In the first instance, the 5% VAT was introduced in 2018, which was applied in the majority of transactions for goods and services for each stage of a supply chain. In 2021, the Ministry of Finance announced a 9% federal corporate income tax (CIT) on a company’s profit. CIT has not yet come into force and will be effective from 1 June 2023.

Introducing a taxation system in the UAE is considered an endeavor to comply with practices and regulations of The Organization for Economic Co-operation and Development (OECD), a one-of-a-kind platform where the governments of 37 democracies with market economies work in collaboration to develop policy norms to foster long-term economic prosperity. Therefore, the UAE’s intention to implement the taxation is possibly a good move in a long-term perspective as well as the possibility to enter a “white list” of jurisdictions. 

Rates 

The proposed CIT rates are as follows:

• The standard statutory CIT rate is 9% for the accounting net profit exceeding AED 375,000 (USD 102,000). 
• 0% rate for the accounting net profit below AED 375,000 (USD 102,000)

Additionally, it is worthwhile to note that for large corporations with consolidated global net profit, exceeding AED 3.15 billion (EUR 750 million), the CIT is yet to be announced in accordance with Pillar Two of the OECD Base Erosion and Profit Shifting (BEPS) initiative. 

Who are exempted from CIT

According to the Ministry of Finance of the UAE, (MOF), the following income categories will be exempted from the CIT:

• Foreign investors income from real estate, equity investments, royalties, and other sources of investment income.
• Foreign investors who do not conduct a trade business in the UAE on a regular basis
• Dividends and capital gains by the company in the UAE, which are generated by the qualifying shareholdings. For example, an ownership interest in the UAE foreign company
• Income from the natural resources extraction

Exemptions (special tax regime) will also apply to entities operating in Free Zones, subject to certain criteria, however, this is yet to be clarified. There are more than 40 Free Zones in the UAE, and before adopting taxation in the country, most Free Zones offered tax exemptions to firms and branches, which were valid for 50 years. Currently, whether the strategy will remain in force or not is an open question. Possibly, the new regime will continue to honor tax benefits granted to Free Zone enterprises that meet all regulatory standards and one of the standards might be the Free Zones which do not conduct business with the UAE Mainland companies (i.e., with parties outside of the Free Zone). Meanwhile, the mainland companies will be subjected to CIT by default. 

While the Free Zones are considered to be in the scope of the announcement, the offshore companies will possibly be considered to follow the similar benefits or total tax exemption scenario.

The actual CIT legislation has yet to be issued, but it’s confirmed that the MOF has stated that CIT will be due on earnings recorded in financial statements made in conformity with internationally accepted accounting standards by UAE enterprises. Nevertheless, the UAE Ministry of Finance will release further information on the UAE corporate tax policy to assist businesses in becoming completely compliant.

If you would like to have advice or assistance with CIT compliance in the UAE, please contact us.

Marsel Shadmanov

Head of Corporate Services at Garant Business Consultancy DMCC

Phone +971 4 421 4335

Email info@garant.ae