A New Phase For Businesses

The UAE has always been known for its zero-tax policies, which has helped the country attract businesses and workers from across the globe. However, recently there has been a significant shift in its fiscal policy. The UAE Cabinet of Ministers issued a decision that involves levying a 9% corporate tax for certain businesses. This decision has been welcomed as a strategic move to diversify the sources of income for the UAE beyond oil, and at the same time allowing the country to maintain its status as a regional commercial hub.

Overview of the UAE Corporate Tax Regime

The UAE Corporate Tax regime is designed to incorporate international best practices into the economy and minimise the burden of compliance on businesses. This tax applies to all businesses and commercial activities, except for natural resource extraction, which remains subject to market-level taxation. The corporate tax regime specifies a 9% tax on taxable income that exceeds 375,000 UAE dirhams ($102,000). In order to support small businesses and startups, there is a provision of zero tax for companies whose income is below that threshold.

Key Features of the UAE Corporate Tax Regime

• Taxable Income: Profit that is defined for tax purposes, will be based on the adjusted accounting net profit of businesses.
• Tax Rate: The standard statutory tax rate is 9% for taxable income exceeding 375,000 UAE dirhams ($102,000). Taxable income up to this threshold will be taxed at 0%.
• Tax Compliance: Businesses have been given ample time to prepare for the introduction of Corporate Tax to help them get ready and be fully compliant.
• Tax Groups: Companies can form a Tax Group and file a single UAE Corporate Tax Return covering all the members of the Tax Group. If companies cannot form a Tax Group, they are required to file a UAE Corporate Tax Return on a standalone basis.

The Corporate Tax Impact on Businesses

The introduction of the UAE Corporate Tax regime is expected to have both positive and negative impacts on businesses. On the positive side, the corporate tax provides a basis for the UAE to execute its support by applying a different Corporate Tax rate to large multinationals that meet specific criteria set with reference to the OECD Base Erosion and Profit Shifting project. This move is expected to solidify the UAE’s position as a world-leading hub for business and investment.

However, the corporate tax may also pose challenges for small businesses and startups. Since there is a relatively low threshold for taxation, smaller enterprises might face challenges, especially given high upfront fees and taxes in free zones. It is crucial for these businesses to have some tax rebates in order to maintain their liquidity during the early stages and enable them to utilise the surplus funds for research and development.

Specific Adjustments for Indian Businesses

Indian businesses operating in the UAE now need to comply with transfer pricing rules and documentation requirements. They would also need to assess the adequacy of their existing tax function, operating model, and governance so they can meet the requirements of the new tax regime. These key adjustments include:

• Tax Residency Rule (POEM): A foreign company may be treated as a resident person for the UAE’s Corporate Tax purposes if it is effectively ‘managed and controlled’ in the UAE.
• Transfer Pricing Provisions: Transfer pricing rules apply to UAE businesses that have transactions with related parties, irrespective of whether the related parties are located in the UAE mainland, a Free Zone or in foreign jurisdiction.
• Substance Requirements in Free Zones: A qualifying Free Zone person must have and must be able to demonstrate adequate substance in a Free Zone in relation to the nature and level of its activities and the qualifying income it earns.
• Administrative / Compliance Requirements: Introduction of corporate tax will bring compliance obligations on companies in the form of tax returns, transfer pricing documentation, and maintenance of records.

Conclusion

UAE’s Corporate Tax regime marks a major policy shift and a step towards international tax transparency standards. Despite potential implications for businesses, the UAE maintains a competitive environment for local and foreign investors with a standard statutory tax rate of 9% for taxable profits over AED 375,000 and a 0% tax rate for taxable profits up to AED 375,000. The UAE Corporate Tax regime is designed to incorporate best practices globally and minimise the compliance burden for UAE businesses. As the UAE continues to evolve as a global financial centre and an international business hub, the new tax regime is expected to support
investment, ensuring the free flow of capital, trade, financing, and services.