EN
DEThe United Arab Emirates
In recent years, the United Arab Emirates (UAE) has undergone substantial tax reforms aimed at modernizing its tax system and aligning with international best practices, while also diversifying state revenue sources. Starting with the introduction of Value Added Tax (VAT) in January 2018, followed by the Economic Substance Regulations (ESR) and Country-by-Country Reporting (CbCR) requirements in April 2019, the UAE has steadily implemented changes to align with global tax standards.
The new Corporate Tax (CT) Law will impose a corporate income tax on the business profits of UAE-based entities within a defined tax accounting period.
The full text of the law and specific regulations are expected to be released by mid-2022, raising a crucial question: do businesses currently have adequate information to evaluate the potential impact of this upcoming tax? In this alert, we provide insights based on the Frequently Asked Questions (FAQ) issued by the UAE Ministry of Finance (MoF).
The announced UAE Corporate Tax (CT) regime introduces a tiered tax rate system with three distinct rates:
0% Tax Rate Annual taxable profits up to AED 375,000 are taxed at a zero rate, effectively exempting small businesses and startups from CT
9% Tax Rate Annual taxable profits exceeding AED 375,000 will be subject to a 9% tax rate, covering the majority of standard business profits within the UAE.
MNE-Specific Rate Multinational Enterprises (MNEs) falling under the Pillar 2 scope of the BEPS 2.0 framework (with consolidated global revenues above AED 3.15 billion) will be subject to rates and regulations specified by the OECD’s Base Erosion and Profit Shifting (BEPS) rules, designed to curb profit shifting and tax base erosion
For tax purposes, taxable profits are based on accounting profits but include specific adjustments as required under the CT law. This structure aligns UAE tax policy with international standards, ensuring a competitive tax environment while supporting compliance with global frameworks.
The UAE remains committed to upholding its tax incentives for businesses registered in Free Trade Zones (FTZs). Businesses operating exclusively within these zones and refraining from conducting business with Mainland UAE are eligible for a 0% tax rate (or exemption, as applicable) until the expiration of their tax holiday period. However, all Free Zone entities are required to file an annual Corporate Tax (CT) return to maintain compliance.
Dual Operations Consideration Businesses with activities in both Mainland UAE and Free Trade Zones—particularly those under a dual license scheme—should assess how the CT regime may impact their operating model and tax planning strategies. A careful review can help identify any adjustments needed to optimize operations while benefiting from the FTZ tax incentives.
The OECD Transfer Pricing (TP) Rules are now applicable in the United Arab Emirates (UAE), requiring all companies to adhere to mandatory TP compliance and documentation requirements. These rules may apply not only to cross-border but also to domestic transactions, ensuring that all intercompany dealings are conducted at arm’s length.
Historically, intercompany sales and financing arrangements within UAE-based groups may not have focused on arm’s length pricing, as financial consolidation would often eliminate the need for internal transaction remuneration. This shift means that all intercompany transactions must now meet arm’s length standards and be supported by appropriate TP documentation.
For businesses, this represents a significant regulatory change, as all current intercompany arrangements—including both cross-border and domestic transactions—must be evaluated and adjusted to meet compliance. Proper documentation is essential to substantiate pricing methods, mitigate risks, and avoid potential disputes with tax authorities.
Under the UAE Corporate Tax (CT) regime, accumulated taxable losses can be carried forward to offset future taxable profits. This provision allows businesses to utilize past losses to reduce taxable income in profitable years, effectively enhancing cash flow and supporting long-term growth. The specifics of loss carry-forward periods and any conditions will be outlined in the UAE CT regulations.
The UAE Corporate Tax (CT) regime provides for tax grouping and group relief provisions, allowing UAE-based groups to benefit from consolidated tax filing and shared tax relief. Eligible UAE groups may:
File Consolidated Tax Returns Groups with qualifying entities should be able to submit a single, consolidated tax return, simplifying compliance and administration.
Offset Tax Losses Within the Group Tax losses from one group entity may be offset against the taxable profits of another, optimizing tax efficiency across the group.
These provisions enhance tax efficiency and enable group entities to leverage combined resources effectively, fostering a supportive framework for UAE-based businesses to manage corporate tax liabilities strategically. Specific conditions and eligibility criteria for grouping will be outlined in the detailed UAE CT regulations.
Under the UAE Corporate Tax (CT) regime, taxable entities will be eligible to claim a foreign tax credit for corporate taxes paid abroad on income that is also taxable in the UAE. This credit can be applied against the entity’s annual UAE tax liability, helping to prevent double taxation on foreign-sourced income and ensuring a more favorable tax environment for UAE businesses with international operations. The details and limitations for claiming foreign tax credits will be specified in the UAE CT regulations.
