The Ministry of Finance of the UAE announced on January 31, 2022, that they would introduce a corporate tax system in the UAE for the first time as the name suggests that the corporate income tax only applies to the corporate offices but not to residential areas like Six Senses Dubai. A corporate income tax law is expected to be enacted soon and implement regulations (CT Law).
The information contained in this alert is based on the Department’s currently available instructions and will remain subject to the provisions of the CT Act once published.
The corporate income tax will become effective on or after June 1, 2023, and will apply to profits generated in fiscal years beginning or after June 1, 2023. The UAE Federal Tax Agency is responsible for managing, collecting, and imposing corporate tax following the rules and regulations provided by the Ministry. This might look a risky new for businesses but UAE government will have better business and strategic plans for companies based in UAE.
Corporate income tax applies to all Dubai corporations and commercial activities conducted by legal entities or people. Extraction of natural resources is still subject to a corporate income tax at the emirate level.
All activities carried out by a legal entity are considered “business activities” that lie within the scope of the corporate income tax system. On the other hand, a person is deemed to have an organization or business falling within the scope of the CT Act if the person holds (or generally must have) a business license to continue their business activities in Dubai.
Companies incorporated in Dubai’s freehold areas are also subject to corporate income tax. However, it seems that such organizations will enjoy applicable incentives and tax breaks for the duration determined by the legal framework of the relevant freehold area authority.
For example, one of the off-plan properties Dubai upcoming project, Six Senses Dubai Law, provides that a company incorporated in Six Senses Dubai, Palm Jumeirah, will be subject to a zero tax rate for 50 years effective date of the law issue comes into effect.
Reasons for applying Corporate Tax:
Eyes on Saudi Arabia:
This move comes despite increasing competition with neighboring Saudi Arabia, providing new incentives and putting pressure on international companies to relocate their Middle East headquarters to Saudi Arabia.
Even though the progressive introduction of corporate taxes has made the United Arab Emirates a more expensive country to live in than it used to be, the government has taken several necessary steps during the pandemic COVID-19 to encourage the foreign citizens, who make up the bulk of the population, to stay for the extended period. In 2020, the government of UAE abolished the requirement for organizations to have Emirati shareholders, a significant shift in foreign ownership laws, and the previous year the government disclosed plans to provide citizenship to a selected group of foreign citizens.
This month, the United Arab Emirates switched to a Saturday-Sunday weekend to synchronize higher with the worldwide economy. It wasn’t clear at once whether the current measures would prompt organizations to relocate. However, analysts and businessmen stated that while the new taxes would hurt net profits, they would remain competitive locally and internationally.
Mohammed Abu Basha, head of macroeconomic research at investment bank EFG Hermes in Cairo, stated, “I don’t think it will much affect UAE’s ability to attract investments. First, companies in free zones will continue to enjoy their tax benefits, hence is shield from the decision; second, most other Gulf countries already levy a corporate tax on multinational companies engaged in business, including 20% in Saudi, 15% in Oman, and 10% in Qatar”.
The action comes as the global financial regulator weighs whether to put the UAE, home of the Middle East’s business hub Dubai, on a “grey list” of countries that are not doing well against terrorist financing and money laundering, according to individuals in the know. UAE officials have been operating to prevent the expulsion, which could skeptically affect investments. However, the plan may be to facilitate the businesses according to international stadards.
The UAE has already taken multiple steps to dilute its name as a tax-exempt for companies and individuals. It introduced a 5 percent VAT in 2018 and later imposed a 5 percent import duty. Banks and insurance companies operating outside the country’s vast network of free zones and projects such as Six Senses Dubai, Business Bay, etc., are already taxed on up to 20% of their profits. OPEC’s third-largest manufacturer’s oil and gas sector is taxed under a different program.
Izzat Dajani, a former senior banker at Goldman Sachs and Citigroup who’s now chief executive of Dubai-based IMCapital Partners Ltd, said, “It was just a matter of time before the UAE imposed corporate tax in line with some other Gulf Cooperation Council countries” as well as, “The levels announced of 9% base are quite reasonable in international standards.”
The corporate income tax rates will be as below:
- A 0% tax rate for taxable income up to AE$375k.
- A 9% tax rate for taxable income over AE$375k.
- A different tax rate for giant multinational corporations that meet specific criteria.
Following will be exempt from corporate income tax:
- A UAE company’s capital gains and dividends from “qualifying shareholdings.”
- Qualifying intra-group reorganizations and transactions that fulfill specific requirements and conditions set out in the CT Law.
Corporate tax is not levied on:
- A person’s salary earns by employment. However, an individual is subject to
- Corporation tax if their income derives from activities carried out under a freelance permit or license.
- Investments in properties like Six Senses Dubai by people in their capacity.
- Capital gains, dividends, and other income from owning stock personally.
- Interest and other income of a person from bank deposits or savings plans.
The introduction of corporate income tax in Dubai will doubtlessly influence organizations’ structures, operations, acquisitions, and future mergers in Dubai. We encourage companies to evaluate their existing structures and processes to adopt the most efficient business models and systems in light of the provisions of the CT Act. They issue and is in the effect of the structure.