In a significant move, the United Arab Emirates (UAE) implemented the Federal Decree-Law No. 47 of 2022, commonly known as the “Corporate Tax Law,” on December 9, 2022. Corporate Tax, also known as Corporate Income Tax or Business Profits Tax in various jurisdictions, is a direct tax imposed on the net income generated by corporations and businesses.
This landmark legislation marks the introduction of Corporate Tax in the UAE, which will be effective for financial years starting on or after June 1, 2023. The primary objective behind the implementation of Corporate Tax is to support the UAE’s strategic goals, foster development, and facilitate economic transformation. By establishing a competitive Corporate Tax regime that aligns with international standards and capitalizing on its extensive network of double tax treaties, the UAE aims to solidify its position as a premier jurisdiction for business and investment. Notably, the UAE Corporate Tax system incorporates globally recognized principles and best practices to ensure transparency and ease of comprehension.
The ambit of Corporate Tax encompasses the following entities, collectively referred to as “Taxable Persons”:
UAE Companies and Juridical Persons: Corporate Tax applies to UAE companies and other juridical persons that are either incorporated or effectively managed and controlled within the UAE. These entities will be subject to the provisions of the Corporate Tax Law and the associated tax obligations.
Natural Persons Conducting Business Activities: Individual natural persons engaging in business or business activities within the UAE, as defined in a forthcoming Cabinet Decision, will also be subject to Corporate Tax. This inclusion broadens the scope of taxation to encompass a wider range of economic activities within the country.
Non-Resident Juridical Persons with Permanent Establishments: Non-resident juridical persons, i.e., foreign legal entities, that have a Permanent Establishment in the UAE will be subject to Corporate Tax. The concept of Permanent Establishment, as explained in Section 8 of the Corporate Tax Law, outlines the criteria for determining the tax liability of non-resident entities with a significant presence in the UAE.
Juridical Persons in UAE Free Zones: Juridical persons established in UAE Free Zones, which serve as economic zones with specific incentives for businesses, are also classified as “Taxable Persons.” These entities are required to comply with the obligations set forth in the Corporate Tax Law. However, a Qualifying Free Zone Person that meets specific criteria outlined in Section 14 can benefit from a 0% Corporate Tax rate on Qualifying Income, further enhancing the attractiveness of the UAE as a business hub.
Recognizing the diverse landscape of economic entities and their contributions to the UAE’s social fabric and economy, the Corporate Tax Law provides exemptions from Corporate Tax for certain entities categorized as “Exempt Persons.” The exemptions fall into the following categories:
Automatically Exempt: Certain entities are automatically exempt from Corporate Tax. This includes all government entities and entities controlled by the government, as specified in a Cabinet Decision. These exemptions acknowledge the unique role played by government entities in the country’s administrative and developmental framework.
Exempt if Notified to the Ministry of Finance: Entities engaged in extractive businesses or non-extractive natural resource businesses may be exempt from Corporate Tax if they notify the Ministry of Finance and fulfil specific conditions. This provision aims to promote and support businesses operating in the extractive sector or engaged in the sustainable utilization of natural resources.
Exempt if Listed in a Cabinet Decision: Certain public benefit entities that meet specific criteria outlined in a Cabinet Decision may qualify for exemption from Corporate Tax. These entities are primarily engaged in activities that promote societal well-being, such as charity, religion, culture, and education.
Foreign Direct Investments (FDIs) and the UAE’s Competitive Advantage:
The UAE’s implementation of corporate tax is anticipated to boost the nation’s capacity to attract in foreign direct investments. Foreign direct investments are essential for stimulating growth in the economy, creating employment opportunities, and spreading knowledge and technology. The establishment of a strong corporate tax framework that complies with international standards has made the UAE a compelling choice for global businesses. With the implementation of Corporate Tax, foreign investors now have access to a stable and predictable tax environment, which builds confidence and diminishes uncertainty.
Due to the UAE’s commitment to international standardization and its incorporation of these standards into its tax regulations, companies are able to thrive in an environment that nurtures growth and prosperity. With a corporate tax rate of 9%, the UAE offers an attractive tax environment for businesses, particularly when compared to other jurisdictions with higher tax burdens.
To be able to further encourage FDIs, the UAE has made some sector-specific exemptions.
For example, enterprises involved in natural resource extraction, such as upstream oil and gas firms, continue to be subject to tax decrees issued by their various emirates. Moreover, public benefit organizations, totally government-owned UAE enterprises engaging in certain activities, and qualifying investment funds are exempt, allowing foreign investors to thrive in these selected industries.
Implications for Medium-Sized Companies:
The implementation of a 9% corporate tax may have a substantial influence on medium-sized enterprises’ profitability and funding available for development, investments, and other activities. While small firms can benefit from tax reduction measures, medium-sized businesses might not be eligible for tax reductions if their income prior to the fiscal period exceeded AED 3 million. Medium-sized businesses need to carefully assess the impact of the corporate tax, reassess their financial plans, and explore possible adjustments to mitigate its consequences.
Finally, the implementation of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, introducing Corporate Tax in the United Arab Emirates, marks a significant milestone in the country’s pursuit of strategic goals, economic development, and international competitiveness. The Corporate Tax Law offers a clear and globally recognized taxation framework that is consistent with global best practices and incorporates widely accepted concepts. The UAE hopes to strengthen its position as a leading jurisdiction for business and investment by adopting Corporate Tax and attracting foreign direct investments (FDIs) through a stable and predictable tax environment. Despite the establishment of corporation Tax, the UAE maintains a competitive advantage with a corporation tax rate of 9%, providing a favourable tax environment in comparison to other jurisdictions.
Furthermore, sector-specific exemptions and incentives encourage FDIs by offering possibilities for foreign investors to succeed in specific industries. Medium-sized businesses, on the other hand, must carefully assess the implications of corporate tax on their profitability and explore possible adjustments to offset its effects. Overall, the implementation of Corporate Tax in the UAE demonstrates the country’s dedication to international standards and fosters a climate conducive to economic growth and prosperity.