Tax System in the UAE in 2022. Part 1

The UAE is a federation of seven emirates. 

There is currently no federal tax code in the UAE, although most, if not all of the seven emirates have issued their local tax decrees. 

Decrees on the Emirati level are usually not very detailed; they describe the general framework of the taxation system in the respective emirate, including, among other things, definitions of a taxable person and taxable income. 

However, in reality, these decrees are only applied to the companies engaged in oil and gas exploration and production, as well as certain petrochemical companies under specific government concession agreements. 

Corporate Tax in the UAE

Branches of foreign banks are subject to corporate income tax under separate banking decrees in some of the emirates. 

While corporate taxes are levied on companies operating in certain industries within the UAE, legal entities registered in free economic zones are generally not subject to corporate income tax for a certain (very long) period, the duration of which depends on the specific free economic zone. Usually, free zones are guaranteed complete tax exemption for 15 to 50 years. 

On January 31, 2022, the UAE Ministry of Finance announced that the UAE will introduce a federal corporate profit tax, which will be effective in the financial years beginning on or after June 1, 2023. 

The tax will apply to companies operating within the UAE outside the free economic zones. 

Corporate tax will apply to all businesses and commercial activities, with the exception of natural resource extraction activities, which will continue to be subject to corporate taxation laws set at the separate emirates’ level. 

The standard tax rate is set at 9 percent. 

There will also be a ZERO percent rate on taxable income in the amount up to AED 375,000 ($102,180). 

The UAE Federal Tax Authority (“FTA”) was established in 2016 by the Federal Decree and is the government agency responsible for collecting and managing federal taxes in the UAE, including Value Added Tax (VAT) and excise taxes. 

Customs duties are administered in each emirate of the UAE by local customs authorities, which are coordinated by the Federal Customs Authority. 

UAE Taxation System for Oil and Gas Companies 

Taxable oil and gas companies are taxed according to the specific terms of concession agreements or tax letters signed by the government of the UAE. 

The fiscal terms of such agreements generally supersede the provisions of the Emirati Tax Decrees, and this is usually specified in the wording of each concession agreement. 

Concession agreements, or tax letters are the main tax regulation tool for oil and gas companies in the UAE (apart from any VAT liabilities). 

As a rule, all matters not specifically mentioned in the concession agreement or tax letter must comply with the provisions of the corresponding emirate tax decree. 

The terms of concession agreements or tax letters are specific and define the tax base, the applicable tax rate, the relevant filing terms and deadlines, and also the recipient of the tax. 

The details of such fiscal regimes are not publicly available, but usually such regimes involve a mixture of royalties and income taxes. 

Customs duties are administered in each emirate of the UAE by local customs authorities, which are coordinated by the Federal Customs Authority. 

Under the agreements, tax rates are typically up to 85%, and royalty rates range from 12 to 20%, depending on the level of production. 

In accordance with concession agreements or tax letters, the government of the relevant emirate is designated as the competent authority for regulation of oil and gas industry, granting of concessions, and collection of taxes. 

Taxation of Branches of Foreign Banks in the UAE

Branches of foreign / international banks are subject to income tax in the emirate, in which they are established and are operating. Some of the emirates, including Dubai and Abu Dhabi, have issued special bank decrees or taxation “Rules” for banks. These “Rules” are generally similar, and have the following main characteristics: 

• The taxable income of foreign banks is usually taxed at 20%. 
• Taxable income is determined on the basis of the branch’s audited accounts, and is subject to adjustment in accordance with the Rules. 
• The “Rules” contain a number of provisions related to the distribution of income and expenses of the branch, as well as the rules for deducting expenses. For example, 
  • The “Rules” provide that a branch bears regional and shared expenses in accordance with the ratio of its assets to the total assets of the operating branches. 
  • The deductibility of the total expenses of the head office and regional administration expenses is capped at 2.5% of the branch’s revenue. 
• In addition, the “Rules” contain specific guidance regarding savings/reserves, depreciation of bank assets and tax loss carry forward. 
• The “Rules” provide procedural/administrative regulations (for example, application deadlines, penalties and interest rates, income tax payment procedures, and the outline of the appeal process). 

The Government Commissioner or the Department of Finance of each emirate is designated as the central competent authority for supervision of tax affairs and collection of taxes. 

Tax Residency in the UAE

Due to the absence of the corporate income tax, and in connection with the fact that the emirates’ income tax decrees do not contain specific provisions regarding corporate tax residency, there is currently no clear legal and internal concept for corporate tax residency in the UAE. 

However, the Federal Tax Authority (“FTA”) does issue UAE Tax Residency Certificates (TRCs) to companies that are registered in the UAE, managed from within the UAE, and comply with the requirements set by FTA and the corresponding Double Taxation Avoidance Agreement. UAE Tax Residency Certificate is required in order to benefit from the provisions of the Double Taxation Avoidance Agreement. 

UAE Corporate Tax Residency Assessment

The UAE Tax Authority has developed a rather strict one-sided internal anti-abuse practice. This practice also applies to the relevant UAE Tax Residency Certificates. The assessment of tax residency is primarily carried out in terms of the economic activity of the company. As part of this process, the applicant must submit various documents. The criteria and requirements are considered to be comprehensive; they may be changed based on the changing global trends. 

Main Terms and Requirements to Documentation 

The most important requirement is that the company must exist and have operated for at least one year from the date the company’s trading license was issued. 

Copies of the following documents are required as part of the application.

• A valid trade license; 
• Memorandum of Association certified by the relevant authority (for example, articles of association, memorandum of association, etc.); 
• Passport, UAE residency visa and the Emirates ID of the authorized signatory specified in the trade license; 
• The most recent certified financial statements verified by the auditor (certified with a seal and a signature of the local auditor); 
• A certified bank statements from a local UAE bank for the last 6 months (certified with the seal of the bank); 
• Lease agreement or certificate of ownership for any commercial premises in the UAE (it is possible that a shared workplace instead of a physical office will not be enough); 
• A sample UAE Tax Residency Certificate that meets the requirements of a foreign tax authority (optional). 
• A document confirming the authority of an authorized signatory. 
• Tax registration number and an email address registered for VAT payments (required only for VAT-paying companies) 

Companies formed under offshore rules and branches of foreign companies are generally not eligible for a UAE Tax Residency Certificate. 

Free zone companies can apply for a UAE Tax Residency Certificate from the Ministry of Finance based on the existing agreement between the Ministry of Finance and the corresponding free zone (the so-called Memorandum of Understanding). 

Tax at Source

According to the current UAE law, tax at source is not withheld by the UAE authorities.

Capital Gains Tax 

Capital gains are not taxed in the UAE, unless it is received by a company that is taxed under any of the income tax or bank tax regulations.

Tax Incentives 

The UAE has created many free economic zones that offer such benefits as:

• (renewable) tax holidays for 15 to 50 years, 
• no restrictions on foreign ownership, 
• no restrictions on the repatriation of capital and profits, 
• exemption from import duties on goods entering the free zone.

Please read more information on the topic in Part 2 of this article!