For a long time, the United Arab Emirates (UAE) was stereotyped as an oil-based economy. Through significant investments in innovation and technology, Dubai has worked deliberately over the years to assist the country in untangling itself and establishing itself as a modern state.
Since then, the Gulf state has been in the spotlight, enacting a series of reforms to better align itself with the international community, the most recent of which is the federal corporate tax. Industry experts and financial analysts applaud the implementation of corporation tax, arguing that it will put even more pressure on the UAE, the undeniable economic engine of the Middle East and North Africa (MENA) region, to gradually reduce its reliance on traditional fossil-fuel revenue. It is important to know the corporate tax implementations when planning a business set-up in Dubai since they may affect your business and transactions.
The Implementation Of The Corporate Tax
The UAE Corporate Tax is predicted to be calculated on the basis of financial accounting net profit or loss, with only minor adjustments to derive taxable income. The Global Minimum Tax (GMT), on the other hand, is far more technical in nature. It consists of three rules: the primary rule is the Income Inclusion Rule (IIR), which, along with the Subject to Tax Rule (STTR), will be implemented in January 2023.
The Corporate Tax will apply to financial income statements beginning on or after June 1, 2023. This is the first time a federal tax will be imposed on the banking sector in the UAE. The corporate tax rate that will be applied to almost all banks in the country will be linked to the OECD’s (Organization for Economic Cooperation and Development) initiative.
The Impact Of The Corporate Tax On UAE Banks
The impact of the Global Minimum Tax on UAE-based banks differs from that of foreign bank branches. This is largely due to the fact that, unlike their foreign counterparts, UAE-based banks are not currently subject to a traditional banking corporate tax. As a result, UAE-based banks are likely to have zero or low UAE Effective Tax Rates in 2023. As a result, they may be subject to the GMT beginning in 2023 on any profits generated outside of the UAE and payments flowing into the UAE from group entities based in foreign jurisdictions via the STTR or UTPR. However, beginning in 2024, the domestic Corporate Tax will apply. Assuming that the UAE follows all of the Pillar 2 principles, all global profits of UAE banking institutions will be topped up and taxed in the UAE beginning in 2024.
Assuming the UAE does not implement the GMT in 2023, the impact of the GMT in 2023 may be felt at the parent jurisdiction level if the UAE Effective Tax Rate (ETR) is less than 15%. With a headline corporate tax rate of 20% applied to foreign bank branches in the UAE, it may appear that an ETR below the minimum rate of 15% is unlikely for such units in the UAE.
The future is all about transparency, and the UAE understands that if it does not join the compliance club, it will lose its competitive advantage. The country will only be home to businesses that, while working for financial gain, do not forget or neglect their social responsibilities, contributing to the UAE’s economic and global status by making meaningful contributions and complying with globally accepted best practices and norms.