The UAE is a focal point for international business and finance. Over the years, the strategic implementation of the country’s laws has attracted many investors who now have long-term operations in the region. In addition, the UAE will implement a corporate tax from June 2023 to make the country more business-friendly.
Additionally, 2023 will witness a wave of legislative reforms in the UAE. A raft of laws came into force with the New Year, strengthening the UAE’s social, economic, and political fabric and aligning it with the rest of the world. Besides, the new tax system is based on globally accepted practices and the principles of justice and fairness, further promoting investment and making competitiveness an international leader.
What is Corporate Tax?
Corporate tax is another name for corporate income tax or business profits tax. The UAE corporate tax will remain the lowest rate globally while reducing companies’ compliance burden. Therefore, introducing corporate tax will boost the UAE’s revenues and is essential to remain competitive in the global business and investment environment.
Furthermore, corporate tax is a direct tax on the income of entities calling themselves corporations or corporations. Companies that pay corporate tax in a country are usually incorporated in that country or operate using income generated there. This will bring more financial discipline into the company culture, leading to the proper maintenance of record keeping.
Application of Corporate Tax
The UAE’s new corporate tax is a sign of the UAE’s commitment to economic stability and long-term growth, making it more attractive to investors looking for a stable and predictable business environment. As a result, companies entering the UAE market can now invest with greater confidence and build greater trust with customers and stakeholders.
Under the emirate-wide tax laws, income tax is paid on a progressive system of tax rates up to a maximum of 55%. In practice, however, these tax decrees are not enforced. Instead, foreign bank branches are subject to income tax at a flat rate of 20%, based on a separate bank decision at the emirate level. In addition, companies engaged in oil, gas, and petrochemical activities in the UAE are subject to income tax at rates above 55% under individual UAE franchise agreements or financial letters.
Corporate Tax Laws and Regulations in the UAE
Knowing the tax regulations and laws in the country where you work is crucial as a business person. Also, consider corporate taxation an essential aspect of business in the UAE.
However, CT Law in the UAE is a direct tax on an entity’s taxable income derived by applying various tax adjustments to the net income or profits of the entity’s corporate and other businesses.
Taxpayer
- Residents of the United Arab Emirates
- Legal entities, including free zones (established in the UAE);
- Natural persons carrying on business in the United Arab Emirates;
- Foreign Legal Persons (POEMs) managed and controlled in the UAE; and
- Any other person can be specified.
Non-residents
- Permanent residence in the United Arab Emirates;
- Income from the UAE; and
- Nexus in the UAE (details to be determined).
Tax period
The tax period is a financial year beginning on or after June 1, 2023.
Exemptions
The following persons are exempt from the Anti-Terrorism Act (subject to certain conditions being met):
- government entities;
- government-controlled entities;
- persons engaged in extractive work;
- people who work with certain non-extractive natural resources;
- certain qualified investment funds;
- Qualified public interest entities;
- pension funds or social security; and
- Any other person determined by the decision of the Council of Ministers.
Small businesses with income below certain thresholds may apply for the small business exemption and are deemed to have no taxable income for the relevant taxation time and may be subject to simplified compliance obligations. An election for the free trade agreement must be held to apply for the small business exemption.
Further, the income threshold for qualifying for small business relief has yet to be determined, and a Cabinet decision will provide clarity over time.
Applicable to the free zone
Eligible free zoners must meet the following criteria to qualify for the 0% corporate tax rate.
- Maintain sufficient material in the UAE;
- Also, receive qualifying income;
- Or, did not choose to undergo CT;
- Comply with all transfer pricing regulations; and
- satisfy any other conditions it may
- Comply with any other conditions that the Ministry of Finance may prescribe.
Summary
Taxpayers must consider the following:
- Review your activities and assess the impact of new TC laws on your business;
- Consider setting up your business to manage compliance and reporting obligations related to the new EC laws; and
- Maintain proper documentation from a CT perspective.
Impact of Corporate Taxes on UAE Companies
The UAE Ministry of Finance recently issued Federal Law No. 47/2022 on corporate and business tax. The Corporate Tax Law was enacted on December 9, 2022, to help the UAE achieve its strategic goals and accelerate its development and transformation. Above all, the date the corporate tax becomes effective varies depending on the company’s financial year. As the financial year of most companies in the UAE runs from January 1 to December 31, corporate tax will be imposed on these organizations from January 1, 2024.
- All registered companies must register for corporate tax and pay 9% per annum on adjusted taxable profits above the exemption limit of AED 375,000. Corporate tax constitutes a short-term liability for a company, affecting its working capital.
- Furthermore, introducing corporate tax will involve bureaucratic compliance, training, and implementation costs, which is reasonable given the UAE’s simple tax regime. However, businesses will undoubtedly focus on tax planning to minimize the impact of corporate tax on their profitability, which will increase the demand for tax professionals.
- Above all, shareholders may keep their share of profits by passing the impact of corporate tax on to end users in the form of higher sales prices, making things a bit more expensive for end users and reducing their purchasing power.
- In addition, the decline in purchasing power will impact the demand for products and services, and the impact of flow will impact the output and sales of enterprises, thereby affecting economic growth in the short term.
Corporate Tax Targets in the UAE
The UAE Ministry of Finance (“Ministry of Finance”) has introduced the UAE Federal Corporate Tax to prevent harmful tax practices and comply with international tax transparency standards.
- Enhance the country’s status as a major business and investment hub.
- Achieve strategic goals by accelerating transformation and growth initiatives.
- An international standard addresses financial transparency.
- Remove unhealthy tax methods from the system.
- Diversify your income in non-oil industries.
Corporate Tax benefits
In addition to all these implications, there are several benefits of introducing corporate tax in the UAE, including:
- This rate is comparatively low compared to other Gulf countries. For example, Saudi Arabia has a 20% tax rate, while Oman and Kuwait have a 15% tax rate.
- Next, competitive corporate tax policies align with international standards, with an average global tax rate of approximately 24%, helping to strengthen the UAE’s position as the preferred location for business and investment.
- Moreover, a corporate tax would benefit the country’s citizens, including increased government revenue and spending, reduced government reliance on hydrocarbon revenues, increased foreign direct investment, and boosted GDP by 2-3% in the short term.
- Additionally, The non-oil industry accounts for over 70% of the country’s GDP. Corporate taxes will help the non-oil industry in the coming years.
- Corporate tax revenue is reinvested in infrastructure and public services to improve the economy and welfare of the country.
- Also, Paying corporate taxes may be more beneficial to business owners than paying additional taxes on personal income. Family health insurance and fringe benefits like retirement plans and tax-deferred trust funds are deducted from corporate tax returns.
Conclusion
Last, taxes are a significant source of government revenue worldwide. Governments around the world spend these taxes on public welfare. Likewise, like VAT, CT will be another source of revenue for the UAE government, which will be utilized for the benefit of the public through the development of infrastructure, hospitals, roads, medical facilities, etc., world-class.
Additionally, it will reduce reliance on oil funding and lead to diversification of government revenue sources, and that would be a sight of a healthy and mature economy.