The UAE has been a very low tax jurisdiction for about a decade. Citizens pay no taxes on their income, and most companies never pay any corporate tax. The UAE has officially enacted a federal decree imposing a corporate tax of 9% on taxable corporate profits exceeding AED 375,000. The law, set to commence on June 1, 2023, was announced in December 2022. The latest addition to the legislation aims to bring more clarity and efficacy in the upcoming fiscal year. At the same time, foreign banks have long paid a 20% corporate tax on operating profits, and hotels and restaurants in Dubai have also paid a certain amount of Tax.
Corporate Tax in the UAE
A corporation tax is a direct tax on an entity’s income that defines itself as a corporation or corporation. Companies that pay corporate Tax in a country are usually incorporated in that country or operate using income generated there.
The UAE’s 2023 corporate tax will impose a 9% tax on profits (revenue less expenses) for all companies with annual revenues above AED 375,000 (approximately US$100,000). Companies that generate less than this amount will pay a 0% tax rate.
Additionally, the Corporate Tax UAE announced that large multinationals with profits exceeding 750 million euros would be subject to a 15% tax, in line with an agreement for the lowest corporate tax rate in the world.
The UAE’s new corporate Tax will come into effect for the tax year commencing June 1, 2023, so most companies will have to set aside funds to pay taxes from that date onwards. However, companies whose tax year begins in January are not required to pay Tax on income earned before January 1, 2024.
Key features of the UAE corporate tax
The Ministry of Finance in the UAE has piqued the interest of businesses worldwide by announcing a new federal corporate tax system to be launched on January 31, 2022. As we await the changes, the future of corporate taxation remains a topic of great intrigue. The new regime will come into effect for financial years beginning on or after 1 June 2023 and will apply to both residents and non-residents conducting business in the UAE. The system also adheres to international standards and best practices. It offers a competitive and transparent tax regime that will enhance the UAE’s position as a leading jurisdiction for business and investment. UAE Corporate Tax is a federal tax that applies to all emirates. Taxes levied as taxes are shared between the Federal and UAE governments.
UAE corporate tax will apply to all business and business activities in the UAE, subject to certain exceptions. The Federal Revenue Authority will manage, administrate, collect, and implement the UAE Income Tax Law. The Ministry of Finance will remain the “authentic authority” for bilateral/multilateral agreements and international tax information exchange.
Some of the key features of the new corporate tax system are:
- A standard corporate tax rate of 9% on taxable income exceeding AED 375,000. Businesses whose taxable income does not exceed this threshold will enjoy a zero tax rate.
- Taxable income in the UAE spans income from any business activity, irrespective of the source or location of income receipt or contract conclusion.
- A comprehensive set of rules for determining the source of income, allocating income and expenses between permanent establishments, deducting expenses, applying tax losses, and avoiding double taxation.
- A range of exemptions and incentives for specific categories of taxpayers, such as government entities, government-controlled entities, extractive businesses, non-extractive natural resource businesses, qualifying public benefit entities, qualifying investment funds, pension and social security funds, and wholly-owned subsidiaries of exempt entities.
- A robust enforcement mechanism that empowers the Federal Tax Authority to conduct audits, impose penalties, and collect taxes.
The corporate tax regime is highly likely to have far-reaching implications for businesses operating in the UAE, particularly those that have thus far evaded direct taxation. Companies must assess their tax exposure, review their existing structures and contracts, implement appropriate compliance processes and systems, and plan for potential opportunities and challenges arising from the new system.
Suppose you are interested in learning more about the new corporate tax system in the UAE. You can visit the Ministry of Finance website or consult Dubai’s best professional tax advisor.
The Future of Corporate Taxation
The future corporate tax regime is expected to include policies ranging from free zones to corporate Tax, the VAT regime, and the abolition of the federal income tax. Following are some salient features of the tax system.
Who can be taxed?
Taxation of legal entities with distinct legal personalities, such as limited liability companies, private security companies, public joint-stock companies, limited liability companies, etc. Additionally, any foreign legal entity that earns income in the UAE and is a tax resident will be charged the fee. Although the free zones will charge 0% corporate tax in return, they meet all regulatory requirements, which also apply to free zone companies doing business with the mainland.
Companies generating AED 375,000 or lower income are tax-free, while a 9% tax will be imposed on those above that threshold. In addition, large multinational corporations with different business conditions will be taxed at different rates.
Who is exempt?
The corporate tax law will exempt you from paying corporate Tax for participating in the collection of dividends or the sale of shares in subsidiaries. In addition, charities, non-profit organizations, investment funds, oil and resource exploration companies, and wholly state-owned companies are exempt from corporate Tax.
Calculation of taxable income
Typically, the net profit or loss on the account shown in the company’s financial statements will be used to determine Tax and income ratios.
A group of companies can form a tax group and be treated as a single tax entity. To do this, the company or subsidiary company must avoid becoming an exempt party or registering in a free zone.
To avoid double taxation, the system would allow credits parallel to foreign taxes paid in foreign jurisdictions to offset foreign tax receipts, which are not exempt.
Certain transfer pricing rules will be in place to govern transactions between related parties (for example, between two subsidiaries within the same company), and these rules will be based on the OECD Transfer Pricing Guidelines. In addition, corporate tax returns must be filed electronically. Further information on the UAE company tax registration process and compliance obligations will be published.
Key Features of Corporate Tax Law
Taxpayers must observe the “non-waiver principle” in Article 34 of the Act when entering into transactions and arrangements with related parties and report on applying this principle.
Article 40 of the Act states that a tax group may be formed provided the conditions specified therein are met. These groups’ taxable income and losses will be determined following relevant regulations. Special expense deductions and allowances are also given in computing taxable income.
The new anti-terrorism law also regulates the transfer of non-profit and non-loss, applications for registration and deregistration, calculation and submission of tax returns, and tax refunds.
Who will Benefit from Corporate Tax?
This new tax break greatly benefits businesses in retail and wholesale, administrative services, catering and support services, maintenance, repair, and other services. However, this new tax initiative will only benefit companies with taxable income exceeding 12.50%.
If you are self-employed and your annual income does not exceed Dh3 million, you will also benefit if your work is included in the categories stipulated by the Cabinet Resolution.
Special account companies not classified under the Act are exempt from corporate tax. This is good news for SMEs and key contributors to the UAE’s economy. This new tax rebate will help you grow your business and reduce your tax burden. This move will boost the UAE economy and attract many investors to start businesses in the UAE.
The UAE has traditionally been known for its business-friendly environment, with its tax-free regime attracting companies worldwide to do business there. However, in recent years the UAE has taken steps to implement a more regulated and regulated tax regime.
As part of a sweeping process, the UAE government has implemented new corporate tax regulations to improve transparency and compliance and foster economic growth.
Overall, the fate of corporate Tax in the UAE is likely to include stronger guidance and controls. As a result, companies in the UAE should be willing to accept the new tax rules and seek advice from corporate tax experts to ensure consistency and mitigate potential risks.