As a business begins to focus on financial reporting, it’s essential to consider and evaluate corporate income tax. Following the UAE Federal Decree No. 47 of 2022 on Companies and Corporate Taxation (“Corporate Tax Law”), companies will be subject to UAE corporate tax at the start of their initial financial year, initiating on or after June 1, 2023.
UAE corporate tax will apply to UAE companies and other legal persons incorporated or effectively managed and controlled in the UAE. This includes natural persons (individuals) carrying on commercial or business activities in the UAE, as stipulated in a Cabinet Resolution issued in due course, and non-resident legal persons with permanent residence in the UAE.
UAE Corporate Tax
A corporation tax is a tax on corporate profits. A corporation is taxed on its taxable income, which includes revenue less the cost of goods sold (COGS), general and administrative (G&A) expenses, research and development, sales and marketing, depreciation, and other operating costs.
Corporate tax rates vary by country; some countries are considered tax havens because of their lower tax rates. Credit goes to the Tax Cuts and Jobs Act (TCJA), which the 2017 President USA signed into law and took effect in 2018; the federal corporate tax rate in the United States is currently 21%. The rate of U.S. corporate income tax is 35%.
U.S. corporate tax returns are generally filed by the mid of the fourth month following the end of the corporate tax year. However, corporations may request a six-month extension to file their corporate tax returns in September. Estimated tax return installment due dates are mid-April, June, September, and December. Corporate taxes for U.S. corporations are reported on Form 1120. If the company’s assets exceed $10 million, it must be submitted online.
Corporate tax rate
Corporation tax applies to the net income of corporations and other business entities. Generally, businesses in the UAE will be subject to a 9% conversion rate. The 0% rate will apply to taxable income up to a certain threshold set by a ministerial decision (estimated to be AED 375,000, according to the FAQ). While the Ministry of Finance has previously stated that higher tax rates may apply to large multinational corporations subject to the second pillar, the Corporation Tax Act makes no mention. However, the FAQ confirms the UAE’s commitment to the timely implementation of these rules and looks forward to further developments.
Exemptions of Corporate tax credit
Corporate tax in UAE applies to many departments, but here are a few exempted departments:
- Government entity or Government-controlled entities.
- People who work in the extractive industries.
- A person who works in the area of non-extractive natural resources.
- Eligible nonprofit entities and qualified investment funds.
- State authorities regulate public pension funds or social insurance.
- National authorities regulate private pension funds or social security.
- A wholly-owned legal person incorporated in China
- Any other person appointed by the decision of the Council of Ministers on the decision of the Minister.
UAE companies and other legal persons established or effectively managed and controlled in the United Arab Emirates; natural persons (individuals) engaged in business or commercial activities in the United Arab Emirates, according to the provisions of cabinet resolutions issued from time to time; having a permanent establishment in the UAE (as defined in from now on) non-resident legal persons (foreign legal entities).
Legal persons incorporated in the UAE Free Zone are also within the circle of corporate tax as “taxpayers” and must comply with the corporate tax UAE law requirements. However, anyone in a free zone who meets the criteria to be considered a free zone qualifying person is entitled to a 0% corporate tax rate on their qualifying income. Individuals without a permanent base in the UAE or those earning income from the UAE that is not linked to their permanent establishment may be liable to withholding tax (at a rate of 0).
Calculate your Taxable Income.
To calculate the income tax of a group for the relevant tax period, the parent company must prepare consolidated financial statements covering each subsidiary that is a member of the tax group.
Transactions between the parent company and the individual group members and transactions between group members are disregarded when calculating the taxable income of the taxable group.
Corporate Tax relief
Allows businesses to reduce their taxable income through certain normal and necessary business expenses. All recurring expenses required to run the business are fully tax-deductible. Investments and real estate purchased to generate income for the company are also deductible.
Companies can deduct employee wages, health benefits, tuition reimbursements, and bonuses. In addition, companies can overcome their taxable income by debiting insurance premiums, bad debts, travel expenses, interest payments, sales tax, fuel tax, and excise tax. Tax preparation fees, legal and accounting services, and advertising expenses can also be used to reduce business income.
Company tax deadline
Any business with a tax year beginning June 1, 2023, and ending May 31, 2024, will pay VAT from June 1, 2023. Therefore, the first tax returns are likely due before 2024.
Any company with a calendar year beginning January 1, 2023, and ending December 31, 2023, will begin accepting T.C.s on January 1, 2024, and may file in mid-2025.
UAE corporate tax updates
On December 9, 2022, the Ministry of Finance (MoF) of the UAE issued Federal Decree No. 47 of 2022 concerning Companies and Corporate Taxation (pdf) (Corporate Tax Act or Law) to establish the new United Arab Emirates Corporation tax (C.T.) system. In addition, a 158 FAQ published on the same day supplements the Act.
The new O.C. system will be effective for accounting periods beginning on or after June 1, 2023. Groups ending in December will have 12 months to prepare and measure any impacts before the law becomes effective. Nonetheless, the general anti-fraud and interim rules will be in place as the law is published in the Official Gazette.
The implication of Corporate tax
The impact of the new counter-terrorism regime on all companies operating in the UAE and natural persons doing business is far-reaching. As a result, businesses and individuals must start assessing the impact of the new rules. This includes assessing the application of the rules, modeling the impact on cash flows, considering exemption schemes, and developing processes and procedures to manage compliance. With more details to be announced through a series of ministerial decisions in the coming months, companies should continue to monitor these developments and prepare for compliance before the actual date.
Paying corporate taxes is more beneficial to business owners than paying additional personal income taxes. Corporate tax return deductions for family health insurance and fringe benefits, including retirement plans and tax-deferred trust funds. It is also easier for companies to deduct losses. Lastly, the profits a company earns can be kept within the company for potential tax benefits and future tax planning.
The impact of cash transfers on UAE bank tax regulations will be announced in due course. This is a major change for both foreign bank branches, which must comply with the new law, and local banks, which, like other companies, are now required to pay corporate tax.