How Understanding the Basics of Corporate Tax in UAE Saved My Life

The Gulf region has for the longest time been a hub of tax free money spinning business. The popular image of super rich Arab sheikh’s paying no Corporate Taxes whatsoever and paying for the world of luxury by doing nothing and just letting the Americans pump out more and more oil and spending their money on fast cars, jets, and models is a stereotype that is fast changing. 

The gulf region is now trying to wean itself away from a terrible addiction to oil. The price of oil is not only being threatened by the rise of renewables but Gulf monarchies are also faced with the problem of providing more and more free public goods with a large but finite pool of funds. The money is being stashed away in sovereign wealth funds which are trying to become alternative sources of government funding to complement the huge funds generated by the oil business. 

Another byproduct of trying to wean the region off oil is that they are now trying to tax their people as well. This includes but is not limited to region wide efforts such as value added taxes for instance. These efforts are both cooperative and competitive. The Gulf region wants to raise more money through direct and indirect taxes. Yet they also do not want to be in a bidding war to the bottom to see who can get the best deal with the lowest rates.

One area of taxation which is evolving is the realm of corporate taxation as capital from all over the world pours into the Persian Gulf, is the area of corporate taxes. Yes, you can make a ton of money as a large company but how much would you have to cough up to the taxman and how much can you take home needs to be looked into more closely. 

On 31 January 2022, the tax landscape of the region shifted yet again with the United Arab Emirates (UAE), Ministry of Finance (MoF) making the breakthrough announcement that a new federal corporate tax (CT) system will be implemented in the UAE, effective financial years commencing on or after 1 June 2023. Barring Bahrain, the UAE has introduced the lowest corporate income tax rate within the GCC region at a standard rate of 9%.

The UAE CT regime has been designed to incorporate best practices globally and minimize the compliance burden on businesses.

On January 31, 2022, there was a major change in the realm of taxation in the whole of the Gulf region. The tax landscape of the middle east shifted one more time, with the United Arab Emirates (UAE) Ministry of Finance (MoF) announcing the stunning changes to the tax law that a new federal tax structure for corporations was going to the set up in the United Arab Emirates and will come into implication from the financial year that was commencing on or after June 01, 2023. The only country in the Gulf with a lower tax rate than this is Bahrain; the UAE has rolled out the 2nd lowest corporate income tax structure within the Gulf Cooperation Council region at an impressive rate of just 9%.

The UAE corporate tax regime has been structured to incorporate cutting-edge practices worldwide and minimize the compliance burden on businesses.

The Federal Decree-Law No. (47) of the year 2022 on the Taxation of Corporations and all sort of Businesses (from now on referred to as the “Corporate Tax Law””) was issued by the legal bodies of the United Arab Emirates (“UAE””) on December 09, 2022.

The Corporate Tax Law gives the legislative framework for the introduction and rolling out of a Federal Corporate Tax (“Corporate Tax””) for the United Arab Emirates.

The introduction of Corporate Tax UAE is supposed to help the UAE hit its strategic objectives and improve its development and growth. The certainty of a competitive Corporation Tax regime that abides by international standards, coupled with the UAE’sUAE’s BROAD network of double tax treaties, will improve the UAE’s position as a leading jurisdiction for business and any investment.

Given the position of the corporate Tax in UAE as an internationally used business hub and global financial center, the Corporate Tax in the UAE regime builds from best practices globally. Therefore, it helps to incorporate principles that are internationally known and accepted. This ensures that the Corporate Tax in the UAE regime will be clearly understood and is clearly within its implications.

The authorities of corporation tax in UAE have announced the introduction of corporation tax from June 01,23. The law states that a taxable person or business will be subjected to a rate of 9% corporate tax from the beginning of their first financial year of UAE commencing on or after June 01, 2023.

Since its announcement, it has created hype among businesses and corporation tax professionals. With this corporation tax announcement, UAE is all set to become the fourth among the GCC countries to introduce a federal corporate tax in UAE.

The introduction of federal corporate Tax in the UAE aims to further strengthen the country’s position as one of the world-leading hubs for businesses and investment and accelerate the strategic objective towards transformation and development. Also, the corporate Tax in UAE concept helps to meet the international standards for corporation tax transparency and avoids harmful tax practices in the country.

Given that corporation tax is new in UAE, it is important for businesses to understand this concept of taxation. Therefore, we have put across some of the most commonly asked questions you might have on corporate Tax in the UAE.

Alight! Let us get started.

Corporate Tax in UAE levied from June 01, 2023 

What is corporate Tax in UAE?

Corporate Tax in UAE is a form of direct Tax applied to the net profit or income of corporations and all other business entities. It is also known as ”Corporate Income Tax” or Business Profits Tax.”

In simple words, it is a corporation tax applied to the net profit made by businesses in the UAE. Therefore, it needs companies to pay a certain percentage of profit as Tax.

 

Who should be paying corporate Tax in the UAE?

All the businesses whose net taxable profit exceeds 375,000 AED fall under corporate Tax application in UAE and need to pay a certain percentage of their net profit as corporate Tax in UAE.

 

What is the rate at which corporate Tax in UAE is being calculated?

The corporation tax rate is calculated at the rate of 9% of the net profit made by the businesses. In order to extend support to small-sized businesses and start-ups, the corporation tax rate will be initially ”0” % if the net profit is up to 3,75,000 AED.

 

What is the final date for implementing the federal corporate Tax in the UAE?

The final date of implementing the corporate Tax in UAE has been brought to effectiveness from the current financial year starting on or after June 01, 2023.

 

When will the authorities release the corporate Tax in UAE law?

The authorities already released the corporation tax law on December 09, 2020. The UAE corporation tax has been made available through a ”Federal Decree-Law no. 47 of the year 2022 on their official website. You can download the UAE corporation tax law by visiting the Ministry of Finance website.

 

What are the businesses and incomes that are outside the scope of corporation tax?

Given the profit threshold of 3,75,000 AED for an income, all businesses that exceed the threshold are liable to pay corporate Tax in UAE. However, various types of business or income are exempted from corporate Tax in UAE. Here is the list of companies or income that are exempted from corporate Tax in UAE:

• Individuals will not be subject to corporation tax. As a result, any kind of income from employment, real estate, investments in the form of shares, and other personal income that is not related to a trade or business in the UAE will be exempted from corporation tax.
• This Tax does not apply to foreign investors who do not conduct business in the UAE.
• Corporate Tax in UAE incentives is currently being offered only to free zone businesses that comply with all kinds of regulatory requirements shall continue.
• Capital gains and dividends received by corporation tax of UAE businesses from its qualifying shareholdings are exempted from corporate Tax.
• Not applicable on qualifying restructurings and intragroup transactions.

 

How is corporate Tax in UAE calculated?

Corporate Tax in UAE is calculated at the rate of 9% of the net profit shown in that company’s financial statements. However, the 9 % corporate tax in UAE will be applied only if the taxable net profit has exceeded 375,000 AED. In other words, a net profit of up to 3,75,000 AED is generally taxed at 0%. 

Let’s take an example; if the net profit of a company is 4,75,000 AED, the corporation tax will be calculated as 9,000 AED (4,75,000-3,75,000 X 9/100).