As businesses begin to focus on financial reporting in 2023, there are essential yet important corporate income taxes considerations to assess and assess. The UAE Federal Corporate Tax Law for International Financial Reporting Standards (“IFRS”) has been enacted. Although they are not yet required to consider current income tax, companies will need to consider whether to account for deferred income tax for reporting periods ending on or after January 16, 2023.
Taxation System in the United Arab Emirates
The UAE’s tax system is one of the region’s main attractions for many ex-pats. For example, employees do not have to pay income tax. Until January 2018, there is no VAT. This tax on the sale of goods and services comes at a relatively low rate of 5%. However, the government also imposes excise taxes on certain products the government deems harmful to human health or the environment, such as energy drinks and tobacco. In addition, from June 2023, a new corporate tax will be imposed on companies in the UAE.
Regional taxes in the United Arab Emirates
FTA
The UAE has free trade zones with special tax, customs, and import regulations. There are more than 40 regions in the UAE. Within these special zones, companies are exempt from corporate tax for about 50 years and enjoy 100% exemption from import and export duties.
Travel costs per emirate
Hotel costs vary by the emirate. Dubai has a tourist dirham fee of between AED 7 and AED 20 per room per night (up to 30 nights). In general, it depends on the class of the hotel. Additionally, Abu Dhabi charges a 4% fee on hotel bills, at Dh15 per room per night. The Ras Al Khaimah Hotel also charges a tourism fee of AED 15 per room per night.
Rent tax
Rental property taxes vary in different emirates. For example, in Dubai, residential tenants pay 5% of the annual rent as a rental tax, while commercial tenants pay 10%. In Abu Dhabi, however, UAE nationals are not taxed on their property, but their ex-pats pay 3%. Additionally, in Sharjah, all tenants are subject to a 2% rental tax.
Federal Taxes in the UAE
Income tax
There is no income tax applicable in the UAE. Therefore, there is no need to declare income tax in the UAE as there is no applicable personal tax. The same applies to self-employed persons residing in the UAE.
Individual tax
Employees in the UAE who are nationals of GCC countries (including the UAE) are subject to a 17.5% social security scheme. In addition, UAE nationals pay 5% (automatically deducted from their salary), and employers pay 12.5%.
Corporate tax
Corporate tax is only levied on UAE oil companies and foreign banks. However, the country has 46 free zones; businesses registered in the UAE are exempt from tax for an extendable period. In addition, there is nothing like capital gains tax unless the company is taxed under another income tax.
Double taxation
The UAE is expanding its network of Double Taxation Agreements (DTAs) and Bilateral Investment Treaties (BITs) to encourage global strategic partnerships. The UAE has been granted some 243 DTAs and BITs to exempt or reduce direct and indirect taxes on investment and profit taxes.
Tourism Facility Tax
Resorts, restaurants, and hotels may charge the following taxes:
- 10% discount on room rates
- Service Charge (10%)
- Council Fee (0-10%)
- City tax (6-10%)
- Tourism fee (6%)
Transfer tax
A transfer fee applies to transfers of title in the UAE. This varies from emirate to emirate. For example, Dubai is 4%. Although both the buyer and the seller share the burden, the transfer fee is generally paid by the buyer.
Inheritance tax
There is no inheritance tax system. However, without a written will, the inheritance will be handled according to Islamic law principles.
Recent corporate tax implication in UAE 2023
The United Arab Emirates has broadcast a new ministerial decision to implement the corporate tax law, exempting eligible public benefit entities from paying mandatory Corporate tax.
The Ministry of Finance has reported a new decision of the UAE Cabinet on the eligibility of public benefit entities. They are designed to ensure organizations operating in the wider public interest do not have to pay taxes.
Updating UAE Tax Laws
These taxes and laws are created for the benefit of the public and society, emphasizing activities that contribute to the structure of the UAE. Typically, this focus is general welfare, promoting philanthropy, community service, or corporate social responsibility.
The executive resolution seeks to reflect the important role of these entities in the UAE, which often includes a focus on religion, charity, science, education, and culture.
In addition, they must continue to comply with all relevant federal and local laws and notify the Ministry of Finance of any entity changes that will affect their status as eligible Status of Public Interest Institutions.
To qualify for public benefit, entities must register with the Federal Tax Service and obtain a tax registration number for corporate tax purposes.
Various reporting obligations apply to eligible public benefit entities to ensure they meet approval criteria.
Corporate Tax Law
Corporate tax rules will change from June 1, 2023, when the federal corporate tax will be imposed on companies with a net profit of AED 375,000 or more. The tax will be applied at a flat rate of 9%. However, there will be some exemptions for small businesses. People who run businesses that comply with the new rules must register with the federal tax office and file tax returns every year.
On October 10, 2022, the corporate tax law appeared in the Official Gazette (entry into force 15 days later). The UAE Ministry of Finance (“MoF”) published the full text on corporate tax (“Corporate Tax Law,” the “Law”). The companies will be accountable to UAE corporate tax (“Corporate Tax”) from the start of their first financial year commencing on or after June 1, 2023. The standard tax rate is 9% (nine percent) on taxable income above the AED 375,000 limit, and for taxable income up to this limit, a zero percent (0%) will apply.
Corporate Tax Rates in the United Arab Emirates
- Taxable income below AED 375,000 is zero-rated.
- Nine percent of taxable income above AED 375,000.
UAE company tax exemption
- Government entity.
- Government-controlled entities.
- People who work in the extractive industries.
- A person who works in non-extractive natural resources.
- Eligible nonprofit entities.
- Qualified investment funds.
- Public pension funds or social security are under the regulatory control of national authorities.
- Private pension funds or social security are subject to regulatory control by national authorities.
- A wholly-owned legal person incorporated in China
- An exempt person who does any of the following:
- Perform any or all of the activities of an exempt person.
- Specializes in acquiring assets or investment funds for the benefit of
- exempt persons.
- It only performs activities related to the activities of exempt persons.
- Any other person appointed by the Council of Ministers’s decision on the Minister’s order.
Conclusion
The UAE has had to bow to intense international pressure. However, the UAE is associated with the Organization for Economic Co-operation and Development. Moreover, as a member of the OECD Integrated Framework, the UAE will soon introduce a federal corporate tax rate as a starting point to fulfill its commitment to the concept of the lowest effective global tax rate.
Introducing the corporate tax rate will also preserve some of the UAE’s most special tax incentives, such as those granted to entities registered in the free zones. Inevitably, once the system goes into effect, companies may revisit their corporate structures to take advantage of the tax benefits available.