The Ministry of Finance announced on January 31, 2022 that the United Arab Emirates (UAE) will introduce a Federal Business Tax on business profits effective as from June 1, 2023.
The new Business Income Tax will be levied on all corporations and commercial activities in the UAE with just a limited amount of exceptions.
In general, a tax rate of 9% will apply to taxable income exceeding 375.000 UAE dirhams (approximately equivalent to USD 102.000). In order to promote the growth of small businesses and start-ups, however, 0% tax rate shall apply to such threshold of business income not exceeding 375.000 UAE dirhams.
Such announcement brings a significant change for a State which has for quite a long time attracted businesses from all over the World because of its status as a tax-free jurisdiction and commerce hub.
Entering into more specific details, we can note as follows:
The new Business Income Tax will be payable on the profits of UAE businesses as reported in their relevant financial statements, prepared in accordance with international accounting standards, with minimal exceptions and adjustments;
As it relates to timing, the new tax regime will enter into force and become effective with regard to the financial year starting on or after June 1, 2023. For companies which adopt the calendar year, it will become effective as from January 1, 2024;
As it relates to its scope of application, the new Business Income Tax will be applicable to all persons - including individuals and legal persons - undertaking business activities under a commercial license in the UAE. It also includes entities operating in the financial and banking sector.
The new Business Income Tax will be applicable to all businesses and commercial activities with the following two exceptions:
entities engaged in the extraction of natural resources, which will continue to be exempt and will remain subject to taxation at the Emirate level;
entities operating in free zones without any business conduct with mainland UAE, which will continue to receive tax incentives provided that they comply with all relevant regulatory requirements. However, they would be required to register and file a business tax return.
As other important exceptions:
foreign investors who do not carry out any business activity in the UAE, will not be subject to the new Business Income Tax;
there shall be no withholding taxes on domestic and cross-border payments;
UAE businesses will be exempt from paying any tax on capital gains and dividends received from their qualifying shareholdings;
the new Business Income Tax will not apply to certain qualifying intra-group transactions and reorganizations.
In order to give relief from double taxation, foreign taxes will be allowed to be credited against any relevant payable UAE Business Income Tax.
Finally, transfer pricing rules and documentation requirements will apply to UAE businesses with reference to the OECD Transfer Pricing Guidelines.
Prof. Avv. Salvatore Vitale
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