). It was to be expected that UAE would introduce a CIT considering that UAE is a member of the Inclusive Framework of the OECD BEPS Initiative.
We provide you hereafter with a general overview of the new regime as recently announced by the Ministry of Finance and the Federal Tax Authority.
The UAE’s new federal tax system will apply across the seven Emirates on the adjusted accounting net profit of businesses. The UAE CIT regime introduces two basic tax rates:
|Annual taxable profit
|< AED 375,000
|> AED 375,000
MNEs that have consolidated global revenues in excess of AED 3.15 billion would be subject to a different rate under the OECD’s BEPS rules (Pillar Two of the OECD’s BEPS 2.0 framework).
The UAE intends to keep its commitment to businesses registered in Free Trade Zones to the extent that (i) they register for tax and file a CIT return; and (ii) they do not conduct business with mainland UAE. Today the UAE has over 36 free trade zones.
It was also confirmed that no withholding tax will be due on domestic and outbound dividend, royalty and interest payments. Foreign investors who do not carry on business in the UAE will in principle not be subject to corporate tax. There is also no taxation of capital gains in respect of foreign investors.
The following categories of income shall normally be exempt from CIT:
|Qualifying intragroup transactions and restructurings
|Dividends received by UAE businesses from qualifying shareholding (TBC)
|Income from the extraction of natural resources (remain subject to Emirate level CIT)
The CIT will also not apply to personal income that is not attributable to a UAE trade or business. Employment income, income from real estate and income from savings and investments do not fall within the scope of UAE CIT. Some anti-abuse provisions will probably be introduced at some point to avoid companies from potentially eroding their taxable base by distributing their earnings as (tax-free) personal income.
UAE businesses will also need to comply with transfer pricing reporting obligations within its CIT regime. Transfer pricing rules and documentation requirements will be fully aligned with OECD transfer pricing guidelines.
Tax consolidation, losses, & credits
The UAE CIT rules will include a broad usage of tax losses carried forward against taxable income under certain conditions. In addition, a UAE group of companies would have the option to form a ‘fiscal unity’ and be treated as a single taxable entity (tax consolidation).
In case of foreign corporate tax paid on UAE taxable income, it would be allowed as foreign tax credit against the UAE corporate tax liability.
Relevance to Belgium
The Belgian list of tax havens currently includes, amongst others, the UAE. Although we have a double tax agreement (DTA) with the UAE and there is an exchange of information, it is unlikely that with the introduction of a 9% corporate tax, the UAE will be removed from this list.
It will make no difference for personal income from a UAE source, but the implementation of a corporate tax at federal level should now meet the ‘subject-to-tax’ requirement, as stipulated in the BE-UAE DTA, for any UAE sourced business income.
Article 23 DTA states that Belgium must provide tax relief in case earnings have been ‘taxed’ in the UAE. This often led to discussions with the Belgian authorities, in case the earnings were not effectively taxed in the Emirates. This will now change as of mid-2023, which could create some interesting new planning opportunities.
To be continued
The official information available at the moment remains preliminary, and therefore subject to change. Additional details of the UAE CIT are expected to become available in the next few months.