With its 9% CT on multinationals and allowing carry forward on interest costs, the UAE is making the transition easier for businesses. Image Credit: Shutterstock

Dubai: The UAE’s decision to peg the corporate tax rate on multinationals based in the country at 9 per cent for the foreseeable future will come across as a major relief point for these corporate giants. It will also give the UAE the flexibility needed to keep attracting overseas businesses to launch operations and base their regional operations here.

Attracting more global businesses into the Gulf will become extra competitive in 2023, with regional likely to remain one of the few hotspots of more growth amidst more evidence that a worldwide recession cannot be ruled out.

So, with the UAE confirming that the effective CT on multinationals and the numbers they generate will be at 9 per cent - in line with what local businesses need to pay - should turn out to be a net positive. According to business setup consultants, this should also be seen in conjunction with the incentives that the UAE and individual emirates offer as incentives to overseas companies that plan to enter.

Awaiting ‘Pillar 2’

Now, the CT on MNCs will remain so until such time the UAE decides to bring in ‘Pillar Two’ rules. This is part of a coordinated move being pursued by leading economies to ensure that the minimum corporate tax on multinationals is set at 15 per cent, irrespective of where they are based. (Pillar Two was conceived to remove the glaring discrepancies whereby some mega-corporations, especially Big Tech, ended up paying little or no tax on their operations, purely because of where they had their nominal HQ addresses.) The UAE will eventually move towards Pillar Two - but for the near term, multinationals will only be taxed at 9 per cent.

“Multinationals will be subject to (9 per cent) CT under the regular UAE CT regime - until such time as the ‘Pillar Two' rules are adopted by the UAE,” said Mohammed Yaghmour, Leader at PwC’s Middle East Tax and Legal Services.

Further information will be released in due course on the implementation of the Pillar Two rules in the UAE.

- Mohammed Yaghmour of PwC Middle East Tax and Legal Services

What does the Ministry of Finance say?

“The UAE is a member of the OECD BEPS Inclusive Framework and is committed to addressing the challenges faced by tax jurisdictions internationally.

“As such, the introduction of a CT regime helps to provide the UAE with a framework to adopt the Pillar Two rules.”

CT exempt businesses

The UAE CT law specifically cites businesses operating in non-extractive and extractive natural resource activities as ‘exempt persons’ in the tax coverage. “These businesses will continue to be subject to emirate-level taxation as is the case currently, and subject to various conditions as many businesses that don’t meet the conditions will still be subject to UAE CT,” said Yaghmour.

Major breakthrough on ‘carry forward’

Businesses in the UAE have also got relief on the carry forward of interest-pegged costs. The earlier PCD (Public Consultation Document) had provided for ‘disallowance of interest cost exceeding 30 per cent of a company’s EBITDA (for the financial year),” said a spokesperson at WTS Dhruva Consultants.

“However, there was no mention of carry forward of the disallowed interest. This resulted in apprehension amongst industry at large as to whether the disallowance was permanent in nature. Representations were made to allow carry forward and set off of such disallowed interest against future profits.

“The UAE CT law while continuing to restrict the interest deduction to 30 per cent of EBITDA has allowed the carry forward. And set off of the disallowed interest up to 10 tax periods.

“This is a welcome development and has come as a relief to capital-intensive sectors that are heavily leveraged.”