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UAE’s New Corporate Tax Policy on Entities – An Overview

UAE over a considerable period is famous for its zero-tax policy. Such policy paved the way for millions of individuals to migrate to the UAE notwithstanding its temporary nature to explore the UAE’s market with a view of having a serious commercial advantage. For that simple reason, UAE was famous for its Zero tax policy and was well-known for being a jurisdiction with zero tax.  However, a new tax policy was announced by the Ministry of Finance (MOF) to impose a Federal Corporate Tax in UAE.

One of the fundamental objectives behind the new change is to keep in line with the OECD (Organization for Economic Corporation and Development) policy for tax control. The purpose behind the establishment of OECD was to collaborate with member states/economies to promote sustainable economic growth.

The OECD Tax Policy

The organization is built on the utilitarian purpose of making policies for better lives. Amongst its many goals, the main goal of OECD is to carve its policies so that, it would uphold prosperity, equality, opportunity, and well-being.

OECD Policy on Corporate Tax

Ensuing the initiative proposed by the OECD, which is commonly known as the “statement” establishing a new framework for tax reform which comprised or known as a “2 pillar package” with more than 130 countries that represented more than 90% of the global GDP, conquered to adhere to a new plan to reform international tax rules to ensure that multinational enterprises pay a fair share of tax irrespective of their place of operation.

In the said two-pillar package

  1. Taxing rights will be on more than 100 billion of profits are expected to be relocated to market jurisdiction each year.
  2. Global minimum income tax will be declined to operate at a minimum rate of 15%

The pivotal purpose of introducing this reformed tax regime by the OECD was to make sure that, large multinational companies pay their fair share of tax everywhere in the world.

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

UAE’s Latest Initiative

It was officially declared by the UAE’s Ministry of Finance, on 31st January 2022, that UAE will be opting for a corporate tax regime, which will be in operation from 1st June 2023. The legal provisions are yet to be issued in this regard. Accordingly, the ensuing paragraphs of this Article are subjected to any such changes that may arise in terms of normal corporate tax laws.

The responsible authority for implementing legal provisions, collecting, and administrating corporate tax will be the UAE Federal Tax Authority.

The novel corporate tax will be in an application for business and commercial entities as well as for individuals who make earnings as freelance individuals. Under the new tax policy, all activities performed by corporate/legal entities are considered liable for corporate tax. Accordingly, even if an individual who has a registered entity, registered for the purpose of carrying out business, is considered liable for payment of corporate tax.

This new corporate tax regime is expected to be extended even for business entities which are functioned in Free zones. However, the application of the corporate tax policy will be subject to the governing law of each free zone.

The Federal Corporate Tax rate

The corporate tax for entities with an annual income of AED 375,000 or below will be zero-rated whereas any taxable income which exceeds AED 375,000 will be taxed at a rate of 9% per annum.

In relation to multinational companies, a different tax rate is applicable. The new corporate tax law will ensure large multinational corporate enterprises pay a minimum level of tax on the income arising in each jurisdiction they operate. This policy is to be implemented based on the Global Anti base Erosion (GloBE) rules. The UAE’s novel corporate tax policy on multinational corporations is expected to harmonize with said policy initiated by OECD.

Categories that are likely to be exempted from the new corporate tax policy

  • Corporate Tax will not be applicable for the employment income of an individual including the salary.
  • Any investment concerning real estate carried out by an individual will be exempted unless such an individual is required to obtain a commercial or corporate license in relation to activities involved with the investment concerning such real estate activities.
  • Individuals who would gain from their investments in corporations such as dividends gained from their shareholding will be exempted as far as it is gained from the individual’s personal capacity.
  • Any income earned through bank deposits or any other income earned through such bank deposits by an individual is excepted from the proposed corporate tax.
  • Any business which is engaged with the extraction of natural resources will be exempted from the corporate tax regime and a different scheme of corporate tax will be in application depending on the governing law of such matters in each emirate.

Moreover, the UAE’s new corporate tax regime would allow a business to utilize the losses it incurred to offset taxable income for the purpose of calculating the corporate tax payable. In view of the policies under the new regime, a loss will be considered to have arisen, for the purpose of calculating corporate tax, if the total deductions are greater than the income.

In conclusion, it is opined that the novel introduction of corporate tax in UAE, will have a serious impact on the business operations, and corporate structures of the companies. In the long run, companies would want to adjust their existing corporate structures in order to comply with the novel corporate tax policy.

Read More : Will Corporate Tax in UAE be Applicable to Businesses in Each Emirate?

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.