Introduction to Corporate Taxation in the UAE: Key Aspects
The United Arab Emirates (UAE) is a popular jurisdiction for cryptocurrency businesses.
In February 2023, the Dubai Virtual Assets Regulatory Authority (VARA) published industry rules allowing companies in the sector to obtain licenses and issue tokens under the clear supervision of the regulatory body. Considering that the emirate is also a hub for developers, particularly companies engaged in NFT marketplaces, metaverses, service providers, and other segments of the blockchain industry, it is evident that the jurisdiction is intriguing not only in terms of regulation but also taxation. The UAE stands as an economic center in the Middle East, renowned for its rapid development and thriving business environment. A key factor in the region's success is its favorable tax regime, attracting numerous local and international companies.
As an integral part of the Gulf Cooperation Council (GCC), the UAE consistently adapts its corporate tax policy to global economic trends while maintaining its reputation as a tax-friendly jurisdiction. We delve into the complex world of corporate taxation in the UAE, discussing the tax structure, rules, incentives, and the evolving landscape that businesses must navigate to thrive in this dynamic economy.
Implementation of Corporate Taxation in the UAE
In January 2022, the UAE Ministry of Finance announced its intention to introduce a federal corporate tax on profits earned by businesses. According to Federal Decree-Law No. 47 of 2022 on the taxation of corporations and businesses (the "Corporate Tax Law"), businesses will start paying UAE corporate tax from the beginning of their first financial year commencing on or after June 1, 2023. The corporate tax will be applied uniformly across all emirates.
By introducing corporate tax, the UAE aims to:
- Strengthen its status as a leading global center for business and investments.
- Expedite progress and transition towards achieving strategic goals.
- Affirm commitment to adhering to international standards of tax transparency and preventing harmful tax practices.
Scope of Corporate Tax
Corporate tax is a mechanism of direct taxation on the net income or profits earned by corporations and other organizations from their economic activities. According to recent legislative changes, corporate tax will apply to:
- All legal and natural persons conducting business based on a commercial license in the UAE.
- Free zone enterprises (the UAE's corporate tax regime will continue to provide incentives for free zone enterprises that meet all regulatory requirements and do not conduct business on the mainland of the UAE).
- Foreign legal and natural persons only if engaged in trade and business in the UAE on a permanent basis.
- Banking operations.
- Enterprises engaged in real estate, construction, development, agency, and brokerage activities.
Exemption from Corporate Tax
The rules for exemption from corporate tax in the UAE include the following:
- Companies engaged in the extraction of natural resources are exempt from corporate tax as they remain subject to the current corporate taxation at the emirate level.
- Dividends and capital gains received by UAE enterprises from qualified stock holdings are exempt from corporate tax.
- Qualified intra-group transactions and reorganizations will not be subject to tax provided certain conditions are met. Additionally, corporate tax does not apply to:
- Salaries and other employment income received by individuals in the public or private sector.
- Interest and other income received by individuals from bank deposits or savings schemes.
- Income of foreign investors through dividends, capital gains, interest, royalties, and other investment-related income.
- Real estate investments made by individuals in a personal capacity.
- Dividends, capital gains, and other income received by individuals from ownership of stocks or other securities in a personal capacity.
Corporate Tax Rates
According to the Ministry of Finance, the corporate tax rates are as follows:
- 0% for taxable income up to AED 375,000 (€96,440).
- 9% for taxable income exceeding AED 375,000 (€96,440).
- Another tax rate (yet to be determined) for large multinational corporations meeting specific criteria outlined in the "second component" of the OECD BEPS project.
The Federal Tax Authority will oversee administration, collection, and enforcement concerning corporate tax. The regulator provides additional resources and instructions on corporate tax, as well as guidance on registration and tax filing, available on its website.
Classification of Taxable Bases and Corporate Taxation Conditions In line with tax regimes adopted in most countries, the "Corporate Tax Law" establishes taxes based on residency and income source criteria. The applicable taxable base depends on the category of the entity subject to taxation.
A "resident entity" is subject to taxation on income derived from both domestic and foreign sources (based on residency criteria). Conversely, a "non-resident entity" is subject to taxation exclusively on income derived from sources within the UAE (based on the source principle).
Residency for corporate tax purposes is not determined by the actual place of residence or stay of the entity. Instead, it is defined by specific criteria outlined in the "Corporate Tax Law." If an individual does not meet the classification criteria as a resident or non-resident, they are not considered subject to taxation and, accordingly, are not liable for corporate tax.
Purpose and Scope of the New Corporate Tax Regime
Recent developments signify significant changes in the tax landscape of the UAE, which has long been a magnet for global businesses due to its tax-free status. Here are key takeaways that businesses should note:
Tax Rates and Thresholds
The new corporate taxation regime in the UAE sets the tax rate at 9% for taxable income exceeding AED 375,000 (~$102,000). However, companies with taxable income below this threshold are exempt from taxation. This relaxation is intended to support small businesses and startups, reflecting the government's commitment to fostering entrepreneurship. The Ministry of Finance asserts that this mechanism will make the UAE's corporate taxation system one of the most competitive globally.
Incentives for Foreign Investors
Corporate tax will not be levied on foreign investors not engaged in business activities within the country. This step ensures that international investors using the UAE as a regional hub for their global operations will not fall under the purview of the new tax.
Consistent Benefits for Businesses in Free Zones
Thousands of companies operate in the UAE's free zones, traditionally enjoying benefits such as zero taxes and full foreign ownership. The Ministry of Finance has noted that these companies in free zones can still benefit from corporate tax incentives, provided they meet the necessary requirements. However, specific details of these requirements have not been clarified.
Compliance and Transparency
The government aims to make the corporate taxation system business-friendly by aligning it with global best practices and minimizing the burden of legislative compliance. Corporate tax will be applied based on profits reflected in the financial statements of UAE enterprises, following internationally accepted accounting standards. There are expected to be limited exceptions and adjustments, with a focus on fairness and transparency.
Impact on Small and Medium-sized Businesses and Startups
While the introduction of corporate tax is not unexpected, given international trends, some representatives of small and medium-sized businesses, as well as startups, may be concerned about its potential impact. Some business owners note that the tax may discourage entrepreneurs, especially due to the payment of advance payments and the prospect of taxation after the business becomes profitable. However, it should be noted that the proposed tax rate remains relatively low compared to other low-tax jurisdictions.
Global Alignment and Digitization
The UAE government's decision to introduce corporate tax is motivated by a desire to join global efforts to combat tax evasion. Additionally, it aims to address challenges arising from the digitization of the global economy. As there is no personal income tax in the UAE, this corporate tax is seen as a way to promote compliance with international tax norms while maintaining the attractiveness of the UAE as a business destination.
In summary, the UAE's decision to introduce corporate tax represents a significant shift in the country's economic policy. While it may cause concern among some companies, especially small and medium-sized enterprises and startups, it is part of the UAE's commitment to complying with international tax standards and efforts to adapt to the changing global economic landscape.
Changes in taxation underscore the need for businesses, including those in the cryptocurrency sector, to carefully assess their financial strategies and long-term plans in a dynamic business environment.