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CORPORATE INCOME TAX IN 2023

UAE TO IMPLEMENT CORPORATE INCOME TAX IN 2023

ESR

ECONOMIC SUBSTANCE REGULATIONS

(DNFBPs)

Registration of Designated Non-Financial Companies

UAE TO IMPLEMENT CORPORATE INCOME TAX IN 2023 – STEPPING INTO THE MAINSTREAM

News & Publications

Many businesses in the UAE have historically enjoyed zero income tax on their profits. This, however, is set to change, with the Ministry of Finance (MOF) announcing on 31 January 2022 that federal corporate income tax (CIT) will be introduced in the UAE. The CIT regime is expected to apply for fiscal years starting on or after 1 June 2023.

This move is motivated by UAE’s desire to meet international tax standards, following similar moves in neighbouring Gulf states, while minimising the compliance burden for UAE businesses and shielding small businesses and start-ups. The UAE, home to the key business hub Dubai, will still have one of the lowest corporate tax rates in the world but the move will diversify state income away from hydrocarbons.

The MOF has announced the following main features of the proposed CIT regime (subject to possible changes once the regime enters into full force):

EFFECTIVE DATE

The CIT regime is expected to apply for fiscal years starting on or after 1 June 2023.

SCOPE

The proposed CIT regime is expected to apply to all business (ie, commercial, industrial and professional) activities in the UAE, except for the extraction of natural resources, which is already (and will remain) subject to taxation at an Emirate-level.

The CIT regime will also apply to individuals to the extent they hold (or are legally required to hold) a business licence or permit to carry out commercial, industrial and/or professional activities in the UAE. This includes income earned by freelance professionals for activities carried out under a freelance licence or permit.

The MOF has stated that the proposed federal CIT regime will also apply to banking operations in the UAE (although branches of foreign banks are already subject to a CIT regime at an Emirate-level).

It was also announced that corporate tax incentives currently offered to free zone businesses will continue to be honoured, to the extent the free zone business complies with all applicable regulatory requirements and does not conduct business in mainland UAE. This may affect many businesses currently operating in both mainland UAE and in free zones under a dual licensing scheme. Free zone businesses will nevertheless have to comply with certain obligations under the CIT regime, including the requirement to register and file a CIT return.

PROPOSED RATES

Three different rates of corporate income tax are proposed to apply, as follows:

0% rate on taxable income up to AED 375,000 (c. US$ 102,000)
9% rate on taxable income above AED 375,000
A different rate (which has not been announced yet) for large multinationals that generate consolidated global revenues above EUR 750m (c. AED 3.15 bn) in line with the Pillar Two of the OECD Base Erosion and Profit Shifting (BEPS) project.

INCOME EXEMPTED FROM CIT

The MOF has announced that the following types of income will be exempted from the CIT regime:

Income derived from the extraction of natural resources
Dividends and capital gains earned by a UAE business from its qualifying shareholdings (ie, an ownership interest in a UAE or foreign company that meets certain conditions to be specified in the UAE CIT law;
Qualifying intra-group transactions and reorganisations subject to certain conditions to be specified in the UAE CIT law;
Foreign entities and individuals who do not conduct a trade or business in the UAE on an ongoing or regular basis
Foreign investors' income from dividends, capital gains, interest, royalties and other investment returns.

OTHER FEATURES

Foreign Tax credits

Foreign CIT paid on UAE taxable income will be allowed to be credited against UAE payable CIT. Note in this context that UAE has entered into over 130 double tax treaties

Losses.

The CIR regime will allow businesses to use losses incurred (as from the entry into force of the CIT regime) to reduce taxable income for subsequent financial periods.

Tax groups

UAE group of companies will be able to elect to form a tax group and be treated as a single entity for taxation purposes, subject to certain conditions to be specified in the UAE CIT law.

Transfer pricing

UAE businesses will also have to comply with transfer pricing rules and documentation requirements based on the OECD transfer pricing guidelines.

The relevant CIT legislation is still being finalised and has not been published yet. Although the regime that will come into force may ultimately diverge from MOF's announcement, businesses operating in the UAE (in particular businesses operating in both mainland UAE and in free zones under a dual licensing scheme) should consider the potential impact of the announced regime and prepare for the upcoming change in the law.

ECONOMIC SUBSTANCE REGULATIONS (ESR)

As part of the UAE’s commitment as a member of the OECD Inclusive Framework, and in response to an assessment of the UAE’s tax framework by the European Union Code of Conduct Group on Business Taxation, the UAE issued Economic Substance Regulations (Cabinet of Ministers Resolution No. 31 of 2019), (the “Regulations”) on 30 April 2019. Guidance on the application of the Regulations was issued on 11 September 2019 (Ministerial Decision No. 215 of 2019), and Cabinet Decision No. 58/2019 on the Determination of Regulatory Competencies lists the Regulatory Authorities tasked with the administration and enforcement of the Regulations. Amendments to the Regulations were made by Cabinet of Ministers Resolution No. (57) of 2020 on 10 August 2020, and updated Guidance was issued on 19 August 2020 (Ministerial Decision No. (100) of 2020 The Regulations require UAE onshore and free zone companies and certain other business forms that carry out any of the defined “Relevant Activities” listed below to maintain and demonstrate an adequate “economic presence” in the UAE relative to the activities they undertake (“Economic Substance Test”).

Relevant Activities:

Banking Business
Insurance Business
Investment Fund
Investment Fund management Business
Lease - Finance Business
Headquarters Business
Shipping Business
Holding Company Business
Intellectual property
Distribution and Service Centre Business

The Regulations apply to financial years commencing on or from 1 January 2019. Entities that are within the scope of the Regulations are required to submit an annual Notification form to their Regulatory Authority , and complete and submit to the same Regulatory Authority an Economic Substance Report within 12 months from the end of their financial year (e.g. 31 December 2020 for entities with a financial year ending 31 December 2019). An entity is not required to meet the Economic Substance Test and file an Economic Substance Report for any financial period in which it has not earned income from a Relevant Activity or if it meets the conditions for being exempt. A Notification form will need to be submitted regardless. Failure to comply with the Regulations can result in penalties, spontaneous exchange of information with the Foreign Competent Authority (as defined in Article 1 of the Regulations), as well as other administrative sanctions such as the suspension, revocation or non-renewal of the entity’s trade license or permit.

Registration of Designated Non-Financial Companies (DNFBPs) on goAML Portal is Mandatory

All Designated Non-Financial Businesses and Professions (DNFBPs) were required to register on the goAML portal. The goAML portal is an integrated platform used to file Suspicious Transaction Reports (STRs) and/or Suspicious Activity Reports (SAR). Under Federal Decree Law No (20) of 2018 and Article 20(2) of Cabinet Decision No (10) of 2019, it is obligatory to have procedures in place to report suspicious transactions to manage anti-money laundering (AML). This system allows companies to help authorities identify criminal and suspicious activity. Failure to register on goAML may result in severe penalties invoked by the Ministry of Economy. If you have not completed your application, please do so at the earliest to gain access to the goAML system.

Steps to Register Your Company on goAML Portal:

Required Documents:

Authorisation letter from the institution you represent
A copy of your passport, resident visa, and Emirates ID
A copy of the commercial trade license (for companies)
Download the ‘Google Authenticator’ application on your phone. (This application contains the password for the SACM protection system, which will change every minute)