The UAE will introduce a federal corporate tax on the profit of businesses from the financial year starting on or after June 1, 2023. A standard statutory tax rate of 9 per cent applies for companies, positioning the UAE competitively when compared with other financial centres and developed economies globally.
The proposed UAE Corporate Tax Rates are:
- 0% for taxable income up to AED 375,000;
- 9% for taxable income above AED 375,000; and
- a different tax rate for large multinationals that meet specific criteria set with reference to ‘Pillar Two’ of the OECD Base Erosion and Profit Shifting project “large” refers to a multinational corporation that has consolidated global revenues in excess of EUR 750m (c. AED 3.15 bn)
Will Withholding Tax (WHT) paid outside of the UAE be allowed as a Corporate Tax credit in the UAE?
As per the MoF CT FAQs, foreign corporate income tax paid on income that is taxable in the UAE
will be allowed as a Corporate Tax credit in the UAE. The amount of Corporate Tax payable will be based on the taxable income for the relevant financial period (tax period).
UAE resident companies will be subject to UAE Corporate Tax on their worldwide income, which includes foreign sourced income that may have been subject to tax of a similar nature to Corporate Tax by another country.
To avoid double taxation, the UAE Corporate Tax regime will allow a credit for the tax paid in a foreign jurisdiction against the UAE Corporate Tax liability on the foreign sourced income that has not been otherwise exempted. This is known as “Foreign Tax Credit”.
The maximum Foreign Tax Credit available will be the lower of:
- The amount of tax that paid in the foreign jurisdiction; or
- The UAE Corporate Tax payable on the foreign sourced income.
Any unutilised Foreign Tax Credit will not be able to be carried forward or back to other tax periods, nor will the FTA refund any unutilised Foreign Tax Credit.
As such, it is expected that WHT paid outside of the UAE should be allowed as a Corporate Tax credit for UAE Corporate Tax purposes provided the WHT relates to taxable income in the UAE.
Free zone entities that fully benefit from tax incentives should not be able to claim a UAE Corporate Tax credit. While we expect WHT to be allowed as a Corporate Tax credit, the amount may be limited to the lesser of the actual WHT paid or the UAE Corporate Tax applicable to the foreign-sourced income. In addition, it is possible that the Corporate Tax credit can only be used if the UAE entity is in a tax-paying position and Corporate Tax credits will be forfeited if the UAE entity has a tax loss.
Given the position of the UAE as a global financial centre and an international business hub, a 0% (zero percent) withholding tax will apply on domestic and cross-border payments made by UAE businesses and UAE businesses will not be required to make any deductions from payments made, nor will there be an obligation to file withholding tax returns.
Note: The information in this article is meant to provide an initial introduction to the proposed UAE Corporate Tax regime and not be used for individual or business decisions as it does not represent the final legislation by the Government. More information o the UAE Corporate Tax regime will be made available in due course.
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