May 31, 2022. DUBAI, UAE.
What does the announcements on UAE Corporation Tax mean for tax on income there?
On 31 January 2022, the UAE Ministry of Finance (MoF) announced that the UAE would introduce a Federal Corporate Tax on business profits. According to the implementation plan, Corporation Tax will be levied for financial years starting on or after 1 June 2023. UAE Corporation Tax will apply to all UAE businesses and commercial activities except those involving the extraction of natural resources, including oil and gas.
The MoF announcement on the subject, stated all activities undertaken by a legal entity would be deemed to be ‘business activities’ and therefore would be covered under Corporation Tax. Although, it is relevant to note that dividends and capital gains earned by UAE businesses from their specified ‘qualifying shareholdings’ will be exempt from it.
Foreign entities and individuals will also only be subject to UAE Corporation Tax if they conduct trade or business in the UAE in an ongoing or regular manner.
UAE Corporation Tax will not apply to an individual’s salary and other employment income (in both the public and private sector). In addition, interest and other income which has been earned from bank deposits or saving schemes will not be subject to the Corporation Tax regime.
Similarly, dividends, capital gains and other income earned by individuals from owning shares or other securities in their personal capacity would also be treated as being outside the scope of UAE Corporation Tax.
Nevertheless, it is understood that an individual’s activities could be considered and therefore be subjected to UAE Corporation Tax if an individual has (or is required to have) a business licence or a permit, including a freelance licence or permit, in order to be able to conduct such activities in the UAE.
In such cases a freelancer will not be taxed on the income they generate as a salary, but the company or licence which hosts their visa will be taxed on their net profit. There is also an outstanding question as to whether an individual, say a tax adviser operating under a profession rather than business licence would be liable. However, the MoF has already stated that an individual’s investments in real estate (in their personal capacity), which does not require a commercial licence or permit to be carried out, would not fall under the scope of the Corporation Tax.
THRESHOLDS AND RATES
As a result of the introduction of the Corporation Tax in the UAE, an individual’s business income up to 375,000 AED will be taxed at 0%.
The Corporation Tax rate will then increase to 9% for taxable income above 375,000 AED. This rate of 9% which is currently been cited would position the UAE as the lowest rate of Corporation Tax in all Middle East countries.
There will also be a special rate which will be applied to so called ‘large multinationals’.
These ‘large multinationals’ will be defined as having consolidated global revenue exceeding Euro 750 million equivalent to 3.15 billion AED).
However, the UAE MoF has yet to announce the tax rate which will be applied to these so-called ‘large multinationals’. Although at present the rate for large multinationals is expected by some commentators to be 15%, as per Pillar Two of the OECD Base Erosion and Profit Shifting (BEPS) project.
Perhaps not surprisingly, following this groundbreaking announcement by the UAE Government that Corporation Tax is definitely coming to the UAE, there has been a lot of speculation in many quarters that the UAE Federal Government could also be about to introduce individual income tax in the UAE.
However, in an interview on 21 February 2022, His Excellency Dr Thani Bin Ahmed Al Zeyoudi, Minister of State for Foreign Trade clarified that the UAE will not introduce an individual income tax for the time being. In addition, in relation to the potential introduction of an individual’s income tax, the Minister stated that , ‘It is not at the table at all now’.
Therefore, starting from 1 June 2023, only income which is derived from activities undertaken by legal entities or by individuals in possession of a licence will be subjected to the UAE Corporation Tax. In addition, those foreign entities and individuals which conduct trade or business in the UAE in an ongoing or regular manner will also fall under the new UAE Corporation Tax regime.
Partner, Tax Advisory