The United Arab Emirates is one of the most progressive countries in the Middle East. Here, the world is developing at the speed of light, and advanced technologies have become a part of every citizen’s life. The UAE generates a huge number of investors who are ready to invest in promising areas of activity. No wonder that in 2022, this jurisdiction topped the ranking of the best countries for entrepreneurs and startups.
In early December, the UAE Ministry of Finance published a corporate tax law on its official website, which will apply to tax periods after 1 June 2023. We will look at how it may affect businesses, whether the reform will affect residents of free trade zones, and the economic prospects in our article.
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The new law recognizes as taxpayers local companies, residents of free trade zones (FTZs), foreign businesses with an effective place of management and control in the UAE, permanent establishments in the country, and non-residents (individuals and entities) deriving income from UAE sources.
In addition to the length of stay in the country (183 days within 12 months), from March 2023 the center of vital interests criterion, which takes into account personal and business connections in the UAE, will be applied to determine the tax residency of individuals. Both resident and non-resident individuals will pay corporation tax on income from local and foreign sources as long as it is linked to the conduct of business in the country. The basic tax rate will be 9% and there is also a tax exempt minimum (about $100,000), 0% for taxable income not exceeding AED 375,000 (approximately $100,000). In accordance with the international Organization for Economic Cooperation and Development (OECD) requirements for the taxation of international groups of companies, the tax rate for Arab member companies of international groups of companies with revenues over €750 million per year can be higher than 9%.
The law provides for a number of other incomes exempt from taxation. First of all, it is income in the form of dividends. Under certain conditions, such income is fully exempt from tax:
- dividends received from residents
- dividends received from participation in foreign companies, provided that they hold at least 5% in the share capital of the foreign company and for at least 12 consecutive months. This income is also subject to corporate tax in the country of incorporation of the foreign company at a rate of at least 9% (more detailed conditions are laid down in Article 23 of the Law).
- income from the sale of shares/interests in non-resident companies, subject to the conditions described above;
- exchange differences and reserves created in connection with participation in a non-resident company, subject to the conditions described above.
As a general rule, taxpayers’ income can be reduced by reasonable expenses. There are a number of restrictions on the recognition of interest expenses. For example, there is a limitation on the deduction of interest depending on the size of the borrower’s EBITDA. The remainder of the interest in excess of the limit can be carried forward over a period of 10 years.
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What are the advantages of investing in UAE
Given the UAE’s position as an international business and global financial centre, the proposed corporate tax regime in the UAE will be based on global best practice and will incorporate principles that are known and accepted around the world. This ensures that the new tax regime in the UAE will be sufficiently simple and understandable for investors.
The introduction of a federal corporate tax will also provide a framework for the UAE to meet its commitment to support the global minimum effective tax rate, which is proposed under “Pillar Two” of the OECD Base Erosion and Profit Shifting project.
Free zones are an important part of the UAE economy and play a central role in the country’s goal of encouraging foreign direct investment and making it easier to do business.
Although companies and branches incorporated in FEZs will be subject to the new UAE corporate tax and tax filing requirements, those who comply with all regulatory requirements will be able to continue to enjoy the benefits of FEZs, namely the application of 0% income tax, irrespective of their level of income.
However, the rate will be different for individual economic sectors:
- foreign firms in the oil and gas sector – 55%;
- branches of foreign banks – 20%.
Excise tax has to be paid on specific products:
- 50% on carbonated water and sugar-containing products and sweeteners;
- 100% – for energy drinks, tobacco and tobacco products;
- 100% on electronic smoking devices.
These payments must be made by those organizations that are manufacturers, importers or custodians of the products in question.
As far as Customs duties are concerned, the List of Exempted Items consists of about 700 entries. If the imported goods are not on this list, the tax here is calculated at a 5% rate on the value.
As previously mentioned, alcoholic, sweet and carbonated drinks are subject to a 50% duty, while cigarettes and e-smoking devices, including the liquids used in them, are subject to a 100% duty. For fuel, the VAT rate is 5%.
There is no export duty.
The number of applications for business registration has multiplied here since 2022. The IT industry is relocating, but there are also other types of businesses – in real estate or in the manufacture of security devices.
But when it comes to property taxes in the UAE, there are a couple of nuances.
When you buy a flat in Dubai for example, there is a title transfer tax. It is 4% and the buyer pays it equally with the seller. Along with the tax, the buyer pays an administrative fee of AED 540 (USD 147) and the registration fee, which varies from AED 2,000 to 4,000 (USD 545 to 1,089) depending on the value of the property.
Dubai residents do not pay income tax when renting out their accommodation. Instead, there is a municipal levy, but it is usually paid by the tenant as part of the utility bill. In Dubai, the rate is 5% of the annual rental value for residential properties and 10% for commercial properties.
Corporate tax UAE – risks and challenges
Let’s try to understand who will be subject to the new taxation and what risks may arise.
For corporate tax purposes, a taxpayer is either a resident or a non-resident person. A resident person is any of the following:
- An entity incorporated or otherwise created or recognized under the applicable laws of the UAE, including a free zone person;
- An entity incorporated or otherwise created or recognized under the applicable laws of a foreign jurisdiction which is effectively managed and controlled in the UAE;
- An individual who carries on business or conducts a business in the UAE;
- or any other person as may be determined by a decision of the Cabinet.
A non-resident person is a person who is not deemed to be a resident person or:
- Has a permanent establishment in the UAE;
- Receives income from local sources;
- or has a connection with the UAE as specified in the Cabinet decision.
It is further provided that a branch of a resident in the UAE is considered to be the same taxpayer. Finally, it is provided that the Cabinet shall issue a resolution determining the categories of business or business activities carried on by resident or non-resident individuals that are subject to corporate tax under the Act.
How to navigate the corporate tax UAE
In order to correctly reflect your business activities, you need to keep accounting records in accordance with UAE law. The easiest and most reliable way is to contact a special accounting company in the UAE who will keep your records. Fees are paid on a monthly basis and depend on the number of transactions. There are many verified licensed auditing companies in the UAE. Packages are available which include quarterly VAT returns and annual audits. The requirement to submit a completed financial audit report is mandatory for many free zones and is required for annual license renewal.
The tax period is a calendar year or 12 months of the period for which the company prepares accounts, i.e. it depends on the taxpayer’s fiscal year.
The law applies to tax periods beginning on or after 01.06.2023 (at the taxpayer’s choice).
Conclusion – UAE remains an attractive destination for foreign investment
Most people who know about living or doing business in the UAE usually wonder why Dubai has no or very low taxes compared to other economically developed countries. Where does the emirates get its wealth from? Many people attribute their answers to the rich oil fields. But that’s not quite right.
The authorities in Dubai set out from the beginning to create an economy that would not be dependent on resource extraction and global resource prices. Strategies for economic development in all spheres have been drawn up and are being implemented systematically. As a result, in recent years, Dubai’s financial prosperity has been based on profits from the real estate and tourism sectors, trade promotion, aviation companies and seaports, as well as foreign investment.
Foreign investors, in particular, are at the heart of Dubai’s development strategies and are the ones with whom the emirate sees its future. For them, the UAE reduces or eliminates tax. Dubai aims to become an international business cluster and there is no doubt that success will be achieved by such a government policy.
The country has a good environment: it is ranked number 1 in the Global Entrepreneurship Monitor on the Global Entrepreneurship Index. It is also possible to register a company remotely. It is for these reasons that many people start their own business here, acquire companies or invest money.
There is no tax on inheritance in the UAE. All questions of inheritance are dealt with in accordance with the rules prescribed in the Quran. There are Shariah laws in the Muslim country. This means that there are certain rules in terms of inheritance.
It is very important for foreign nationals to take care of their wills in good time. If a will is not properly drawn up, or if there is no will at all, there is a possibility for people to inherit property in a different order from that in which the testator would have preferred. For example, upon the death of a spouse, the priority will not go to the wife, but to her male relatives.