UAE’s New Corporate Tax Regime and the Implications for Businesses

The United Arab Emirates (UAE) has long deliberated the need for a corporate tax. After clearing a defined path for taxation, the UAE’s Ministry of Finance has announced the introduction of ‘UAE Corporate Tax’ which shall be applicable from 1st June 2023. The move to introduce corporate tax also serves to reinforce the UAE’s commitment to the Organization for Economic Co-operation and Development (OECD) of which it’s a member. The government aims to align with four principles by introducing this new tax regime.

1. Create flexibility while aligning with modern business practices and adapting to evolving socio-economic norms

2. Bring certainty and simplicity to the tax structure for businesses and keep the process cost-effective 

3. Ensure the taxation is fair and just for different types of organizations and create equity

4. Create a transparent system

Caveats and Considerations of UAE’s New Corporate Tax

The ministry also stated that it will provide further guidance to help companies comply and conform to the rules while avoiding any misconceptions and errors. In the preliminary press statement, the ministry detailed the extent of taxation and the conditions of application and/or exemption. Laying out some of the parameters, here are a few pointers companies should look out for while filing their taxes and planning finances for the upcoming financial year.  

• As per the new tax regime, the corporate tax shall be applicable only on an income above AED 375,000. For any income equal to or lesser than that, a 0% corporate tax is levied.
  
  
• The tax rates for income above the set limit are

o   9% on the income above AED 375,000 

o   A different tax rate for large multinational organizations that meet certain criteria

• The Federal Tax Authority (FTA) will be responsible for handling the administration, collection, and enforcement of the corporate tax regime in the UAE.
  
  
• As the tax regime is applicable from 1st June 2023, for companies that operate considering 1st January to December 2023 as the financial year, the corporate tax will be applicable starting from 1st January 2024.

Implications for Organizations

With only a few months left for the new tax rules to be officially implemented, there are certain implications that organizations must actively prepare for. Businesses must assess their existing systems that handle the finances and taxes and ensure they are prepared to sufficiently address the requirements of the new regime.

At the same time, the new regime could affect their current operation models requiring them to keenly revisit the entire legal structure and make amends where necessary. Finally, they may need to pinpoint exposures and opportunities to file, submit and drive taxation efficiently while restructuring and making space for options such as legal entity rationalization, domestic and non-domestic restructuring, etc. In part, efforts required to enforce these changes require technical know-how of systems that operate and offer ease of integration of the new regime. As new data flows into the systems, stakeholders must understand how the tax structures apply, and to what extent it will affect the payments, to prepare for other changes that will come after the new regime. With so many factors to consider, businesses must choose to act wisely and prepare for short-term and long-term implications to operate efficiently.