The United Arab Emirates issued Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, which provides the legislative basis for the introduction of a federal corporate income tax (CIT) regime on business profits from financial years starting on or after 1 June 2023.
Under the regime, CIT will be levied at a rate of 9% on taxable income exceeding AED375,000 and will apply to both resident and non-resident persons.
UAE businesses will be subject to CIT on their worldwide income. However, dividend income and capital gains will be exempt, subject to meeting the conditions of the participation exemption. The Law provides for a foreign branch profits exemption where those profits have been subject to tax overseas at a rate of at least 9%. Foreign tax credit will be available for taxes paid overseas on forms of income that are not exempt from UAE CIT.
Natural persons who are UAE residents and subject to CIT will be taxable only on the income earned from business activities undertaken in the UAE. Non-residents will be subject to CIT on any taxable income attributable to a permanent establishment (PE) or nexus in the UAE or any income that is considered UAE-sourced income.
The definition of a PE is in line with global tax principles – fixed place of business PE and dependent agent PE and provides for an investment manager exemption to prevent the inadvertent creation of PEs for foreign funds.
Although Free Zone entities will be in scope of the new CIT regime businesses established therein can benefit from 0% tax rate on qualifying income. The application of the 0% tax treatment will be subject to several conditions, such as maintaining adequate substance.
Capital gains derived from, and dividend income received from qualifying participations will be exempt, subject to meeting certain conditions.
The UAE is to implement interest limitation rules. In line with the OECD’s BEPS Action 4, interest expenditure will be deductible up to 30% of the taxable person’s accounting earnings before the deduction of interest, tax, depreciation and amortisation (EBITDA).
Alongside the new CIT regime, the UAE will also implement Transfer Pricing (TP) rules in line with the OECD TP Guidelines, as well as periodic TP reporting obligations.