Navigating the UAE’s new corporate tax landscape: key considerations for businesses

Shiraz Khan
Al Tamimi & Company, Dubai

Janet Gooi
Al Tamimi & Company, Dubai

Introduction

The United Arab Emirates (UAE) has long been recognised as a tax-friendly jurisdiction, which has attracted multinational corporations, investors and individuals from around the world. However, in an effort to reduce its dependence on revenue from hydrocarbons and with the evolution of global tax policies, particularly those developed within the remit of the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) project, the UAE has implemented significant reforms to its tax landscape. The introduction of corporate tax in 2023 at the federal level in the UAE marked a pivotal shift, triggered by the UAE’s diversification strategy and commitment to aligning with global tax standards. These reforms have occurred as governments worldwide increase the pressure on low-tax jurisdictions to enhance tax transparency.

This article provides an overview of the UAE’s current corporate tax landscape, focusing on key corporate tax considerations and the relevant tax developments for businesses.

The UAE corporate tax landscape

Historical overview

Historically, a key feature of the UAE’s tax system was characterised by the absence of direct taxation on businesses and individuals, except for Emirate-level taxation imposed on entities engaged in oil and gas exploration and branches of foreign banks. The establishment of free zones further enhanced the UAE’s appeal by offering tax incentives, including long-term tax holidays, 100 per cent foreign ownership and the unrestricted repatriation of profits abroad. These benefits contributed to the UAE’s rise as a global business hub and enabled the country to attract multinational corporations to establish regional headquarters in the UAE.

The UAE has sought to cement the resilience and prosperity of its economy as it shifts from a dependency on revenue from hydrocarbons. The implementation of value-added tax (VAT) in 2018 was a significant milestone, with VAT being imposed at a standard rate of five per cent on most supplies of goods and services. As part of the UAE’s commitment to the BEPS Inclusive Framework, the UAE has introduced a series of measures aimed at upholding tax transparency and fairness. In this regard, the Economic Substance Regulations were introduced, requiring entities engaged in certain ‘relevant activities’ to demonstrate a substantial economic presence within the UAE.

The current corporate tax framework

The recent introduction of a federal corporate tax in the UAE reflects the culmination of these efforts to further align the UAE with international tax standards. The new Federal Decree Law No 47 of 2022 on the Taxation of Corporations and Businesses (known as the ‘Corporate Tax Law’) imposes a nine per cent corporate tax on the taxable income of businesses exceeding AED 375,000, with exemptions for certain categories of entities, including government entities, extractive and non-extractive natural resource industries and qualifying public benefit entities.

Further, certain entities operating in free zones across the UAE, which meet prescribed conditions, may be eligible for a zero per cent tax rate on their ‘qualifying income’. Some of these key conditions include deriving qualifying income, maintaining adequate substance in the UAE, complying with the transfer pricing requirements and ensuring the de minimis rule is met, as well as preparing audited financial statements.  The rules on determining whether income is ‘qualifying income’ are narrow and complex, and it ultimately depends on the nature of the income and the type of business activities carried out by the free zone entity. This framework allows the UAE to balance compliance with international tax standards, while maintaining favourable conditions for business activities that are of strategic importance to free zones, such as manufacturing, trading of qualifying commodities, reinsurance and headquarter business, etc.

Individuals who are engaged in a business or business activity are only subject to corporate tax if their total turnover exceeds AED 1m during a Gregorian calendar year.

In addition, the Corporate Tax Law also provides various relief for small businesses that have limited resources to meet their tax obligations. Businesses with an annual revenue not exceeding AED 3m can elect not to be taxed until the tax period ending 31 December 2026, provided specific conditions are met.

Withholding tax

Withholding tax is imposed on specific types of UAE-source income earned by non-residents that is not attributable to a permanent establishment within the UAE, although the exact categories of UAE-source income subject to withholding tax have yet to be determined. While the current withholding tax rate is set at a nominal zero per cent, an increase in the future remains a distinct possibility. If such a scenario materialises, non-residents can leverage the UAE’s extensive network of double tax treaties, which offer opportunities for companies to mitigate withholding tax exposure and optimise their overall position.

Key international tax developments

BEPS Pillar Two

The UAE’s adoption of the OECD’s BEPS framework, particularly the Global Anti-Base Erosion Model Rules (Pillar Two) (GloBE Rules), represents another critical step to align the country with global tax standards. Pillar Two introduces a global minimum tax rate to ensure that large multinational enterprises (MNEs) pay a minimum level of tax on their global profits, regardless of where they are generated. This initiative addresses base erosion and profit shifting, where businesses shift profits to low-tax jurisdictions to reduce their overall tax burden.

The recently issued Corporate Tax Law has been amended to introduce a domestic top-up tax mechanism, such that the effective tax rate applicable to large MNEs is 15 per cent. While the legislation governing the mechanics of the top-up tax is yet to be issued and implemented, it is expected that the entities belonging to large MNE groups may no longer be able to benefit from the zero per cent preferential tax rate offered to qualifying free zone entities, although this position remains to be confirmed by the UAE.

A public consultation was recently launched by the UAE to obtain the views of interested parties and stakeholders on the various policy design options for the implementation of Pillar Two in the UAE, as well as substance-based incentives that would form part of the corporate tax regime in the UAE, a move that was welcomed by businesses in the UAE.

Transfer pricing

Transfer pricing has become a significant focus for businesses operating in the UAE, as transfer pricing requirements were included in the Corporate Tax Law. These transfer pricing requirements, which are aligned with the OECD model, mandate that related-party transactions must be conducted at arm’s length based on the prescribed transfer pricing methodology. In other words, transactions between related entities must be priced as if they were conducted between independent parties.

For multinational corporations, maintaining robust transfer pricing documentation is key to demonstrating compliance with the arm’s length principle. Failure to comply with the transfer pricing regulations can lead to significant tax adjustments and penalties in the UAE, especially for businesses engaged in complex inter-company transactions across multiple jurisdictions.

Conclusion

The UAE’s transition from a tax-friendly jurisdiction to an evolving tax jurisdiction reflects the country’s commitment to achieving its diversification strategy and aligning itself with international standards, while maintaining its competitive edge as a global business hub. The implementation of a corporate tax regime at the federal level in the UAE introduces a new dimension to the business environment for both domestic and international businesses. Corporate tax will now form a key consideration when choosing an optimal business structure and defining the operating model. As the direct tax regime in the UAE continues to evolve, businesses should remain agile and adaptable in order to respond to new developments and challenges in the tax landscape in the UAE and globally.