Introduction

The United Arab Emirates, famed for its business-friendly climate, has lately experienced significant regulatory reforms, including the implementation of a new corporate tax code. The United Arab Emirates Ministry of Finance announced the adoption of a federal corporation tax on business earnings in a significant move aimed at complying with global economic standards and reducing the compliance burden on firms. The UAE corporate tax of 9 percent went into effect on June 1, 2023, breaking the country's present lack of a federal-level corporation tax. “The introduction of corporate tax is intended to help the UAE achieve its strategic objectives and accelerate its development and transformation,”[1]the ministry said. This article highlights on the law and orders in the cooperate sector that has been considered since the implementation of Corporate Tax law.

About the law

The United Arab Emirates has formally released Federal Decree Law No 47 of 2022 on the Taxation of Corporations and Businesses, which establishes a 9 percent corporate tax rate on taxable firm income more than AED 375,000. This Corporate Tax Law takes into effect on June 1, 2023, making enterprises liable to UAE taxation from the start of their first financial year. Profits above AED 375,000are subject to a regular tax rate of 9 percent, whereas profits below this threshold are subject to a zero percent tax rate, aimed at encouraging small firms and entrepreneurs. An anticipated aspect of the Corporate Tax law concerns the treatment of Free Zone Persons, recognizing their important role in promoting free trade zones and contributing to the UAE's economic progress. Qualifying Free Zone Residents can have their Qualifying Income taxed at zero percent and their Non-Qualifying Taxable Income taxed at 9 percent if they meet certain standards, such as maintaining substance and complying to transfer pricing provisions. Regardless of Qualifying status, all Free Zone entities must register and file a Corporate Tax return. Government entities are exempt from UAE Corporate Tax unless they operate under a license issued by a Licensing Authority. Unless engaged in non-mandated activity, government-controlled entities are excluded. The law provides that income from extractive and non-extractive enterprises is taxed separately under relevant Emirate Legislation and the Corporate Tax law, respectively, for entities in the extractive industry. Tax grouping is introduced as a means for taxpayers to reduce administrative burdens and share losses to minimize tax. The Corporate Tax law clarifies rules governing the utilization of tax losses when a subsidiary joins or ceases to exist within a tax group. Several articles of UAE Corporate Tax legislation cover Transfer Pricing, in accordance with the OECD Transfer Pricing Guidelines.

Transactions involving related parties and connected individuals must follow the arm's length principle, and taxpayers must prepare Transfer Pricing documentation, which includes a disclosure form, master file, and local file. Specific ministerial directives and tax authority instructions will establish compliance conditions and formats. Non-residents with business activities in the UAE are considered taxable persons. Foreign permanent establishment (PE) exemptions are subject to foreign tax of at least 9 percent, with changes allowing for revocable elections. Conditions are set for tax-neutral intra-group transactions and business restructurings, and a two-year claw-back period is established. Certain restrictions were introduced to qualify for tax-neutral intragroup transactions and corporate restructurings, and a two-year claw-back period was established. To qualify for tax-neutral intra-group transactions and company restructurings, group transfers and restructure conditions were introduced, and the claw-back time was set at two years. Anti-abuse policies, The Cooperate Tax Law established general anti-abuse principles that apply to transactions that result in a tax advantage when there is no genuine commercial rationale, and the tax advantage was the main or one of the main reasons of the transaction.

Dubai’s Department of Finance (DoF) has launched an integrated training programme –IMTITHAL – aiming to raise awareness of UAE corporate tax. The first of its kind in the country, the IMTITHAL programme is based on interactive participation and will feature many realistic examples related to the corporate environment in various economic sectors. The training programme is organised and delivered in cooperation with the strategic partner, Dubai Chambers, and the knowledge partner, KPMG.

The UAE Cabinet Decision No. (49) of 2023, which governs the handling of resident and non-resident individuals engaging in business or business operations for the purposes of the UAE Corporate Tax Law, has been formally announced by the Ministry of Finance. The fundamental goal of the ruling is to offer clarification on the application of the Corporate Tax regime for people, ensuring that only income earned from company or business-related activities is taxed. Personal income, including revenues from employment, investments, and real estate (without licensing requirements), is expressly exempt from UAE Corporate Tax. Individuals involved in company or commercial operations will only be required to comply with UAE Corporate Tax and registration responsibilities if their total revenue exceeds AED 1 million in a given calendar year. 

Conclusion

Inconclusion, the United Arab Emirates (UAE) has embarked on a significant economic transformation through the implementation of a new corporate tax code, marking a departure from its historical absence of federal-level corporation tax. The introduction of a 9% corporate tax rate, effective from June 1, 2023, reflects the UAE's commitment to aligning with global economic standards and fostering sustainable development. The Corporate Tax Law incorporates various provisions aimed at promoting economic growth, such as a zero percent tax rate for profits below AED 375,000 to support small businesses and entrepreneurs. The treatment of Free Zone Persons acknowledges their vital role in the UAE's economic progress, offering tax incentives for qualifying entities. The legislation addresses specific sectors, such as extractive and non-extractive enterprises, providing clarity on tax treatment under relevant Emirate Legislation and the Corporate Tax Law. Tax grouping provisions are introduced to streamline administrative processes and allow for the sharing of losses among group entities. Transfer pricing regulations align with OECD guidelines, emphasizing the arm's length principle for transactions involving related parties. Non-residents engaged in business activities in the UAE are now considered taxable persons, subject to a minimum 9% tax. Anti-abuse policies are established to prevent transactions aimed solely at obtaining tax advantages without genuine commercial rationale. The UAE government, recognizing the need for awareness and education, has launched the IMTITHAL training program to inform businesses about the intricacies of the new corporate tax regime. The Cabinet Decision No. (49) of 2023 further clarifies the application of the Corporate Tax Law for individuals engaged in business activities, ensuring that only income earned from such activities is subject to taxation. This comprehensive regulatory framework signifies the UAE's commitment to creating a transparent and business-friendly environment while contributing to its strategic objectives of economic development and transformation. The introduction of corporate tax, accompanied by supportive measures and awareness programs, positions the UAE as a dynamic and globally compliant business destination.

[1] Derhally, M.A. (2022) 'UAE issues corporate tax law, paving way for implementation in 2023,' The National, 9December.