Corporate Tax Applicability For Holding Company In UAE & Its Subsidiary

In the UAE, the new headline Corporate Tax rate is 9% for businesses generating a taxable income above 375,000 UAE dirham ($102,000).

The UAE corporate tax regime has introduced a three-tier system with three rates:

• All the annual taxable profits below  AED 375,000 shall be subject to zero rates.
• Taxable profits that exceed  AED 375,000 shall be subject to a 9% rate.
• Nevertheless, All those multinational enterprises (MNEs) that fall within the purview  of OECD’s Pillar two reforms shall be subject to different rates per the OECD’s BEPS rules.

However, as per the proposed legislation, the participation exemption for the income from dividends received and for the capital gains that are earned from the sale of shares of a subsidiary shall apply as long as the;

• UAE shareholder company possesses/owns at least 5% of the shares of the subsidiary company.
• The foreign subsidiary is subject to the corporate tax rate of at least 9% in its jurisdiction.

Taxable persons

Taxable person shall include the following individuals:

• UAE-incorporated companies, the foreign legal entities having a permanent establishment in the UAE or else those which are tax resident in the UAE
• The branches of foreign and UAE companies; and
• And the taxable natural persons that are operating through the sole establishments or in the capacity of the individual partners in an unincorporated partnership and conducting business in the region mentioned above, i.e., UAE. 

The purview of the corporate income tax

The UAE’s federal tax system shall apply to all businesses and commercial activities operating within the seven emirates. However, there are certain exceptions to levying of the aforesaid tax:

• Individuals who earn income by way of personal capacity (such as salary, investment income) as long as the income generating activity does not require a commercial license.
• Businesses operating in the extraction of natural resources are registered in free trade zones.

History

Recalling history in a hurry, most businesses in the United Arab Emirates (UAE) have enjoyed zero income tax on their profits. However, The Ministry of Finance of the United Arab Emirates (UAE), on January 31, 2022, made an announcement related to  the levy of a federal Corporate Tax (“CT”) on business profits, which shall be effective from  June 1, 2023. 

The government of the United Arab Emirates shall levy corporate tax on the oil companies and foreign banks from the aforesaid date of June 1, 2023. Nevertheless, it shall still not  impose income tax on individuals, and no changes have been made to this policy respectively.

Comparison with other countries

The 9% corporate tax rate in the UAE is still competitive globally. It has the lowest rate in the Middle East region.

Why did the UAE Government make this bold decision?

As per experts, introducing the corporate tax in the United Arab Emirates (UAE) was unavoidable as UAE  planned its transition from an oil-dominated economy.

The proposed corporate tax regime, which is to be introduced in 2023, shall be built around  best practices followed internationally and is designed to promote the UAE as the global center for both business and investment. The UAE has previously signaled its commitment to the OECD’s BEPS project.

As per FlyingColour Tax, Taxation Consultancy and Accounting Company in Dubai, the proposals that have been put forward reflect that the new UAE CT regime ‘shall build from best practices followed globally, and incorporate the principles that are internationally known and accepted’. Thus ensuring that the mechanism ‘shall be readily understood rather than introducing new concepts.
FlyingColour has a team of knowledgeable accounting and taxation professionals in Dubai with extensive experience. Moreover, FlyingColour provides financial statements, tax services, consulting, and apt services to organizations throughout the UAE.