Taxation

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:

1. Value Added Tax (VAT):

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.

2. Corporate Income Tax:

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.

Effective date

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.

Scope of the CT

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:

  • Businesses operating in the extraction of natural resources. These will continue to be subject to the tax decrees issued by the respective Emirate
  • Individuals earning income in their personal capacity (i.e. salary, investment income) as long as the income generating activity does not require a commercial license
  • Businesses registered in Free Trade Zones, provided they comply with all the regulatory requirements, and that do not conduct business with Mainland UAE

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.

Rates

The announced UAE CT regime introduces a tier system with 3 rates:

  • All annual taxable profits that fall under AED 375,000 shall be subject to zero rate.
  • All annual taxable profits above AED 375,000 shall be subject to 9% rate.
  • ALL MNEs that fall under the scope of Pillar 2 of the BEPS 2.0 framework (i.e. consolidated global revenues in excess of AED 3.15 billion) shall be subject to different rates as per OECD Base Erosion and Profit-Sharing rules.

Taxable profits are the accounting profits subject to certain adjustments.

Exempt Income

The following income shall be in general exempt from income Tax:

  • Dividend income earned by UAE company from its qualifying shareholdings (to be defined in the law)
  • Capital gains
  • Profits from group reorganization
  • Profits from Intra-group transactions
  • There will be no UAE withholding tax on domestic and cross-border payments.

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.

Free Trade Zones

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.

Transfer Pricing rules

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.

Losses

Accumulated taxable losses shall be allowed to offset future taxable profits.

Groups

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.

Foreign Tax Credits

Taxable entities will be allowed to take as a credit against its annual tax liability the foreign corporate tax paid on UAE taxable income.

3. Customs Duties:
  • Import Duties: Customs duties are imposed on certain goods imported into the UAE. The rates vary depending on the type of goods and their country of origin.
  • GCC Common Customs Law: The Gulf Cooperation Council (GCC) has implemented a common customs law, and member states, including the UAE, follow these regulations.
4. Free Zones:
  • Tax Exemptions: Free zones in the UAE offer tax incentives, including exemptions from corporate and personal income taxes for a specific period (generally 15-50 years, renewable).
  • Customs Benefits: Free zones often provide customs duty exemptions on imports and exports within the zone.
5. Double Taxation Agreements (DTAs):
  • Limited DTAs: The UAE has entered into some Double Taxation Agreements, primarily for the avoidance of double taxation on income and capital gains, but these are limited in number.
6. Economic Substance Regulations (ESR):
  • Introduction: The UAE has implemented Economic Substance Regulations to ensure that entities conducting certain activities have substantial activities and operations in the country.
  • Compliance Requirements: Entities engaged in relevant activities are required to meet specific economic substance requirements and file reports.
7. Withholding Tax:
  • No Withholding Tax: The UAE does not currently impose withholding tax on dividends, interest, or royalties.
8. Real Estate Taxes:
  • Property Taxes: As of my last update, there were no federal property taxes in the UAE. However, local municipalities may impose property-related fees.
9. Individual Income Tax:
  • Tax-Free Income: There is no personal income tax for residents in the UAE. Individuals can enjoy tax-free salaries and income
10. Tax Planning and Compliance:
  • Legal Advice: Given the evolving nature of tax regulations, businesses and individuals are advised to seek legal and tax advice to ensure compliance with the latest requirements.

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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