The introduction of corporate tax in the UAE this year means companies will need to move quickly to adapt their business operations, corporate structure and accounting systems as it will first apply to those with financial years beginning on or after 1 June 2023. Businesses with a January to December financial year have a little more time to prepare, as their first reportable year will be 2024, and they will need to file their corporate tax return by September 2025.
The simultaneous introduction of transfer pricing rules will apply to UAE businesses (and multinational corporations with branches in the UAE) that have transactions with related parties and connected persons, irrespective of whether they are located in the UAE mainland or a free zone or in a foreign jurisdiction. Companies will also be required to file a related-party disclosure form and maintain a local file and a master file in the UAE, subject to a revenue threshold. While there is no express provision for businesses to file transfer pricing documentation annually, the extremely brief documentation submission window of 30 days means it will have to be treated as an annual compliance exercise.
The corporate tax law will bring significant compliance requirements for UAE businesses
Impact on businesses
The introduction of the corporate tax law will bring significant compliance requirements for UAE businesses in the form of company registrations, tax return filings, retention of business records, mapping of intercompany transactions, and transfer pricing documentation. In addition, an impact on business operations, supply chain, business structures, and the IT and financial functions of groups operating in the UAE should be expected.
Businesses should lose no time in starting to analyse the practical impact the law will have on their business operations, corporate structure, accounting systems, financial position and stakeholders.
A detailed impact analysis should be conducted well ahead of 1 June 2023
A detailed impact analysis should be conducted well ahead of 1 June 2023. As part of this analysis, and in the interest of being prepared for the corporate tax and transfer pricing regimes, companies will ideally need to:
- identify the required changes to their business model and corporate structure to minimise the fiscal burden and the administration costs
- design a robust accounting technology system in line with the tax requirements
- identify the related parties, review the existing agreements/transfer pricing policies, and maintain solid transfer pricing documentation in place
- evaluate the applicability of corporate tax on income streams, analyse any exemption criteria and assess whether their UAE entities are eligible for such exemption
- register the business for corporate tax purposes via the Federal Tax Authority portal – in principle, all companies should register as there is no minimum registration threshold.
FDI-friendly
While the changes brought by the new corporate tax increase the administrative burden on UAE businesses, they also align the country with the most advanced tax jurisdictions that are spearheading the OECD’s base erosion and profit-shifting (BEPS) project. BEPS makes multinationals (and large domestic companies) pay 15% minimum tax rates in member states where they trade.
The UAE’s competitive corporate tax regime cements its position as a leading global hub for business and investment. The 9% rate, one of the lowest globally, maintains the country’s attractiveness for foreign direct investment (FDI). It is one of the lowest in the Gulf region and well below the worldwide average statutory corporate income tax rate of 23.37%.
Not only will the introduction of corporate tax increase the perception of the UAE as a totally onshore tax location, but its extensive network of double-tax treaties will also provide an extra layer of certainty for foreign investors operating in the UAE.
Rates, thresholds and exemptions
Although a significant number of key provisions in the UAE’s introduction of corporate tax remain to be clarified before 1 June 2023, they are not expected to differ dramatically from the information contained in the public consultation document. A 0% tax rate is expected on business profits up to and including the threshold – likely to be 375,000 dirhams (US$102,000) – to support small businesses and start-ups. The 9% rate is expected to be levied on taxable business profits above that threshold.
Entities classified as large multinational groups, with an annual consolidated turnover of €750m (3.15bn dirhams), will likely be taxed under the global minimum rate laid down in the OECD guidelines under BEPS pillar 2 (ie 15%). Free zone businesses will be subject to 0% corporate tax on a qualifying income basis as long as they meet the economic substance and transfer pricing requirements of the legislation.
