Abu Dhabi and the UAE are desirable locations to establish a business and attract foreign investment, in large part due to their globally competitive tax regulations. The country remains committed to operating a business-friendly economy in line with international best practices. The pace of changes in tax legislation globally has increased exponentially in the last decade. The UAE continues to react to these developments and has enacted updates in line with such changes, like the OECD Base Erosion and Profit Shifting (BEPS) actions.

Reform Efforts

The UAE has enacted numerous tax laws since 2017. At that time, the UAE charged corporate tax at the emirate level, including in Abu Dhabi. This was levied on branches of foreign-owned banks and the oil and gas industry. The most recent and significant tax update is the introduction of a federal corporate tax in the UAE. This is in addition to value-added tax (VAT), which has been in place in the UAE since 2018. Other recent tax developments in the country include the implementation of economic substance rules, updates to foreign ownership rules and the introduction of social security.

The UAE has also signalled its intention to implement Pillar Two of BEPS 2.0, which will introduce a global minimum tax rate of 15% on multinational groups. The detailed rules, including the rate of tax, have yet to be published, but it is likely these rules will come into effect in the UAE from 2025.

Corporate Tax

The UAE published Federal Decree Law No. 47 of 2022 on December 9, 2022, introducing federal corporate tax, which will be applicable for financial years starting on or after June 1, 2023. There will be two corporate tax rates operating in the UAE:

• 0% rate for taxable income below Dh375,000 ($102,000); and

• 9% rate for taxable income above Dh375,000 ($102,000). Entities operating in free zones will be subject to corporate tax at a rate of 0% on its qualifying income, provided that they meet certain conditions, which are covered below. Taxable income is the profit of a company after they have been subject to some adjustments, as specified by the corporate tax rules.

Prior to the federal corporate tax regime, individual emirates, including Abu Dhabi, enacted their own corporate tax regimes. Traditionally, companies operating in the oil and gas industry and branches of foreign-owned banks were subject to emirate-level tax. The UAE federal corporate tax regime will apply to all companies and industries, with the exception of the oil and gas sector, which will remain subject to emirate-level taxation.

UAE corporate tax applies to companies incorporated in the UAE, foreign companies that are effectively managed and controlled in the UAE, and UAE permanent establishments of foreign companies. These entities will be required to:

• Register with the Federal Tax Authority (FTA) and obtain a tax registration number;

• Adhere to transfer-pricing regulations, which are detailed further in this overview;

• Maintain adequate records to support their corporate tax returns; and

• File annual corporate tax returns, to be submitted within nine months of the accounting year-end of the company. The UAE corporate tax rules are intended to cement the country’s position as a business-friendly jurisdiction. The detailed rules give further information on how the regulations will be applied in practice, adjustments to be made and administration points for the application of corporate tax. For example, certain activities or income may be exempt. There are also specific rules for the treatment and utilisation of losses, as well as criteria for forming a corporate tax group, which would allow companies to consolidate their results and form one taxable entity in order to simplify their administration and filings.

Free Zones

The more than 50 free zones operating in the UAE have been beneficial mechanisms to incorporate companies for various reasons, particularly as they allow for foreign ownership and grant a tax holiday for a number of years. With the introduction of UAE corporate tax, Qualifying Free Zone Persons (QFZPs) will be subject to UAE corporate tax at the free zone rate of 0%. To be considered a QFZP, an entity registered in a free zone in the UAE must maintain adequate substance; earn qualifying income as clarified by Cabinet Decision No. 55 and Ministerial Decision No. 139 of 2023 prescribing definitions and conditions for QFZPs; comply with the arm’s-length principle; prepare transfer pricing documentation; have not elected to be subject to corporate tax; and prepare and maintain audited financial statements. QFZPs remain subject to UAE corporate tax rules and still need to file annual tax returns.

UAE corporate tax law stipulates that UAE-sourced income earned by a foreign person that does not have a permanent establishment in the UAE will be subject to withholding tax at a rate of 0%, or a rate to be specified in the Cabinet decision. Currently, the law does not specify the types of income subject to withholding tax and further guidance is expected in the coming years.

However, going forward, any UAE-sourced income earned by foreign entities (that do not have a permanent establishment in UAE) may be subject to WHT if the Ministry specifies a rate.

Transfer Pricing

The UAE, including Abu Dhabi, introduced transfer-pricing rules as part of the corporate tax regime. The term transfer pricing refers to the pricing of transactions between related entities and connected parties, such as subsidiaries of the same parent company, between a subsidiary and a parent, or between a director of a company and that company. The UAE transfer-pricing rules aim to prevent local companies from artificially shifting profits so that they may be subject to lower tax rates. The rules require companies to set prices for related-party transactions that are consistent with prices that would be charged between unrelated parties.

The UAE transfer-pricing rules are aligned with OECD guidelines. However, a key addition is that UAE rules were expanded to connected persons. This broader approach means that a greater number of transactions may be subject to UAE transfer-pricing rules than under the OECD guidelines. Furthermore, with two corporate tax rates operating in the UAE – 0% in free zones and 9% on the mainland – domestic transactions between these regimes are likely to be a key focus of the UAE tax authority.

The UAE transfer-pricing rules state that local taxpayers must use one of the five prescribed transfer-pricing methods – which are the same as the OECD methods – to determine the arm’s length price of its related-party transactions. The rules also require entities to maintain supporting documentation, such as a disclosure form, to be filed as part of the corporate tax return; master and local files for UAE entities with turnover above Dh200m ($54.4m) or for UAE entities who are members of multinational groups with global turnover of more than Dh3.2b ($871m); and compliance with the arm’s length principle.

As part of the OECD’s BEPS Action 13 transfer-pricing documentation standards, the UAE introduced country-by-country reporting from 2019. Currently, only UAE-headquartered multinational groups are required to file annual notifications and reports.

Withholding Tax

As part of the new corporate tax regime, the UAE is introducing withholding tax at a rate of 0%. UAE withholding tax will be applied to locally sourced income incurred by a person not resident in the UAE. In addition to the initial list, the types of income that will be subject to UAE withholding tax will be further clarified by a Cabinet decision. The Ministry of Finance has confirmed that there is no requirement to register or file any withholding tax documents for the foreseeable future, likely until the rate increases from 0%.

Capital Gains Tax

Capital gains are subject to corporate tax unless they meet exemptions, such as the participation exemption or other group relief.

Double-Tax Treaties

Double-tax treaties are bilateral agreements negotiated between two countries to address double taxation, which occurs when the same income is taxed in more than one jurisdiction. As of April 2023 the UAE had more than 135 double-tax treaties with the following countries: Albania, Algeria, Andorra, Angola, Antigua and Barbuda, Argentina, Armenia, Austria, Azerbaijan, Bangladesh, Barbados, Belarus, Belgium, Belize, Benin, Bermuda, Bosnia and Herzegovina, Botswana, Brazil, Brunei Darussalam, Bulgaria, Burundi, Burkina Faso, Canada, Cameroon, China, Costa Rica, the Comoros Islands, Colombia, Chad, Côte d’Ivoire, Chile, Croatia, Cyprus, the Czech Republic, the Democratic Republic of the Congo, Dominica, Ecuador, Ethiopia, Egypt, Estonia, Equatorial Guinea, Fiji, Finland, France, Gabon, Gambia, Georgia, Germany, Ghana, Greece, Guinea, Guinea-Bissau, Guyana, Hong Kong, Hungary, India, Indonesia, Iraq, Ireland, Israel, Italy, Japan, Jersey, Jordan, Kazakhstan, Kenya, Kosovo, Kyrgyzstan, Latvia, Lebanon, Liberia, Libya, Liechtenstein, Lithuania, Luxembourg, Macedonia, Malaysia, Maldives, Malta, Mali, Mauritius, Mauritania, Mexico, Moldova, Monaco, Mongolia, Montenegro, Morocco, Mozambique, Nigeria, the Netherlands, New Zealand, Niger, Pakistan, Palestine, Panama, Paraguay, the Philippines, Poland, Portugal, Romania, Russia, Rwanda, San Marino, Saudi Arabia, St Kitts and Nevis, St Vincent and the Grenadines, Senegal, Serbia, the Seychelles, Singapore, Sierra Leone, Slovakia, Slovenia, South Africa, South Korea, South Sudan, Suriname, Spain, Sri Lanka, Sudan, Switzerland, Syria, Tajikistan, Thailand, Tunisia, Turkey, Turkmenistan, Uganda, Ukraine, the UK, Uruguay, Uzbekistan, Venezuela, Vietnam, Yemen, Zambia and Zimbabwe.

Tax Residency

The UAE FTA issues tax residency certificates (TRCs) to mainland and free zone companies. A TRC is issued for a specific double-tax treaty and is valid for one year.

Individuals residing in the UAE can apply for a UAE TRC in order to avail themselves of tax treaty benefits. In September 2022 the UAE released guidance that included a new domestic definition and criteria for what constitutes an entity or individual as a tax resident of the UAE. A person can be considered a resident if the UAE is their primary place of residence; if they are physically present in the country for 183 days or more during a consecutive 12-month period; or if they are physically present for 90 days or more during a consecutive 12-month period, and hold a valid residence permit or are a national of a GCC country.

Value-Added Tax

The UAE implemented a consumption-based VAT regime from January 1, 2018, based on the Common VAT Agreement of the States of the GCC. The law has seen considerable evolution in the intervening years. The standard VAT rate in the UAE is 5%, or 0% for exports. All goods and services obtained in the course of conducting business in the UAE are taxable, unless specifically exempted or out of scope according to the UAE VAT Decree Law.

All local entities making taxable supplies exceeding Dh375,000 ($102,000) in the previous 12 months or the coming 30 days are required to register for VAT. Entities making taxable supplies or incurring taxable expenses of Dh187,500 ($51,000) to Dh375,000 ($102,000) can apply for VAT registration on a voluntary basis. Registered entities must file monthly or quarterly returns, as stipulated by the FTA.

A recent trend in UAE VAT has been an increased focus on compliance and enforcement. The FTA has been conducting VAT audits and assessments, and there has been increased activity in terms of dispute resolution on such positions. Ahead of the implementation of corporate tax, there are various procedural changes that have been introduced to align reporting and compliance requirements.

Given that businesses in Abu Dhabi will be focusing on gearing up for the implementation of corporate tax and transfer pricing, it is critical to understand the interplay between various taxes. Any restructuring envisaged will potentially require VAT actions from a registration and grouping perspective. Similarly, any transfer-pricing analysis may also impact VAT disclosures. The UAE tax market is therefore catching up with more mature tax markets in terms of this focus on comprehensive tax strategy, as well as focusing on robust processes and technology to help manage various tax obligations.

Customs Duty

Generally, a Customs duty of 5% is imposed on the cost, insurance and freight value of imported goods. Other rates may apply to certain goods such as alcohol and tobacco, while some exemptions may also be available. Goods imported and intended for re-export often benefit from relief on Customs duties, as do manufacturers on the import of their machinery, raw materials and spare parts used for industrial purposes. Additional Customs relief measures and exemptions are available in regards to specific activities and goods originating in certain countries. With the upcoming corporate tax implementation, and once transfer-pricing rules come into effect, there will be a greater focus on Customs valuation and aligning disclosures with those offered up to the authority overseeing corporate tax and transfer pricing.

Excise Tax

The UAE government has imposed excise tax on certain categories of goods which are perceived as being harmful to human health or the environment. This includes goods such as carbonated drinks, energy drinks, sweetened drinks, tobacco, and tobacco and smoking products. The rate of excise tax ranges from 50% to 100%.

Economic Substance Rules

The UAE has had economic substance rules since 2019. Their primary intent is to ensure that entities are locally maintaining economic substance in line with the level and type of activity they undertake. Economic substance can broadly be considered to consist of employees, premises, management and costs. The rules apply to all UAE-registered entities on an annual basis, with the extent of application ranging from no action, to annual notification only, to full annual notification plus reporting. Non-compliance may result in significant penalties and business licence termination.

Foreign Ownership Rules

On November 23, 2020 the UAE government announced a significant change to its foreign ownership laws. The amendments came into effect on June 1, 2021, allowing foreign investors to own 100% of UAE-based businesses in sectors such as manufacturing, renewable energy, hospitality and food services. The amendments also eliminated the condition that the chairman and a majority of the company’s directors be UAE citizens. The amended rules are aimed at attracting foreign investment, fostering growth and diversification, and positioning the UAE as a global business hub. Foreign investors are now able to hold 100% ownership of a UAE-based company without the need for a local partner or sponsor. This applies to limited liability companies, sole proprietorships and civil companies. However, foreign ownership restrictions still apply to companies engaged in oil and gas exploration, banking and insurance.

Investment Incentives

Establishing a business in Abu Dhabi is subject to licensing requirements, as well as foreign investment restrictions. Businesses in the UAE can be set up in:

• Mainland Abu Dhabi, to undertake business in Abu Dhabi and outside the UAE;

• Free zones, as an onshore entity to undertake business only within the free zone and outside the UAE; or

• Free zones, as an offshore company to undertake business only outside the UAE mainland. Free zones are special economic areas established to promote foreign investment and economic activity in dedicated zones, as well as outside the UAE. Each free zone is independent, with its own rules and regulations. For any business setting up in Abu Dhabi, it is advisable to undertake a cost-benefit analysis to determine the location and entity structure to put in place to optimise various tax benefits.

Municipal & Tourism Taxes

Most emirates impose hotel levies, which apply to the value of hotel room rental, services and entertainment. These levies are imposed and administered differently by each emirate. In Abu Dhabi, hotels are required to levy a 4% municipality fee. A hotel sale is revenue generated by a hotel for services provided to their guests or visitors, which includes rent for the room, food, beverages and other services. Hotels in all emirates levy an additional service charge equivalent to 10% of the hotel sales revenue.

Foreign Exchange Laws

The official currency of the UAE is the dirham. Since 1980 the dirham has been pegged to the US dollar at an exchange rate of $1:Dh3.6727. Foreign exchange controls in the UAE are aligned with the Foreign Account Tax Compliance Act, Common Reporting Standards and Anti-Money-Laundering frameworks.

Social Security

The UAE has a social security regime that applies to UAE and other GCC national employees. For UAE national employees, social security contributions are calculated at a rate of 20% of an employee’s gross remuneration, with 5% payable by the employee, 12.5% payable by the employer and 2.5% payable by the government. In Abu Dhabi, social security contributions are calculated at a higher rate of 26% of an employee’s gross remuneration, with 5% payable by the employee, 15% payable by the employer and 6% payable by the government. Other GCC nationals working in the UAE are subject to the relevant social security regulations in place in their home country.

Personal Income Tax

There is no personal income tax levied in the UAE.

 

OBG would like to thank KPMG for its contribution to THE REPORT Abu Dhabi 2023