Introduction of Federal Corporate Tax in UAE on or After 1 June 2023

An overview Corporate Tax in UAE

The UAE is progressively shifting from a tax-free economy to a tax-based one, which will provide extra revenue for the UAE government to support development operations. For financial years beginning on or after June 1, 2023, the Ministry of Finance will levy a corporate tax in UAE (New Corporate Tax) on company profits. In a measure that would benefit small enterprises, the Ministry of Finance stated that earnings of up to Dh375 000 would not be taxed. Personal income from work, real estate, and other investments, as well as any other income generated by people that are not derived from business or different types of commercial activity, licensed or otherwise, will be exempt from corporation tax.

Applicability of new UAE Corporate Tax rate

• UAE Corporate Tax will apply to all UAE enterprises, except those engaged in exploiting natural resources, which will continue to be taxed at the Emirate level.
• Corporate Tax shall apply to foreign firms and people only if they operate a trade or company in the UAE on an ongoing or regular basis.
• UAE Corporate Tax shall be uniformly applied to all kinds of profits and other (net) income shown in financial statements produced in conformity with globally recognized accounting standards.

Across-the-board capital gains tax

Only banks and insurance businesses were formerly subject to UAE corporate taxes. They pay a 20% tax on their earnings. Individual emirates have previously imposed limited corporate taxes on oil and gas exploration and production companies at up to 55% rates. Although the Gulf has not imposed a personal income tax, several nations have implemented VAT (value-added Tax) on people and commercial operations in recent years. Saudi Arabia increased the rate to 15% last year. The UAE’s decision to impose an across-the-board capital gains tax “brings the UAE business tax framework in line with worldwide trends.”

Objectives of New UAE Corporate TAX

• Enhancing the UAE’s status as a world-class commercial and investment destination.
• Meeting international tax transparency requirements and avoiding adverse Tax.
• Accelerating the UAE’s growth and change to fulfill its strategic goals.

What Will the New Corporate Tax Rate Be?

• It will be 0% on taxable income up to Dh375,000;
• 9% on taxable income over Dh375,000; and
• There is a different tax rate for selected multinationals (with consolidated worldwide revenues exceeding 750 million euros – or Dh3.15 billion – and satisfying additional requirements).

Who is Responsible for Paying and Who is Not Responsible for Paying the Corporate Tax Rate in UAE?

• Individuals would not be subject to corporation tax on income derived from employment, real estate, share investment, or other personal income not tied to a UAE trade or company.
• Foreign investors who do not do business in the UAE will not be subject to corporation tax.
• Corporate Tax will be levied on the business’s adjusted accounting net profit.
• Businesses in free zones that fulfill all conditions may continue to benefit from corporation tax breaks.
• Natural resource exploitation will continue to be subject to corporate taxes at the Emirate level.
• There will be no withholding tax on domestic or cross-border payments.
• There would be no corporation tax on capital gains and dividends received by a UAE firm from its qualified shareholdings.
• There would be no company tax on eligible intragroup transactions and restructuring.
• Foreign Tax will be permitted to be credited against the amount of UAE business tax owing.
• Businesses will have access to generous loss transfer and utilization regulations.

Free Zone Businesses Will Be Subject to the Uae Corporate Tax in Some Instances.

All enterprises in the UAE are now subject to corporate taxation. Meanwhile, the UAE authorities reiterated that there would be no personal income tax.

In the case of free zones, the 9% corporate tax rate will apply to enterprises located inside them that obtain economic advantages from the mainland. “The advantages now available to free zone enterprises will be honored for businesses who adhere to all regulatory standards – and do not do business with the rest of the UAE. For the first time in the UAE’s history, the implementation of corporation tax in UAE marks a watershed moment – a paradigm change – for the nation and its business community.”

Expansion of Tax Coverage Across GCC Nations

Corporate Tax is a direct tax placed on the earnings of businesses. Business owners must pay taxes on their output, employees, property, and environmental effect, in addition to their revenue.

Non-residents who do business in a GCC nation via a permanent establishment are liable to corporation tax. In several GCC nations, entrepreneurs or company owners in various sectors, most notably oil and banking, must pay corporate Tax. Furthermore, a wide variety of government taxes and levies are levied across all economic sectors across the area.

Read also: What is corporate tax and how does it affect company owners in the UAE?

Conclusion

The UAE corporate tax framework will guarantee that the compliance burden on enterprises that generate and maintain accurate financial statements is minimal. Businesses will be obliged to submit a single corporate tax return every fiscal year and be exempt from making advance tax payments or preparing provisional tax filings. “The establishment of a corporate tax system would assist the UAE in achieving its strategic objectives and will encourage firms to establish and grow operations in the UAE”. UAE enterprises will have adequate time to prepare for the UAE’s corporation tax implementation. The UAE Ministry of Finance intends to provide further information on the UAE corporate tax system by the middle of the year to assist firms in preparing for and complying entirely with the new regime.

For more information on Corporate Tax in UAE, please don’t hesitate to contact us Farahat & Co.