Corporate Tax Planning Strategies in UAE

The History of Corporate Tax in UAE

For many years, the United Arab Emirates operated as a very low tax jurisdiction. Citizens do not pay tax on their income, and most companies have never had to pay any corporate tax in the UAE. Instead, most of the state’s revenues came from nationalized and private fossil fuel extraction industries that paid around a 50% tax on revenues. Meanwhile, foreign banks have long paid a 20% corporate tax on operating profits, and hotels and restaurants in Dubai paid certain taxes, too.

However, in recent years the United Arab Emirates has begun trying to diversify its economy away from fossil fuels. This means that there are a growing number of businesses that currently do not pay any tax at all. With less potential revenue from fossil fuels and a fast-growing economy, it makes sense for the government to tax revenues on businesses to enable further investment in infrastructure, education, and healthcare.

The United Arab Emirates first introduced a VAT tax in 2018, which imposed a 5% levy on all consumer purchases. Then in January 2022, the government announced a corporate tax of 9% that would come into effect the following year.

Another reason is that the United Arab Emirates has introduced its new corporate tax to bring the country in line with international norms and to help tackle tax avoidance. Most other advanced economies worldwide impose taxes on business profits, and the 9% tax on UAE companies is still significantly lower than the norm in most other developed countries (usually around 20%). The new corporate tax in UAE will also help disincentivize foreign businesses from using the country as a base to avoid tax in their home countries.

The UAE’s 2023 corporation tax – what is it?

The UAE’s 2023 corporation tax will be a 9% tax on all businesses’ profits (revenue minus expenses), generating over 375,000 AED (about USD 100,000). Businesses that generate less than this sum will continue to pay a 0% tax rate.

The new corporate tax UAE will come into effect in the tax year beginning June 1, 2023, so most companies will have to start setting aside money to pay their taxes from that date. However, businesses whose tax year begins in January will not have to start paying tax on revenues generated before January 1, 2024.

Why is corporate tax important in the UAE?

The corporate tax UAE is a tax levied on a company’s profits. The UAE is a major business and commercial hub. As such, businesses need to understand the corporate tax landscape in the UAE.

The government imposes a corporate tax on businesses, and the amount of tax a business pays depends on several factors, including the business size, its profits, and the type of business.

There are many reasons why corporation tax is important.

Firstly, it is a key source of revenue for the government. This revenue is intended to cover the costs of providing public services such as education, health care, and infrastructure.

Secondly, corporate tax in UAE helps level the playing field between businesses. Ensuring that all businesses pay their fair share of corporation tax helps to create a level playing field and prevent large businesses from having an unfair advantage over smaller businesses.

Who should pay corporate tax in the UAE?

All businesses with a taxable profit (net) of more than 375,000 AED are subject to corporate tax and must pay a set proportion of their net profit as corporate tax. UAE companies incorporated or managed and controlled in the UAE, and some entities in a free zone fall under this category.

Corporation Tax Planning in UAE: Tax Saving Strategies for Businesses

Companies in the UAE are now looking for ways to lower the corporation tax they have to pay. However, even if companies must pay their corporation tax following the law, this does not imply that they should pay more than required. Although the tax system in the UAE can be difficult to understand, there are several lawful ways to reduce the amount of corporation tax in UAE you will owe to the Federal Tax Authority starting June 1, 2023. To effectively organize your company finances, you need organization skills and knowledge of UAE corporation tax.

How to Reduce Corporation Tax Bill in UAE 

Corporation tax in the UAE will be at a standard rate of 9%. However, there are many ways to lower the amount, which means your corporation tax bill may be lower. Let’s discuss the top approaches to lower your tax bill:

Claim even the smallest business expenditures 

Remember to submit a claim for every one of your business’s expenses. Even though it may be difficult to keep track of every taxi ride, car parking ticket, or minor purchase of stationery, you must document everything. The sum of all these seemingly small expenditures can add up quickly to a large amount over one year.  

You may lose money if you don’t claim all your expenses during corporate tax in UAE return filing. This is because whenever you claim expenses for business operations, you are cutting into the company’s profits. As such, the total amount of UAE corporation tax you will be required to pay will be lower. To stay on top of the costs incurred by the company, regardless of how much they are, requires nothing more than a little bit of organization, which will benefit the company in the long run. Hiring a tax accountant in the UAE can make this procedure simpler for you. Delegate the task.  

Remember that the definition of a legitimate business expense can differ from one organization to the next. A need for one business could be considered an expensive expense by another, depending on the nature of the business. The requirement that all business costs must be used totally and solely for business purposes rather than for personal use is the most important point to keep in mind regarding corporate tax UAE regulations. 

Seek corporation tax relief on mileage. 

Another claim that is simple to overlook is automobile mileage. Regarding taxes, it may be more beneficial for business owners and employees to drive company cars and submit claims for mileage reimbursement. 

Please note that we are still awaiting further clarification on the allowable mileage and fuel costs businesses can claim. However, the amount the firm spends on its employees will be subtracted from its profits as a tax deduction. You can consult with your corporate tax UAE advisors to know more about the business expenses that are considered tax deductible. 

Use the company phone.  

Consider switching to corporate phones if you or your employees make many business calls using personal mobile phones. There’s no corporation tax liability for the employee for the cost of using the phone. Instead, the business receives a corporation tax deduction for the expenses related to providing the employee with a phone. 

Pay yourself 

If you’re a business owner, you can determine your compensation to suit your needs. For example, directors can accept either salary or dividends as payment for their services. Because the tax authorities consider salaries paid to staff as tax-deductible business expenses, a salary would be an effective way to decrease the amount of corporation tax.

Corporate Tax in UAE: A Secured Financial Future for Businesses in UAE 

No federal corporate tax is levied on businesses in the United Arab Emirates (UAE), which boasts a tax-friendly environment. However, businesses operating in the nation must consider how taxes affect their bottom line. Therefore, planning for company taxes becomes important in this situation.

Corporate tax in UAE planning examines a business’s financial operations to reduce taxes owed and boost earnings. This is especially crucial for businesses operating in the UAE since there are several levies, such as Value Added Tax (VAT), Economic Substance Reporting (ESR), Anti Money Laundering (AML), that can affect a company’s financial performance & reporting.

The top five advantages of company tax planning in the UAE are as follows:

  • Tax Optimization: Corporate Tax UAE planning may assist businesses in minimizing their tax obligations and freeing up more money for investment.
  • Improved Cash Flow: By releasing money that would have otherwise been paid as taxes, corporate tax planning may help increase a company’s cash flow. This can assist companies in fulfilling their financial commitments, such as paying their suppliers and staff.
  • Increased Profits: Businesses may raise their profits by paying less taxes, boosting their cash flow and financial performance.
  • Compliance with Tax Legislation: By ensuring compliance with the nation’s tax regulations, businesses may avoid potential fines and penalties for non-compliance.
  • Competitive Edge: Businesses that successfully manage their tax payments have an advantage over rivals, allowing them to invest in new goods and services, grow their business, and compete in their sector.

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