The United Arab Emirates to introduce a corporate tax
The United Arab Emirates is planning to introduce a corporate tax with effect from 2023 states a press release dated 31 January 2022
Corporate tax
Corporate tax will apply as of June 2023 to all businesses and commercial activities except for the extraction of natural resources, which will continue to be subject to emirate-level corporate taxation.
The taxable profits will be based on the profits as reported in the financial statements prepared in line with internationally accepted accounting standards.
Capital gains and dividends received will be exempt from corporate tax. UAE businesses will be able to credit foreign taxes against the UAE corporate tax. Moreover, the UAE will not impose withholding taxes on domestic and cross-border payments or charge corporate tax on foreign investors who are not active in the UAE.
The corporate tax rate will be 9% on taxable profits of businesses over AED 375,000 (about €90,000), under that threshold, no corporate tax will be due.
The UAE corporate tax regime will continue to honour the corporate tax incentives currently being offered through the free zones.
Under the new tax regime, businesses will need to file just one corporate tax return each financial year and will not be required to make advance tax payments or prepare provisional tax returns, the release says. However, UAE businesses will be subject to transfer pricing and documentation requirements set out in the OECD transfer pricing guidelines. The Ministry of Finance announced it will issue guidance on the new corporate tax regime in the middle of the year to aid businesses in preparing for the new system and achieving full compliance.
International
With the introduction of the corporate tax, the UAE reaffirms its commitment to meeting international standards for tax transparency and preventing harmful tax practices. The UAE has undertaken to implement 15 Actions (Base Erosion and Profit Shifting) to tackle tax avoidance, improve the coherence of international tax rules, ensure a more transparent tax environment and address the tax challenges arising from the digitalisation of the economy.
137 countries in the BEPS inclusive framework reached final agreement on a two-pillar plan to modernize corporate tax rules, which includes a reallocation of taxing rights based on the digital economy (pillar 1) and the introduction of a global minimum effective tax rate (pillar 2).
Pillar 1 will amend profit allocation and nexus rules so that large MNEs pay some tax on a portion of their residual profits in jurisdictions in which they have consumers. The corporate tax regime will have “generous loss utilization rules” and will allow UAE groups to be taxed as a single entity or apply group relief for losses, intragroup transactions, and restructurings.
Under pillar 2 of the plan, multinational enterprises with annual revenue over €750 million would pay an effective corporate tax rate of 15 percent in the jurisdictions in which they operate, primarily through the OECD's global anti-base-erosion (GLOBE) rules and a treaty-based subject-to-tax rule that allows source jurisdictions to tax some related-party payments that are taxed below a minimum rate of 9 percent.
MNEs that are in scope of Pillar II would be subjected to a separate tax rate, presumably to avoid that UAE based profits would not meet the 15% effective tax rate (‘ETR’) requirement, which would mean that parent entities would have to pay a top up tax under Pillar 2.
Conclusion
The 9% corporate tax rate will not be sufficient for dividends from UAE companies to qualify for the dividend received deduction but the 15% effective tax rate for Pillar II groups should create a level playing field with international groups outside Belgium.
The UAE authorities will not tax the salaries of individuals, so that using a company can still be useful.
The UAE introduced a VAT of 5% in 2018 and in 1996, Belgium signed a double tax treaty with the UAE in 1996 that can be useful for further planning.