Tax Incentives Under the Proposed UAE CT

Tax Incentives Under The Proposed UAE CT

Tax Incentives Under the Proposed UAE CT

The United Arab Emirates (“UAE”) is in the process of implementing a Federal Corporate Tax (“CT”) effective from 1 June 2023. With the introduction of CT in the UAE, various UAE businesses will now be required to pay taxes on income and comply with various tax registration, compliance, and reporting requirements.

In this infographic, we have provided an overview of the various tax incentives that are offered under the proposed CT regime and the benefits and challenges associated with such tax incentives.

Tax incentives

Key tax benefits

Key Challenges

Tax holiday for Free Zones (“FZ”)

  • FZ will be taxed at the rate of 0%, excluding income from mainland branches and transactions with mainland entities.
  • No tax exemption for services rendered to the mainland by FZ entities in the Designated Zone.
  • Applicability of the Economic Substance (“ES”) test where the FZ loses its tax exemption.

Dividend exemption

  • Dividends earned from UAE domestic companies; and
  • Dividends earned from foreign companies subject to qualifying shareholdings.
  • Tax credit in respect of taxes paid on dividends in the foreign jurisdiction may not be available.

Capital gains (“CG”) exemption

  • CG earned by UAE businesses from qualifying shareholdings.
  • CG on sale of shares of a FZ which is a holding company.
  • Exemption to be applied only for CG on sale of shares and does not include any other capital asset.
  • No Tax credit for CG taxes paid in a foreign jurisdiction.

Foreign branch profit

  • Option to either claim a tax exemption or a foreign tax credit (“FTC”).
  • Exemption method would be more beneficial vis-à-vis FTC, if the foreign branch tax rate is more than the UAE CT rate.

Tax Group

  • Elect to form tax group and be treated as a single taxable person thereby reducing the tax cost and the overall administration burden.
  • Opting to form tax group without a proper analysis could result in higher tax cost.

Key Takeaways

Although the Public Consultation document is not yet final and is subject to change, the UAE businesses are evaluating the impact of the proposed UAE CT regime on their operating model and are assessing various options to optimize their tax cost.

Given this, it is crucial to take into consideration the various tax incentives available under the proposed CT regime that has bearing on the tax cost of the company. UAE businesses must analyze and do a cost-benefit analysis by taking cognizance of the tax incentives to make appropriate business decisions.

Contact Us

Markus Susilo
Markus Susilo
Partner- Payroll and Indirect Tax
Alessandro Valente
Alessandro Valente
Director - International Tax Service & Transfer Pricing