The UAE has always been famous for its business-friendly policies. These policies attracted a heavy amount of foreign investment from large multinational corporations and investors. However, in order to diversify income sources other than tourism and oil, the UAE is implementing a new corporate tax (CT) from June 1, 2023. Federal Decree-Law No. 47 of 2022, known as the corporate tax law, lays the foundation for the CT legal framework in the UAE. The new corporate tax regime will affect all sectors of the economy, including the oil and gas industry. As many of the companies in the oil and gas sector are already taxable at the Emirate level, they are exempt from the new corporate tax regime.
The general rate of CT is 9%; however, the rate is 0% for businesses that earn a taxable profit of less than AED 375,000. There are numerous benefits to introducing CT in the UAE. The first and foremost reason is to increase government income and reduce the budget deficit. Furthermore, this will enable the UAE government to counter money laundering and tax evasion from other parts of the world. Corporate tax will ultimately enhance the UAE’s reputation as a global hub for business by introducing internationally acclaimed tax practices. It is noteworthy that CT will not have a drastic impact on SMEs, it will mainly impact high-profit-producing businesses.
Corporate Tax for the Oil and Gas Industry in the UAE:
With the introduction of corporate tax in the UAE, people commonly ask: How will the implementation impact various industries? The question is valid; however, the subject of CT is still developing in the UAE. The oil and gas industry in the UAE has certain exemptions with respect to the corporate tax in the UAE. As per Article 4 of the corporate tax law, a business engaged in extracting natural resources will be exempt from CT if conditions are met as per Article 7 of the Decree-Law. Furthermore, a business is also exempt from CT if it is engaged in a non-extractive natural resources business, provided the conditions are met as per Article 8 of the corporate tax law. However, if a business has income from other business activities, it will be subject to the new corporate tax regime. Other business activities include:
- A business that is not secondary or subordinate to a natural resource-based business, whether it involves extractive or non-extractive activities.
- A business that is secondary or subordinate to a natural resource-based business, whether it involves extractive or non-extractive activities. However, the revenue of the business is greater than 5% of the entire revenue of the business in a tax year.
Let’s define the following terms that are in use in the oil and gas sector:
Natural resources: These include oil, water, gas, coal, natural minerals, and natural resources extracted from the state’s region.
Extractive business: a type of business that involves finding, extracting, and using natural resources that are owned by the state.
Non-extractive natural resource business: a business that deals with the processing, storage, transportation, marketing, and distribution of natural resources owned by the state. This also includes separating and refining these resources to make them usable in various industries.
Taxation under Emirates tax decrees:
The exemption from corporate tax for oil and gas companies does mean that they are not subject to other taxes. This means that businesses that are involved in extractive or non-extractive natural resource businesses are still taxable under the particular Emirate tax decree. The point here is that the exemption is only for CT and not for other applicable taxes. Some examples of Emirate tax decrees are the Dubai Income Tax Decree of 1969 and the Sharjah Income Tax Decree of 1968.
The introduction of the corporate tax in the UAE is a significant step towards diversifying the country’s income sources. While the new CT regime will impact all sectors of the economy, the oil and gas industry has certain exemptions. However, businesses need to meet conditions as per the law. It is important to note that the exemption from corporate tax does not mean that businesses involved in extractive or non-extractive natural resource businesses are not subject to other applicable taxes under Emirate tax decrees.
The implementation of corporate tax will enhance the UAE’s reputation as a global business hub by introducing transparent tax practices. Ultimately, the success of the corporate tax regime will depend on its proper implementation and enforcement. This requires collaboration between businesses and government authorities.
How can we help you?
With the introduction of a new tax regime, it is challenging to comply with the laws and avoid penalties. Therefore, it is beneficial to consult experts and avoid any fines. Creative Zone Tax Accounting possesses extensive knowledge and expertise in tax matters. Whether you need assistance in corporate tax for the oil and gas industry in the UAE or any other industry, consult us any day. Feel confident and leave your tax matters to us. Contact us now.