UAE corporate tax and private wealth

In a landmark policy shift, the UAE Ministry of Finance has introduced the Corporate Income Tax Regime (CIT), effective June 2023. The move marks a departure from the UAE’s longstanding no-taxation policy, positioning it in a new phase of economic development. The UAE’s Corporate Tax Law aims to promote foreign investment and transparency, maintaining a corporate tax environment that is neutral and conducive to business growth. Historically recognized as a global business hub due to its strategic location and investor-friendly policies, the UAE’s introduction of CIT aims to leverage its economic and political influence globally and particularly in the Arab and Gulf Region.

CIT regime: Structure and implementation

The CIT regime’s implementation is applicable to taxpayers on either 1 June 2023 or 1 January 2024 depending on the fiscal year-end of the business. The CIT will be levied on the net profits/income of businesses, with different tax rates applied based on income thresholds. Businesses with taxable income below AED 375,000 will be taxed at a 0% rate, while those above this threshold will be subject to a 9% tax rate.

For multinational entities meeting the OECD BEPS Pillar 2 criteria, a minimum tax rate of 15% is envisaged. However, the UAE Ministry of Finance has confirmed that Pillar 2 rules will not apply to companies in 2024. Until such time as the Pillar Two rules are adopted, multinationals will be subject to corporate tax under the regular CIT regime.

Scope and applicability

The CIT Law intends to tax worldwide income for resident taxpayers and UAE-sourced income for non-resident taxpayers. The applicable tax rates (9% or 0%) will be levied on ‘taxable income’ as defined under the law. Resident entities with stakes in overseas entities may be subject to tax on income from these entities, with exemptions available under certain conditions. Capital asset disposals are included in taxable income, subject to the relevant CIT rate.

Zero percent tax rate for Qualifying Free Zone Persons

A notable aspect of the CIT regime is the provision for a 0% tax rate for Qualifying Free Zone Persons (QFZPs). This is aimed at maintaining the attractiveness of free zones in the UAE for foreign investment. Entities in free zones that comply with the requirements of a QFZP and earn qualifying income are eligible for this zero-tax rate. This measure is particularly useful in creating tax efficient corporate and wealth structures, and ensures that UAE free zones continue to be competitive and attractive for international business.

Family offices and foundations

The CIT law encompasses family offices and foundations, offering restructuring options for tax efficiency. While these entities are typically taxable, the law provides mechanisms to treat them as transparent entities for tax purposes, potentially benefiting connected individuals.

Special considerations for small businesses and group companies

The CIT Law provides ‘Small Business Relief’ for eligible businesses, aiming to reduce administrative burdens and support innovation. Eligible small businesses can elect to be treated as having no taxable income for a certain period. Additionally, the law allows for the offset of tax losses against future taxable income and permits inter-group loss transfers under specific criteria. The law also avails options to help companies and wealth structures restructure their businesses in a tax-efficient manner.

Action steps for businesses and investors

In light of the CIT introduction, companies should reassess their structures for tax compliance and efficiency. This includes adapting to new regulations, pursuing potential restructuring for tax benefits, and ensuring approvals for tax exemptions are obtained. Cross-border transactions should also be evaluated for tax efficiency, including consideration of benefits under double taxation agreements.

Personal taxation and long-term outlook

The UAE does not currently impose personal income tax on salaries or investment income. However, individuals conducting business activities in the UAE may be subject to the 9% CIT on their business income. There is no indication of a move towards higher corporate taxes in the foreseeable future.

Conclusion

The introduction of CIT in the UAE represents a significant shift in the region’s fiscal landscape, affecting a broad spectrum of business activities. Companies operating in the UAE must carefully navigate these changes to ensure compliance and maintain optimal tax efficiency in their operations.
 
Authored by: Zain Satardien