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Corporate Tax in UAE : All You Need to Know

The UAE published Federal Decree-Legislation No. (47) of 2022 on the taxation of companies and enterprises on December 9, 2022 (hereafter referred to as the "CT law"). The Corporate Tax law, which is applicable to fiscal years beginning on or after 1 June 2023, establishes the legal framework for the adoption and operation of a Federal Corporate Tax in the UAE. 15 days after it is published in the official gazette, the CT law will go into force. Starting with the fiscal year that begins on or after June 1, 2023, the tax will be applied to firms in the UAE. The Dh 375,000 threshold was added to the law to promote startups, small and medium-sized businesses, and the competitiveness of the economy. It's important to remember that the corporation tax will only be applied to realize profits, not to the whole revenue of the company.

Importantly, neither individual wages nor job income will be subject to the company tax. Personal income from bank deposits or savings plans as well as investments in real estate made by people in their individual capacities are likewise exempt from taxation. In practically every nation, corporations pay a corporate tax to the government in an effort to diversify the government's income sources. The Corporate Tax Law, according to the Ministry of Finance, will aid in the development of an integrated tax regime to boost the UAE's international economic competitiveness and support global financial systems within the framework of the UAE's established partnerships.

What Does Corporate Tax Mean?

Companies and other enterprises will be required to pay a standard rate of 9% of their taxable earnings under the new tax system if they reach Dh375,000. For fiscal years beginning after June 1, 2023, the tax will be in force.

Who is Subjected to Corporate Tax in the UAE?

The following entities are subject to corporate tax in the UAE:

  1. Businesses incorporated in the UAE;
  2. People who do business or engage in commercial activity in the UAE, whether they are residents or foreigners;
  3. Those are managed and controlled in the UAE or that are foreign legal companies with a permanent presence there

Dividends, interest, royalties, capital gains, service fees, and other UAE-sourced income obtained by a foreign person will not cause corporation tax liabilities in the UAE if there is no permanent presence in the UAE.

Who Are the Residents and Non-residents?

Taxable people, who are either residents or non-residents, are subject to the corporation tax (residence for corporate tax is a concept defined in the UAE corporate tax law and is not impacted by where a person resides). A resident person is a legal person who has been incorporated or constituted in accordance with UAE corporate legislation (including free zone entities). It also encompasses any person doing business in the UAE as well as any foreign legal organization that is effectively managed and controlled in the UAE.

On the other hand, a non-resident person is a non-UAE resident who maintains a permanent establishment in the UAE. When a person receives money from the state, they are considered to be a non-UAE resident (subject to a 0% withholding tax).

Read More : Corporate Tax Compliance and Planning Services

Who is Exempt From Corporate Tax in the UAE?

Given their significance and contributions to the UAE's social fabric and economy, several kinds of firms or organizations are exempt from corporate tax in UAE. They are known as Exempt Persons, and they consist of:

  1. Exempt from this rule are government-controlled organizations, public and private pension funds, investment funds that meet certain criteria, and organizations that qualify for receiving public benefits.
  2. Businesses involved in the non-extractive portions of the value chain for natural resources as well as in the extraction of the UAE's natural resources that are taxed at the emirate level will be exempt from the corporation tax system in the UAE.
  3. If a subsidiary company is completely owned by an exempt person, such as a holding company employed by an investment fund to keep an asset, the subsidiary business may be eligible for a corporate tax exemption. In order to be free from corporation tax, such businesses might apply with the Federal Tax Authority.

In the case of Free Zones

Free zones will be subject to the legal requirements for administrative and compliance oversight and the corporate tax framework in the UAE. On "qualifying income," Qualifying Free Zone Persons (QFZPs) may take advantage of a corporate tax rate of 0%. Income that is taxable but not qualified will be taxed at the standard corporate rate of 9%. The free zone has to meet certain requirements to be recognized as a QFZP.

  1. Maintains adequate substance in the State. 
  2. Derives Qualifying Income as specified in a decision issued by the Cabinet at the suggestion of the Minister. 
  3. Has not elected to be subject to Corporate Tax under the Decree-Law.;
  4. Abide by the transfer price guidelines and supporting paperwork
  5. Fulfill any additional requirements the ministry may impose.

Which Income Sources Are Non-taxable?

The following income and related expenditure shall not be taken into account in determining the Taxable Income: 

  1. Dividends and other profit distributions received from a juridical person that is a Resident Person. 
  2. Dividends and other profit distributions received from a Participating Interest in a foreign juridical person as specified in the Decree-Law. 
  3. Any other income from a Participating Interest as specified in the Decree Law.
  4. Income of a Foreign Permanent Establishment that meets the condition of the Decree-Law. 
  5. Income derived by a Non-Resident Person from operating aircraft or ships in international transportation that meets the conditions mentioned in the Decree-Law.

Whose Income is Exempt?

A number of other sources of income are also excluded from corporate tax under the corporate tax law. A Taxable Person won't be charged Corporate Tax on such income as a result, and they also cannot deduct any expenses that are relevant. The corporate tax on the taxable income of Taxable Persons who receive exempt income will still apply.

It is important to avoid double taxation on some forms of income, which is why certain revenue is excluded from corporate tax. Dividends and capital gains from both local and international shareholdings will often be free from corporate tax. Additionally, for the purpose of Corporate Tax in UAE, a Resident Person may choose, under certain circumstances, to exclude revenue from a foreign Permanent Establishment.

Which Tax Benefits Are Available Under Corporate Tax in the UAE?

Taxpayers who satisfy certain requirements may take advantage of a variety of tax reliefs provided under the corporation tax law:

  • Tax Loss Relief: 

To determine the taxable income for succeeding tax periods, a tax loss may be subtracted from the taxable income of those tax periods. Any succeeding tax period's taxable income cannot be reduced by more than 75% (seventy-five percent), or any other proportion determined by a Cabinet resolution.

  • Transfer of Tax Losses: 

To determine the taxable income for succeeding tax periods, a tax loss may be subtracted from that period's taxable income. Any succeeding tax period cannot have a tax loss reduction that exceeds 75% (seventy-five percent), or any other percentage determined by a Cabinet decision. 

  • Business Restructuring Relief: 

Profit or loss resulting from mergers of businesses, legal entities, divisions of companies, and other qualified restructuring transactions may be deducted from Taxable Income.

  • Small Business Relief: 

In order to qualify for small business relief, taxpayers must be UAE residents and have income that is below a level that will be determined by a ministerial decision for the current tax period and the prior tax periods. 

How May Farahat & Co. Help you?

We have a staff of expert tax Consultants in Dubai with extensive expertise in tax law advisory, arbitration, compliance, and litigation since we are a well-known Corporate Tax Consultant in Dubai. Residents and foreigners in Dubai may depend on our tax consultant in Dubai for wise advice and current information on Corporate Tax in the UAE. On the other hand, our corporate tax consultant in Dubai attends to the requirements of businesses operating in the UAE, whether locally or worldwide. Contact us right now if you need detail regarding exemption from corporate tax from our tax Consultants in Dubai, United Arab Emirates.

Read More : How to Prepare Accounting and Bookkeeping for Corporate Tax in UAE

Ervee is a CPA with international experience in Tax and Accounting. He has over 12 years of experience in accounting and bookkeeping and over a year in VAT implementation, registration, and accounting in UAE. He regularly drives out inefficiencies in company operations and loves the challenge of helping clients find additional ways for an easier and improved compliance and verification of transactions.