The United Arab Emirates (UAE) has a unique taxation system characterized by its federal structure and the absence of personal income tax for residents. However, the introduction of Value Added Tax (VAT) in 2018 has marked a significant change in the tax landscape. Here are key aspects of taxation in the UAE:
VAT was introduced in the United Arab Emirates on 1 January 2018. The general VAT rate is 5% and applies to most goods and services, with some goods and services subject to a 0% rate or an exemption from VAT (subject to specific conditions being met).
The 0% VAT rate applies to goods and services exported outside the VAT-implementing Gulf Cooperation Council (GCC) member states, international transportation, the supply of crude oil/natural gas, the first supply of residential real estate, and some specific areas, such as health care and education.
Further, according to Cabinet Decision (No. 46 of 2020) on 4 June 2020, a person shall be considered as being ‘outside the state’, and thus fall under zero-rating export of services, if they only have a short-term presence in the state of less than a month and the presence is not effectively connected with the supply.
A VAT exemption applies to certain financial services, as well as to the subsequent supply of residential real estate. Further, transactions in bare land and domestic passenger transport are also exempt from VAT.
Certain transactions in goods between companies established in UAE Designated (Free) Zones (DZs) may not be subject to VAT. The supply of services within DZs is, however, subject to VAT in accordance with the general application of the UAE VAT legislation.
For UAE resident businesses, the mandatory VAT registration threshold is AED 375,000 and the voluntary registration threshold is AED 187,500. No registration threshold applies to non-resident businesses making supplies on which the UAE VAT is required to be charged.
VAT grouping is allowed, provided certain conditions are met.
There are specific documentary and record-keeping requirements, such as the requirement to issue tax invoices and submit VAT returns (on a quarterly or monthly basis depending on the allocation by the FTA).
Excess input VAT can, in principle, be claimed back from the FTA, subject to a specific procedure. Alternatively, VAT credits may be carried forward and deducted from future output VAT.
Businesses that do not comply with their VAT obligations can be subject to fines and penalties. There are both fixed and tax-geared penalties.
Corporate tax (CT) is a form of direct tax levied on the net income or profit of corporations and other entities from their business. Corporate Tax is sometimes also referred to as “Corporate Income Tax (CIT)” or “Business Profits Tax” in other jurisdictions.
On 31 January 2022, the tax landscape of the region shifted yet again with the United Arab Emirates (UAE), Ministry of Finance (MoF) making the breakthrough announcement that a new federal corporate tax (CT) system will be implemented in the UAE, effective financial years commencing on or after 1 June 2023. Barring Bahrain, the UAE has introduced the lowest corporate income tax rate within the GCC region at a standard rate of 9%.
The UAE CT regime has been designed to incorporate best practices globally and minimize the compliance burden on businesses.
The CT will be applicable for financial years starting on or after 1 June 2023.
Any company that adopts a fiscal year starting on 1 June 2023 and ending 31 May 2024 will be subject to CT starting 1 June 2023. The first tax return filing is likely to be due towards the end of 2024.
Any company that adopts a calendar year starting 1 January 2023 and ending 31 December 2023 will be subject to CT starting 1 January 2024 and filing is likely to be due towards mid-2025.
The UAE has introduced a federal tax system that is applicable to all businesses and commercial activities operating within the seven emirates. However, there are certain exceptions:
It is interesting to note that the foreign Banking sector, which has been operating under the Emirate level Bank tax decree will now be subject to the UAE Federal Tax Law. The impact of CT on the Emirate level banking tax decree will be communicated in due course. This will be a significant shift for both branches of foreign Banks, that will need to switch to the new Law and for local banks who similar to other businesses will now be subject to corporate tax.
The announced UAE CT regime introduces a tier system with 3 rates:
Taxable profits are the accounting profits subject to certain adjustments.
The following income shall be in general exempt from income Tax:
Considering the exempt income scheme it can be anticipated that the Law shall include a participation exemption or similar principles commonly seen in international markets and businesses would need to evaluate if they will be able to meet the prescribed conditions (if any) to avail the exempt income scheme.
The UAE intends to honor its commitment to businesses registered in Free Trade Zones to the extent that such businesses do not conduct business with mainland shall be subject to zero percent tax (or be exempt as the case may be) until the end of the holiday period. All free zones have to file an annual CT return.
Businesses with presence in both Mainland UAE and Free Trade Zones as well as those operating under the dual license scheme should consider the impact on their operating model.
The OECD Transfer Pricing Rules shall now be applicable in the UAE. All companies have to comply with the Transfer Pricing rules and documentation requirements. These transfer pricing rules will now become mandatory and may also be applicable to domestic transactions.
While intercompany sales and financing services are common practice amongst UAE groups, previously remuneration for these activities has not been on the forefront given the transactions would likely be eliminated upon financial consolidation.
This is a game changer as intercompany transactions would need to be undertaken at arm’s length and generally should be supported by appropriate documentation. Businesses would need to evaluate their current arrangements and assess the impact on both cross-border as well as domestic transactions.
Accumulated taxable losses shall be allowed to offset future taxable profits.
Tax grouping and group relief provisions are allowed. UAE Groups should be able to file consolidated tax returns. Offsetting tax losses among groups might be allowed.
Taxable entities will be allowed to take as a credit against its annual tax liability the foreign corporate tax paid on UAE taxable income.
It's important to note that tax regulations can change, and it's advisable to consult with Sheikh Anwar Accounting & Auditing LLC for the most up-to-date information on taxation in the UAE.
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