Tag: Corporate Tax

The United Arab Emirates’ (UAE) Corporate Tax Regime: Globally Competitive and Business Friendly

Businesses often seek a favourable environment that fosters growth and offers tax savings. In this inBrief, we discuss the UAE’s tax-friendly landscape which stands out globally, drawing entrepreneurs, family offices and businesses that are eager to thrive in a jurisdiction with fewer restrictions and attractive exemptions and reliefs.

 

The UAE has become a major financial hub in the recent few years and is one of the easiest countries in which to do business. With the recent introduction of the Corporate Tax (CT) framework under Federal Decree Law 47 of 2022 (CT Law), the UAE aligned its fiscal policy with international tax standards and best practices, particularly pursuant to the goals of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) project, which further solidifies the UAE’s position as a competitive business centre.

 

Tax Landscape

 

The UAE’s CT structure is designed to levy a modest 9% tax rate on businesses with profits (income after deduction of expenditure incurred wholly and exclusively for the purposes of a taxable person’s business) exceeding AED 375,000. This remains notably low compared to, for instance, Portugal, a traditionally favoured European country, with a 21% CT rate on profits exceeding €25,000 (approximately AED 95,000).

 

Portugal’s tax structure presents a notable contrast to the UAE’s, with implications for businesses. Portugal’s Value Added Tax (VAT) of 23% far exceeds the UAE’s 5%, in addition to levying a 25% withholding tax on dividends, interest, and royalties, adding complexity for businesses involved in cross-border trade. Comparatively, the UAE offers 0% withholding tax. Further, Portugal imposes a capital gains tax of up to 28%, while the UAE’s corporate tax rate is set at 9%.

 

Internationally Competitive and Connected

 

To facilitate and promote cross-border transactions and to continue to grow as a financial hub, the UAE has 137 Avoidance of Double Taxation Agreements and Bilateral Investment Treaties with other countries and the European Union (EU). These agreements are aimed at reducing double taxation and facilitating cross-border businesses. This approach encourages investment flows between treaty partners by reducing or even eliminating withholding taxes.

 

In addition, the UAE offers significant incentives to foreign investors through its 10-year Golden Visa program, which provides individuals with the opportunity to live, work, and invest in the UAE without the need for a local sponsor. The UAE also provides targeted incentives for technology and innovative startups, including funding opportunities, incubator programs, and tax exemptions to foster innovation and business growth.

 

No Personal Income Tax

 

One of the key advantages of the UAE’s favourable tax environment is the absence of personal income tax on wages, earnings, income from real estate investments and other types of investment income. This is in contrast to many European Union jurisdictions, where personal income tax rates often exceed 40% or even 50% for high-earning taxpayers.

 

Tax Relief and Exemptions

 

The CT Law provides for specific exemptions (for instance, the participation exemption), tax groupings for efficiency and preferential rates for qualifying small businesses and businesses engaged in specific sectors (innovation or technology). The aim of these tax exemptions and reliefs is to encourage corporate transactions, reduce the tax burden on emerging businesses and to stimulate economic growth within the UAE.

 

UAE Corporate Tax Law – A Business Attraction Tool

 

The UAE’s 9% CT rate, 5% VAT rate, absence of personal income tax (in most cases), 0% withholding tax rate, certain tax exemptions, international tax agreements and ease of doing business make it an unparalleled and highly competitive destination for multi-nationals, entrepreneurs, investors and family offices. As a result, the UAE CT regime acts as a tool to attract businesses to this highly business-friendly environment, especially in contrast to higher-tax jurisdictions in the EU, North America and Asia. ■

Corporate Tax Registration Deadline: Have you registered?

With the first UAE corporate tax registration deadline looming (31 May 2024), companies and other businesses need to ensure that they have checked their deadline to register as a taxable person.

 

The registration process under the Federal Law No. (47) 2022 (CT Law) is still new to the UAE and 2024 marks the first mandatory year for companies to register with the Federal Tax Authority (FTA) as a taxable person. Since this is the first year for such registration, companies and individuals (where applicable) should be aware that additional requirements (documents and/or fees) may be requested from the FTA following submission of the company’s registration via the EmaraTax portal (Portal).

 

When evaluating whether one has an obligation to register for corporate tax, a prudent question that arises is whether or not you are captured under the CT Law provisions as a taxable person. To the extent that the answer to this question is yes, you will then need to look at whether you are required to register. In the majority of cases, if the answer to the first question is yes, the answer to the second question will also be yes, save for certain automatic exemptions, which we have discussed below.

 

Am I a taxable person?

 

i) Individuals

 

CT Law shall apply to natural persons engaged in a business or business activities in the UAE. This will include sole establishments or proprietorships and individual partners in an unincorporated partnership conducting business in the UAE. As a general rule, whether an individual is engaged in a business that is subject to CT will depend on whether the activity requires a commercial license or equivalent permit from the relevant competent authority.

 

ii) Companies, Partnerships and other Legal persons

 

CT Law shall apply to UAE companies, partnerships and other legal persons incorporated in the UAE, as well as to foreign legal entities that have a permanent establishment in the UAE or that earn UAE-sourced income.

 

For the application of CT Law, legal persons incorporated in a foreign jurisdiction that are effectively managed and controlled in the UAE will be treated as if they are UAE-incorporated entities.

 

Limited and general partnerships and other unincorporated joint ventures and associations of persons will be treated as ‘transparent’ for corporate tax purposes, meaning, the income generated from such establishments will ‘flow through’ and be taxed in the hands of the partners or members only.

 

I am a taxable person; do I need to register?

 

UAE branches of domestic companies are considered an extension of their ‘parent’ or ‘head office’ and are therefore not considered separate legal entities and are not required to separately register or file for UAE corporate tax. However, the parent and/or head office of the UAE branch is required to register.

 

In contrast, UAE branches of foreign businesses likely will be required to register via the Portal, on the basis that the income earned shall be included and deemed taxable income. It is notable that such entities may be eligible to apply for certain corporate tax exemptions and we can advise on this further on a case-by-case basis. However, such tax exemptions do not negate the requirement for these entities to register as a taxable person under the CT Law.

 

Freezone companies, that are engaged in business or business activities in the UAE, must register via the Portal, even if they are eligible to apply for, and avail certain exemptions in relation to corporate tax liability.

 

Foreign individuals may also be required to register via the Portal as a taxable person should they undertake a licensed business activity within the UAE. However, it should be noted that wages earned by individuals are not taxable, therefore, a foreign individual (being a natural person) shall not need to register via the Portal as a taxable person if they are earning an employment wage in the UAE.

 

What if I don’t register?

 

The current fine for failing to register as a taxable person within the specified deadline is AED 10,000.

 

In its latest reports, the FTA conducted 40,000 inspection visits in local markets across all emirates in the UAE in 2023, marking an 80% increase from 2022. This intensified supervisory effort is aimed at combatting tax evasion and promoting tax compliance. Therefore, companies, businesses and individuals should be aware that although corporate tax is new to the UAE, the authorities are taking a firm approach to ensuring compliance.

 

Do I still have to register if exemptions apply?

 

Under CT Law a company and or an individual undertaking a business activity or business must register whether or not that entity may be eligible for certain tax exemptions unless an exemption already applies. Please refer to below.

 

So, who should not register?

 

Companies who may not need to register pursuant to the current guidance released by the FTA are as follows:

 

Government Entinty

Automatically exempt unless conducting a business or business activity under a license as issued by licensing authority.

Government Controlled Entity

Exempt if the entity carries out ‘Mandated Activities’ (an activity conducted by a company directly or indirectly wholly owned and controlled by Federal, Local Government, ministries, governmental departments, agencies, and/or public institutions). Otherwise, shall be subject to corporate tax if conducting a business or business activity under a license as issued by licensing authority.

Extractive Business

May not be required to register unless they conduct a business which is within the scope of corporate tax.

Non-Extractive Natural Resource Business

May not be required to register unless they conduct a business which is within the scope of corporate tax.

 

What if an automatic exemption doesn’t apply to a company?

 

Should a company not fall into one of the above automatic exemption categories, then the company must register via the Portal (whether established or not in a freezone) and following such registration, may apply for an applicable tax exemption from being subject to corporate tax on the company’s earnings. These tax exemptions include but are not limited to:

 

– Qualifying Freezone company, undertaking a qualifying activity, earning qualifying income;

 

– Qualifying public benefit entities, including but not limited to charities; and

 

– Public and private pension/social security funds.

 

Additional tax exemptions may assist in resulting in a lower or zero percent tax rate:

 

– Permanent Establishment rules

 

– Foreign Permanent Establishment rules

 

– Double Taxation agreements

 

What about individuals?

 

Individuals once again shall need to register if they undertake a business or business activity. Notwithstanding this, individuals shall not be taxed and therefore shall not need to register for corporate tax where the income is generated as a result of the following:

 

– Wages earned from a company, including income earned as compensation for duties carried out as an executive on a board.

 

– Personal Investment Income: for example; where an individual uses personal savings, invests into a listed company, and earns income from the investment, this shall not be deemed a taxable income. In this context, the individual will not need to register.

 

– Real Estate Income: being income earned from rental income or the sale of a property.

 

However, although certain income may be taxable, individuals may be eligible for certain tax exemptions and may avail a more favourable corporate tax rate of zero percent benefiting from applicable exemptions (to be evaluated following registration) such as:

 

– Turnover threshold;

 

– Withholding Tax rate; and/or

 

– Exempt income.

 

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Afridi & Angell advises international and domestic clients with respect to corporate tax structuring, corporate tax exemptions/reliefs, coordination with taxes paid abroad/foreign tax credits, compliance and registration. ■

Developments in Corporate Tax Compliance

In the past week, guidance has been provided by both the Ministry of Finance and the Federal Tax Authority (FTA) regarding deadlines for Corporate Tax registration.

 

The new deadlines have the potential to significantly reduce the time left for meeting the deadlines for Corporate Tax registration. For example, certain applicable taxable persons will be required to submit the Corporate Tax registration applications by 31 May 2024 in order to avoid a violation and the applicable penalties.

 

Previous guidance from the FTA stated that taxable persons would have until the due date of their first tax return to register. For example, if a taxable person had a financial year ending on 31 May 2023, they would have a registration period of 26 months available until 28 February 2025. Similarly, for taxable persons with a financial year ending on 31 December 2022, a registration period of 33 months would be available until 30 September 2025.

 

Federal Tax Authority Decision No 3 of 2024 (FTA Decision) was issued on 22 February 2024 mandating specific application deadlines to register for Corporate Tax applicable to both juridical and natural persons, that are either resident or non-resident persons, to be effective from 1 March 2024.

 

We emphasise that the deadlines are applicable for the submission of Corporate Tax registration applications, as distinguished from completion of the registration process and possession of a registration certificate.

 

The deadlines specified by the FTA Decision are determined by a combination of the month of issuance of the taxable person’s Trade License, whether a juridical person was incorporated prior to 1 March 2024, and the residency of the taxable person.

 

Tax Registration Deadlines of Resident Juridical Persons

 

A juridical person that is a Resident Person, incorporated or otherwise established or recognised prior to 1 March 2024, shall submit the Tax Registration application, in accordance with the following:

Date of License Issuance Irrespective of Year of Issuance

Deadline for submitting a Tax Registration application

1 January – 31 January

31 May 2024

1 February – 28/29 February

31 May 2024

1 March – 31 March

30 June 2024

1 April – 30 April

30 June 2024

1 May – 31 May

31 July 2024

1 June – 30 June

31 August 2024

1 July – 31 July

30 September 2024

1 August – 31 August

31 October 2024

1 September – 30 September

31 October 2024

1 October – 31 October

30 November 2024

1 December – 31 December

31 December 2024

Where a person does not have a License at the effective date of the FTA Decision

(3) three months from the effective date of the FTA Decision

 

A juridical person, that is a Resident Person incorporated or otherwise established or recognised on or after 1 March 2024, shall submit the Tax Registration application, in accordance with the following:

Category of Juridical Persons

Deadline for submitting a Tax Registration application

A person that is incorporated or otherwise established or recognized under the applicable legislation in the UAE, including a Free Zone Person

(3) three months from the date of incorporation, establishment or recognition

A person that is incorporated or otherwise established or recognized under the applicable legislation of a foreign jurisdiction that is effectively managed and controlled in the UAE

(3) three months from the end of the Financial Year of the person

 

Tax Registration Deadlines of Non-Resident Juridical Persons

 

A juridical person, that is a Non-Resident Person prior to 1 March 2024, shall submit a Tax Registration application in accordance with the following:

Category of Juridical Persons

Deadline for submitting a Tax Registration application

A person that has a Permanent Establishment in the UAE

(9) nine months from the date of existence of the Permanent Establishment

A person that has a nexus in the UAE

(3) three months from the effective date of the FTA Decision

 

A juridical person, that is a Non-Resident Person on or after 1 March 2024, shall submit a Tax Registration application in accordance with the following:

Category of Juridical Persons

Deadline for submitting a Tax Registration application

A person that has a Permanent Establishment in the UAE

(6) six months from the date of existence of the Permanent Establishment

A person that has a nexus in the UAE

(3) three months from the effective date of the FTA Decision

 

Tax Registration Deadlines of Natural Persons

 

A natural person conducting a Business or Business Activity in the UAE shall submit a Tax Registration application in accordance with the following:

Category of Natural Persons

Deadline for submitting a Tax Registration application

A Resident Person who is conducting a Business or Business Activity during the 2024 Gregorian calendar year or subsequent years whose total turnover derived in a Gregorian calendar year exceeds the threshold specified in the relevant tax legislation

31 March of the subsequent Gregorian calendar year

A Non-Resident Person who is conducting a Business or Business Activity during the 2024 Gregorian calendar year or subsequent years whose total turnover derived in a Gregorian calendar year exceeds the threshold specified in the relevant tax legislation

(3) months from the date of meeting the requirements of being subject to tax

 

Penalties for Non-Compliance

 

On 27 February 2024, the Ministry of Finance issued Cabinet Decision No 10 of 2024 (amending the schedule of violations and administrative penalties of Cabinet Decision No 75 of 2023) that specifies that an administrative penalty of AED 10,000 will be imposed for failure to meet the deadlines provided for the submission of a tax registration application.

 

Points for Consideration

 

We suggest that you review and understand the registration timelines, and commence any necessary action to ensure compliance. Furthermore, Corporate Tax registration will now form part of any new corporate establishment process as, unlike VAT registration for which certain thresholds are required to be met, resident juridical entities will have only three months from the date of incorporation, establishment or recognition to submit an application for their Corporate Tax registration. ■