Impact of the UAE Corporate Tax Law on International Businesses

The impact of the UAE Corporate Tax Law on international businesses is significant. The United Arab Emirates (UAE) stands as a prominent global center for business and investment, boasting a diverse and dynamic economy that presents appealing opportunities for both local and foreign investors. Recently, the UAE has implemented a Federal Corporate Tax (CT) law, applicable to all entities and individuals engaged in commercial activities under a business license in the UAE, including those in Free Zones.

This CT law will take effect for financial years beginning on or after June 1, 2023, and will levy a standard rate of 9% on Taxable Income surpassing AED 375,000. Profits falling at or below this threshold will be subject to a zero percent tax rate, aimed at supporting small enterprises and startups. This article seeks to offer an overview of the UAE CT law and its implications for international businesses operating in or investing in the UAE.

Applicability of the CT Law:

The CT Law applies to all entities and individuals involved in commercial activities within the UAE, irrespective of their legal structure, ownership model, or where they are incorporated. This includes Free Zone businesses, Tax Groups, Unincorporated Partnerships, Qualifying Public Benefit entities, Related Parties, Connected Persons, foreign entities and individuals conducting regular trade or business activities in the UAE through branches, agents, or representative offices.

Calculation of Taxable Profits

Taxable profits that surpass AED 375,000 are taxed at a standard rate of 9%. Taxable Income is determined by subtracting allowable expenses from gross income. Certain expenses, such as bribes, fines, penalties, and non-business-related expenditures, are either not deductible or subject to limitations.

Exemptions and Exceptions

Corporate Tax exemptions encompass dividends and capital gains derived from qualifying intra-group transactions like Business Restructuring and Participation Exemption. Entities exempt from Corporate Tax include Government Entities, Government-controlled Entities, Extractive and Non-Extractive Natural Resource Businesses, Qualifying Public Benefit Entities, pension and social security funds, Qualifying Investment Funds, and wholly-owned UAE subsidiaries of certain exempt entities.

Compliance and Reporting Requirements:

All entities subject to taxation must obtain a Corporate Tax Registration Number from the Federal Tax Authority (FTA) before initiating business operations. Annual Corporate Tax returns must be filed within nine months from the end of the financial year. Submission of the Corporate Tax return must be accompanied by payment of the tax due for the financial year. Failure to file on time, make payments, underpay, or comply with the Corporate Tax law may incur penalties.

FTA Authority:

The FTA can conduct audits, assessments, and tax collections from taxable entities. It is authorized to exchange information with other authorities at the UAE's Federal and Local levels.

Effect of UAE Corporate Tax Law on International Businesses:

International businesses must assess their existing or intended company structures and operations in the UAE to gauge their Corporate Tax exposure and ensure adherence to the law. This may involve reassessing choices such as legal form, ownership structure, place of incorporation, business activities, and commercial licenses.

Impact of UAE Corporate Tax Law on Operations in Free Zones or Mainland:

Similarly, international businesses operating in Free Zones within the UAE may face Corporate Tax obligations on income generated from conducting business activities in the country, while those operating outside Free Zones may encounter different taxes or fees imposed by relevant emirate authorities. Thus, businesses may need to weigh the advantages and drawbacks of operating within or outside Free Zones in the UAE.

Reviewing Accounting Standards:

International businesses might also need to assess their accounting systems, financial statements, transfer pricing policies, etc., to ensure accurate calculation and reporting of taxable profits and allowable expenses in compliance with Corporate Tax regulations.

Effect of UAE Corporate Tax Law on Tax Planning and Structure:

International businesses must reassess their current or prospective tax planning and structures concerning their operations or investments in the UAE to enhance tax efficiency and mitigate tax-related risks. For instance, adjustments might be necessary in financing arrangements, intra-group transactions, dividend policies, capital gains strategies, and more.

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Impact of UAE Corporate Tax Law on Investment by International Businesses:

Likewise, international businesses receiving dividends or capital gains from their operations or investments in the UAE may qualify for Corporate Tax exemption under specific conditions outlined in the law. As a result, businesses may need to strategize their holding periods and exit plans for their UAE operations or investments.

Impacts of UAE Corporate Tax on Relief for Small Businesses:

Within the framework of the UAE Corporate Tax Law, certain criteria must be met to qualify for relief for small businesses, with the revenue threshold set at AED 3 million as determined by Ministerial Decision.

Implications of DTAAs:

International businesses may also need to consider the ramifications of the UAE's extensive network of double tax treaties, which could offer relief from double taxation or lower withholding tax rates on particular income streams.

Changes in Investment Patterns:

The implementation of Corporate Tax (CT) in the UAE may alter the appeal and competitiveness of the country as a destination for foreign direct investment (FDI) or portfolio investment. On one hand, CT could diminish net returns for certain investors or elevate the cost of conducting business in the UAE. Conversely, it might bolster the credibility and stability of the UAE as a jurisdiction conducive to business, aligning with international standards and best practices. Additionally, CT may not significantly affect some investors already subject to corporate tax in their home countries or those benefiting from the UAE’s double tax treaties.

Conclusion:

The introduction of the UAE CT law marks a pivotal development that will reshape the country's tax landscape, impacting both domestic and foreign businesses. Designed to support the UAE's strategic goals and expedite its growth and transformation, the CT law underscores the nation's commitment to upholding international tax transparency standards and curbing harmful tax practices. Drawing from global best practices and incorporating universally recognized principles, the UAE's CT regime aims for clarity and comprehensibility.

International businesses operating or investing in the UAE must carefully evaluate the implications of the UAE Corporate Tax Law on their company structure, operations, tax planning, and investment strategies. These businesses must ensure compliance with the Corporate Tax law and its provisions. By doing so, international businesses can continue to capitalize on the UAE's vibrant and diverse economy, which offers appealing prospects for business and investment.