The Ministry of Finance has announced the introduction of a 9% federal corporate tax in the UAE on business profits with a threshold of AED 375,000. This comes into effect from the financial year beginning 1st June 2023.

The corporate tax in UAE will be payable on the profits of UAE businesses as reported in their financial statements prepared in accordance with internationally accepted accounting standards. There will be minimal exceptions and adjustments. This clearly means that financial statements must now be without exception audited on time.

What is Corporate Tax ?

Corporate Tax is a form of direct tax levied on the net income or profit of corporations and other businesses.

Who will Subject to UAE CT?

UAE CT will apply to all UAE businesses and commercial activities alike, except for the extraction of natural resources, which will remain subject to Emirate level corporate taxation

Businesses with activities in the UAE ( from Offshore and Onshore) will need to consider the implications of Company Tax on their transactions including cross border transaction and entity structure and ensure compliance with the new Corporate Tax requirements.

Companies and branches registered in free zones will also fall within the scope of the CT regime, and will be subject to tax return filing requirements.  In order to honour existing tax arrangements within free zones, such entities will be subject to a 0% CT rate provided that they maintain adequate substance and comply with all regulatory requirements.  A free zone person with a branch in mainland UAE will be taxed at a regular CT rate on mainland source income while continuing to benefit from the 0% CT rate on its “other income”.  Where a free zone person transacts with mainland UAE but does not have a mainland branch, the free zone person can continue to benefit from the 0% CT rate if its income from mainland UAE is limited to ‘passive’ income (meaning interest and royalties, and dividends and capital gains from owning shares in mainland UAE companies).  

The 0% CT rate will also apply to any transactions between free zone entities and their group companies in mainland UAE.  However, payments made to free zone entities by a mainland group company will not be tax deductible.  Furthermore, the Consultation Document notes that, to prevent free zone businesses from gaining an unfair competitive advantage compared to businesses established in mainland UAE, any other mainland sourced income will disqualify a free zone person from the 0% CT regime in respect of all their income.  Once the draft law is released, we expect that free zone registered entities will need to evaluate their existing position and whether they will continue to benefit from the tax exemptions, or whether their position will change in light of the CT law.

How can we help you in Corporate Tax regime?

At Alliott Hadi Shahid, we would be happy to help clients consider and review their current corporate structures to assess the impact of the proposed UAE CT rules, and also discuss any opportunities resulting therefrom. Our expertise and experience will help you navigate this new landscape and ensure your organization makes a smooth and seamless transition to the Corporate Tax era