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UAE initiates new Corporate Tax law

by Madaline Dunn

The United Arab Emirates (UAE) has initiated a new fiscal policy with the introduction of a federal corporate tax, it has been announced.

Outlined in Federal Decree-Law No. (47) of 2022, the new taxation framework spans the UAE’s free zones, and permits public participation through a digital consultation phase. 

From June 2023, corporate tax stands levied at 0 per cent for annual taxable incomes up to AED375,000 and 9 per cent beyond that threshold. 

Free zone commercial transactions maintain the 0 per cent rate. 

It was shared that the corporate tax has a key role in sustainable development by fostering a sustainable revenue base, driving forward the country’s strategic objectives, and upholding tax transparency and fairness. 

The UAE National Committee for Sustainable Development Goals, regularly reports on the UAE’s progress, ensuring that sustainable development goals are interwoven with the nation’s development priorities, it was noted.

The committee evaluates the influence of tax policies on economic growth, and the UAE has been proactive in reforming these policies to address growth challenges, improve inclusivity, and support sustainable economic expansion.

These reforms include simplifying the tax system and broadening its base to promote fair recovery and financial improvement.

The UAE has broadened the range of goods subject to tax and has continuously updated tax regulations to increase taxpayer flexibility, including reduced penalties for non-compliance with value-added tax and the introduction of a temporary exemption system offering a substantial reduction in fines.

The UAE has also committed to the BEPS programme’s inclusive framework and supported the OECD’s Pillar Two initiative.

This initiative establishes a global minimum corporate tax rate to prevent base erosion and profit shifting (BEPS), counter harmful tax practices, and promote global tax fairness.

Additionally, the UAE has also initiated a public digital consultation on the global minimum tax, becoming the first country in its region to do so. 

This consultation encourages feedback from a broad spectrum of international stakeholders.

The federal corporate tax system was highlighted as a key component of its broad transformational projects aimed at fortifying the nation’s financial infrastructure to effectively manage future challenges and adhere to its national priorities. 

This initiative is a collaborative effort between the Ministry of Finance and the Federal Tax Authority, ensuring the efficient administration, collection, and enforcement of the new tax laws.

The introduction of corporate tax is designed to ensure financial sustainability and inclusivity for the future, it was shared, and comes as a proactive measure in response to the dynamic global economy, marked by volatility and financial uncertainty.

Further, it highlighted that mobilising public revenue through this corporate tax is “crucial” as it seeks to build stable and sustainable government revenue streams. 

“Such financial stability is key to supporting projects that align with sustainable development goals, enhancing local resources, diversifying income sources, and ensuring a sustainable flow of finances,” it said in a statement. 

Following the establishment of the federal corporate tax law in the UAE, the Cabinet and the Ministry of Finance have released over 25 detailed regulatory decisions to guide its implementation and clarify its provisions. 

Here, key decisions include exemptions from tax registration for certain entities, stipulations for taxable persons and companies in the free zone to maintain audited financial statements, and conditions under which non-residents are not deemed to have a permanent establishment in the UAE for tax purposes.

The Ministry has also outlined requirements for maintaining transfer pricing documentation and set forth conditions for corporate tax exemptions. 

Further, it has established decisions regarding:

  • Accounting standards, 
  • Pension funds, 
  • Social security, 
  • Participation exemptions, 
  • Transitional provisions for corporate tax, tax groups, interest deduction restrictions, and the tax treatment of joint ventures, 
  • Foreign partnerships, 
  • Family establishments, and 
  • Intra-group transfers.

Specific ministerial decisions address the tax treatment of resident and non-resident individuals, the conditions for investment funds, and the definition of public benefit entities eligible for corporate tax exemption. 

The Cabinet has also set administrative fines for violations of the corporate tax law, with significant penalties for delayed tax registration as determined by the Federal Tax Authority.

The UAE Ministry of Finance shared that it is actively working to ensure the business community understands the new federal corporate tax law, its framework, and its specific implications for various business sectors and taxpayer groups. 

As such, it has initiated public awareness sessions for the general public and the media to demystify the provisions of corporate tax law and demonstrate its economic impact, covering both mainland and free zone areas.

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