Income Tax in the Middle East - Implication of Dubai’s Decision on Your Company

The UAE government recently declared the implementation of a federal corporate income tax, following the largest legal reform in the country's history. Dubai, a country that has been long captivating businesses from all over the world owing to its tax-free trade hub status, will now be subjecting companies to corporate tax effective from June 1, 2023. The UAE's federal corporate tax will be subject across all Emirates and pertain to all commercial activities and business, with the exception of natural resource extraction, which will continue to be taxed at the Emirate level. The UAE's corporate tax policy will be among the most competitive globally, with a statutory tax rate of 9% for taxable income over 375,000 UAE dirhams ($102,000) and nil for taxable income up to that amount to help startups and small businesses. In this article, let's take a look at how corporate income tax will affect structures and deals, as well as what businesses should be mindful of. 

 

Free Zones

As per the announcement by the Ministry of Finance, corporation tax will apply to free zone companies, and they will be obliged to file corporate tax filings. However, if free zone establishments comply with applicable regulatory standards and do not operate business onshore in the UAE, the new regime will honor the tax incentives currently granted to them. International companies with "rep-offices" or intermediaries in the UAE will need to evaluate whether they will be classified as taxable permanent establishments under the FTA (free trade agreement) and whether the FTA will seek to ascribe considerable taxable earnings to the operations of such offices.

 

Foreign Direct Investment

The UAE government has strategically positioned the implementation of corporate tax to guarantee that the UAE remains a competitive destination for foreign direct investment for years to come, and there will be no UAE withholding tax on royalties, dividends, interest, and other comparable payments. Moreover, employment income (whether from the private or public sector) would remain tax-free, and no tax will be applied on income or gains from personal investments.

 

Corporate Deals

The implementation of corporate tax will have an impact on the M&A market. A rise in asset transactions rather than stock purchases will be seen, allowing buyers to better control the tax liabilities they accrue. More detailed tax warranties and indemnities will need to be included in agreements. However, this could especially be the case in the early years of the new corporation tax regime, when there is a higher chance of errors as the system and its obligations are integrated into business processes.

 

 

RSM Insights

Introducing a federal corporate tax on business profits for the first time will affect most UAE enterprises' tax and compliance systems. To ensure compliance with the new UAE corporate tax regime, businesses will need a clear understanding of the tax implications and available optimization/mitigation strategies, as well as any required changes to their operating model(s), corporate structure, finance/tax function, legal agreements, reporting systems, and third-party contracts. Businesses must assess the impact of adopting the UAE corporate tax regime early on and plan ahead of time for a smooth transition.

 

Feel free to consult RSM UAE for a more in-depth analysis of tax implications for your company. RSM is one of the world's leading audit, tax, and advisory service networks, recognized for innovative solutions across the globe. RSM professionals can help your company undertake the granular analysis required to plan for the new corporate tax.