The new Corporate Tax in the UAE has been the talk of the town for quite some time now. It has been recently introduced in the Emirates by the Ministry of Finance. Entrepreneurs and businessmen are not quite sure what this tax is about. This guide will give you a detailed insight into this new kind of tax. Read on to find out everything about it.
What is Corporate Tax UAE?
The corporate tax also known as the Business Profits tax is a kind of direct tax imposed on the total profit or income of businesses and corporations operating in the UAE. It is applicable across all of the UAE because this is a Federal tax.
This tax will be a competitive one that will be applied to the complete area as per best international practices that will make the position of the Emirates stronger as the world’s best place for investment and doing business. CT will also help in speeding up the transformation and development of the Emirates to meet the country’s strategic goals and targets.
Corporate Tax will also prove to help in ensuring the country’s commitment to avoiding bad tax practices and matching the international standards set by the countries for tax transparency.
A strong corporate tax regime is present in GCC members and numerous other countries.
Corporate Tax Date of Becoming Effective
After 1 June 2023, The UAE CT regime will become active for all the upcoming financial years. The following are some of the ways how the tax will become effective for businesses running in the UAE:
- A business that has a financial year beginning on the 1st of July 2023 and finishing on the 30th of June 2024 will have to pay the UAE Corporate Tax from the 1st of July 2023. The starting of first financial year that starts after or on the 1st of June 2023 is July 1, 2023.
- A business that has a (calendar year) financial year beginning on the 1st of January 2023 and ending on the 31st of December 2023 will have to pay the UAE Corporate Tax from the 1st of January 2024. January 1, 2024, is the start of the first financial year that starts after or on 1 June 2023.
The enforcement, administration, and collection of corporate tax in the UAE is the responsibility of the Federal Tax Authority. The Ministry of Finance will still be the competent authority for the international exchange of information for tax purposes and purposes of bilateral/multilateral agreements.
Except for the extraction of natural resources, which will still be required to pay Emirate-level corporate taxes, UAE Corporate Tax will apply to all enterprises and commercial operations conducted inside the UAE. A legal entity’s actions will all be considered “business activities” and corporate tax will be effective on them.
You can assess if a person runs an enterprise that falls under the umbrella of the UAE Corporate Tax. We can do that by mentioning that the person already has or needs a business license. Or be eligible to engage in related professional, industrial, and/or commercial activities in the UAE.
The amount shown in the financial statements prepared in accordance with generally accepted accounting principles is the amount a company reports as its accounting net profit. The accounting net profit of a company after deducting certain items that are specified by the UAE Corporate Tax law will be the taxable income.
Principal Elements of the Corporate Tax in UAE
The following are the principal elements of the corporate tax in the UAE:
- If businesses operating in free zones follow the rules, they are still eligible for the benefits of the corporate tax.
- People are not liable to corporate tax on income from sources such as stock investments, work, real estate, etc., and sources that are unconnected to a business or trade operational in the Emirates.
- Corporate tax will not be due on qualified intragroup transactions and restructurings.
- Corporate tax will not be applicable to foreign investors who do not do business in the UAE
- Corporate tax will be applicable to the business’s adjusted accounting net profit.
- The tax will not be effective on the capital gains and dividends of a UAE business from its related shareholdings.
- Corporate tax on resource exploitation will be applicable at the Emirate level.
- Companies can use excellent loss transfer and utilization laws.
- No withholding tax is applicable to international and domestic payments.
- You can offset the amount of due corporate tax with foreign tax credits.
UAE Corporate Tax Rate
UAE corporate tax rate is set by the government. Following are the CT rates:
- 9% for taxable income above AED 375,000
- 0% for taxable income up to AED 375,000
- A different corporate tax rate for big multinationals that fulfill certain criteria set according to ‘Pillar Two’ of the OECD Base Erosion and Profit Shifting project.
Large Multinational Corporation
A large multinational corporation is an entity that functions in its home country and other countries in the form of registration or presence such as a foreign branch, subsidiary, etc. A business does not become a large multinational corporation if it only earns income in any other place outside of the home country without having a foreign registration or presence.
The global minimum effective tax rate is proposed under ‘Pillar Two’ of the OECD Base Erosion and Profit Shifting project. According to that, a large multinational corporation is one that has consolidated global revenues of more than 750m EUR (c. AED 3.15 bn).
Who Will be Subject to Corporate Tax UAE?
UAE corporate tax will be effective for business income earned under a commercial license. A person’s salary and other employment income regardless of earning it from private or public companies will not be applicable for corporate tax.
If a person is not obliged to get a commercial license or permit to engage in any commercial activity in the Emirates, they are not subject to Corporate Tax when investing in real estate in their individual capacity.
Dividends, capital gains, and other income received by individuals from their own ownership of shares or other securities do not have to pay Corporate Tax.
Although no Corporate Tax needs to be paid unless the freelance professional’s yearly net income reaches more than AED 375,000, UAE Corporate Tax will normally apply to revenue derived from activities performed under a freelancing permission or license.
Similarly, the tax will not be applied to an individual’s earnings and other income from savings plans or bank accounts.
Corporate Tax Liability
You can calculate the Corporate Tax UAE liability in the following way:
- For income of AED 0 to AED 375,000 the amount is AED 0.
- For an income of more than AED 375,000. So, the amount will be AED 400,000 – AED 375,000 = AED 25,000) at 9 percent is AED 2,250.
The Corporate Tax liability for the year will be AED 0 + AED 2,250 equals AED 2,250.
The final payable amount of the Corporate Tax will be decreased by the foreign taxes applicable to the related earnings.
Exemptions for Corporate Tax UAE
Businesses engaged in the extraction of natural resources are outside the scope of UAE Corporate Tax but will have to pay Emirate-level corporate taxes. Dividends and capital gains earned by a UAE business from its qualifying shareholdings will be exempt from UAE CT. A qualifying shareholding refers to an ownership interest in a UAE or foreign company that meets certain conditions to be specified in the UAE CT law. In addition to that, corporate Tax won’t apply to dividends or capital gains that a UAE business makes from its qualified shareholdings
What About Foreigners?
If foreign individuals and entities do business or trade in the UAE in a daily or ongoing manner, they will have to pay Corporate Tax. A tax credit will be granted to offset the Corporate Tax due for any foreign corporate tax that was paid on taxable income in the UAE. In general, a foreign investor’s income from royalties, dividends, interest, capital gains, and other investment returns will not be subject to the UAE Corporate Tax.
Corporate Tax on Free Zones
Businesses setup in the free zones must pay UAE Corporate Tax. But the regime will keep on honoring the Corporate Tax incentives in the present time being given to the companies functional in the UAE free zones that do not do business operations in mainland UAE and meet the regulatory requirements.
Free zone businesses must register and file a Corporate Tax return. Do check out the compliance obligations of businesses set up in the free zones to do it the right way. The Corporate Tax treatment will be applied to all businesses in free zones in the same manner.
Withholding Tax Rate Under Corporate Tax in UAE
The payer representing the recipient of the income will collect the withholding tax at source. They are commonly used in respect of payments such as royalties, dividends, interest, etc. The withholding tax is present in various tax systems. This tax is not effective for cross-border and domestic payments regardless of the nature under the corporate tax regime of the UAE.
Which Industries Have to Pay Corporate Tax?
Banking activities must pay corporate tax in the UAE. Businesses involved in real estate construction, management, agency, development, and brokerage activities also have to pay Corporate Tax. Businesses involved in the extraction of natural resources do not have to worry about Emirate-level corporate taxation and Corporate Tax because they are free from them.
FAQs – Frequently Asked Questions
Does the UAE have corporate tax?
Yes, the UAE has corporate tax applicable to businesses and companies doing operations in the UAE.
Do companies pay taxes in Dubai?
Small to medium companies don’t pay taxes in Dubai. Due to its reputation as a tax-free city, Dubai attracts both foreign investors and residents looking for employment. Companies and residents of the United Arab Emirates are not subject to income taxes by the government.
Is UAE tax-free for business?
Yes, UAE offers tax-free businesses to be operated here. The United Arab Emirates is one of the few remaining significant, expanding economies that is still tax-free. It has gained recognition on a global scale.
How can corporation tax be avoided in the UAE?
Businesses that work or are involved in the extraction of natural resources are free from Corporate Tax because they will continue to be subject to the present corporate taxation at the Emirate level. Moreover, Corporate Tax won’t apply to dividends or capital gains that a UAE business makes from its qualified shareholdings.
Does the UAE have 0 tax?
In the United Arab Emirates, there is currently no personal income tax. Generally, you don’t have to report obligations or pay any individual tax registration.
So, that is it for today about corporate tax in UAE. The tax is comparatively new in the country as it was never there before. According to the UAE government, employees and companies operating in the UAE must own commercial licenses. Free zone companies that don’t have their head offices set up in the UAE’s mainland and comply with every legal criterion will be given corporate tax incentives They will also continue to be honored by the corporate tax regime of the UAE
Foreign individuals and entities eligible for the corporate tax are those who constantly or daily do commerce or trade in the Emirates. These include banking operations, firms, or businesses engaged in real estate development, management, brokerage, agency, and construction.
If you are looking to start your business in the UAE, you can get in touch with RIZ & MONA Business Consultancy. All of your needs will be met by our experienced consultants. Contact us if you have any questions about business creation or taxation. We promise you a simple process and the establishment of your ideal business in the UAE.