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UAE introduces federal corporate tax

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Tax Hot Topics newsletter The United Arab Emirates’ (UAE) Ministry of Finance recently announced the UAE will soon implement and impose a federal corporate tax for the first time in the country’s history.

Legislation concerning the corporate tax is currently being finalized and will be subsequently promulgated. This legislation is expected to provide key details and guidance on the new tax regime—however some the UAE Ministry of Finance released some key details in its press release announcing the new tax, including:

  • Effective date: Fiscal years beginning on or after June 1, 2023.
  • Rate: 9% of taxable income above AED 375,000. However, a different tax rate may apply for large multinational enterprises meeting specific criteria under Pillar Two of the Organisation for Economic Cooperation and Development’s (OECD’s) Inclusive Framework on Base Erosion and Profit Shifting.
  • Scope: All UAE businesses, corporations and entities engaged in and licensed to undertaken commercial activities generally will be subject to the UAE corporate tax. However, businesses engaged in the extraction of natural resources will be exempt from the tax and shall continue to be subject to Emirate level taxation.
  • Base: The tax will be payable on the profits of UAE businesses as reported on financial statements prepared in accordance with internationally acceptable accounting standards, with minimal exceptions and adjustments.
  • Losses: Losses incurred by entities subject to tax may be carried forward for offset against future taxable income, subject to certain conditions. Losses also may be utilized against taxable income of another group company, subject to certain conditions.
  • Transfer pricing: UAE businesses will be required to comply with transfer pricing rules and documentation requirements as set out in the OECD’s Transfer Pricing Guidelines.
  • Grandfathering: Free zone businesses will be subject to tax. However, the forthcoming UAE tax law will continue to honor the tax incentives currently being offered to free zone businesses that comply with all regulatory requirements and that do not conduct business with mainland UAE.
  • Withholding: There will be no withholding tax applicable on domestic and cross-border payments of any nature.
  • Foreign tax credits: Any foreign tax imposed on UAE taxable income shall be allowed as a tax credit against UAE corporate tax liability.

The UAE Ministry of Finance plans to issue additional information on the new tax regime in the coming months. Businesses should assess the potential impact of new UAE corporate tax on their operations and prepare for new tax compliance requirements in the UAE.

Contacts:
David Sites
Partner
Washington National Tax Office
T +1 202 861 4104

Cory Perry
Senior Manager
Washington National Tax Office
T +1 202 521 1509

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