Historically, many enterprises in the UAE have paid no income tax on their revenues. This, however, is changing, as the Ministry of Finance (MOF) stated on January 31, 2022, that the UAE would implement a federal Corporate Income Tax (CIT). The CIT regime is planned to take effect for fiscal years beginning on or after June 1, 2023.
This move is prompted by the UAE's desire to match international tax norms, following similar movements in the neighbouring Gulf States while reducing compliance burdens for UAE enterprises and protecting small businesses and start-ups. The UAE, which is home to the important commercial hub of Dubai, will continue to have one of the world's lowest corporate tax rates.
What is Corporate Tax?
A corporate tax is a tax levied on a corporation's profits. Taxes are levied on a company's taxable income, which includes revenue less the cost of goods sold (COGS), general and administrative (G & A) expenses, selling and marketing, R & D, depreciation, and other operating costs.
Corporate tax rates differ greatly between countries, with some countries considered tax havens due to their low rates. Because corporate taxes can be reduced through various deductions, government subsidies, and tax loopholes, the effective corporate tax rate, or the rate a corporation actually pays, is usually lower than the statutory rate, the stated rate before any deductions.
Understanding the Corporate Tax in UAE
The implementation of the corporate tax regime aligns with the global economy's plans to impose a global minimum tax on multinational corporations. The UAE has stated its support for the proposed global tax standards, and this tax regime will assist it in aligning with international standards and becoming an active player in the global economy. The new corporate tax regime also states that businesses established in the Freezone will not be subject to it as long as they do not conduct business with the Mainland.
The new corporate tax system is structured as follows:
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A standard tax rate of 9% will be applied to businesses with taxable income in excess of Dh375,000.
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For businesses with taxable income lesser than Dh375,000, no tax will be levied.
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The latter was introduced with the intention of assisting small businesses and entrepreneurs while also bringing them under the tax regime.
Scope of Application
The corporate tax will be levied on all UAE businesses, and commercial activities carried out by legal entities or individuals in all seven emirates. Natural resource extraction will continue to be subject to an emirate-level corporation tax.
All activities carried out by a legal entity are considered "business activities" and are subject to the corporate tax regime. An individual, on the other hand, will be deemed to have a "business" that falls under the purview of the Corporate Tax Law if he/she has (or is generally required to have) a business license or permit to carry out their considerable activities in the UAE.
Companies incorporated in the UAE's freezones or financial freezones will be subject to federal corporate taxation as well. Thus, it appears that such companies will continue to benefit from applicable tax breaks and incentives in the manner and for the duration described in the relevant freezone authority's legal framework.
Proposed Rate
The following corporate income tax rates are proposed to be used:
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0 %rate on taxable income up to AED 375,000 (approximately US$ 102,000);
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9 % rate on taxable income above AED 375,000;
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Different rates (yet to be announced) for large multinationals with consolidated global revenues exceeding EUR 750 million (approximately AED 3.15 billion), in accordance with Pillar Two of the OECD Base Erosion and Profit Shifting (BEPS) project.
Read more:-Let’s know about Excise Tax in UAE
List of Income Exempted From CIT
According to the MOF, the following types of income will be exempt from the CIT regime:
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Income derived from natural resource extraction;
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Dividends and capital gains earned by a UAE company from its qualifying shareholdings (i.e., An ownership interest in a UAE or foreign company that meets certain conditions specified in the UAE CIT law;
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Qualifying intra-group agreement and reorganizations, subject to certain conditions set out in the UAE CIT law;
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Foreign entities and individuals who do not conduct ongoing or regular trade or business in the UAE; and
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Dividends, capital gains, interest, royalties, and other investment returns received by foreign investors
Impact of corporate tax on Business Owners
Businesses are expected to benefit rather than suffer as a result of the new corporate tax regime:
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A corporate tax system would assist businesses in adhering to the laws and regulations of the land in both letter and spirit.
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It has the potential to deter tax evasion and avoidance.
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Every fiscal year, businesses must file only one tax return electronically.
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On account of provisional tax returns, there is no requirement for advanced corporate tax payment.
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In the UAE, group companies can form a tax group and file a single tax return for the entire group. They can also transfer and offset their tax losses to other members of the group.
Conclusion
The imposition of a corporate tax in the UAE will undoubtedly have an impact on business operations, structures, and future mergers and acquisitions in the UAE. We encourage businesses to evaluate their current structures and operations in order to implement the most efficient business structures and models in light of the CT Law provisions once they are issued and in effect.
More information and exemptions will be made available in the coming months. As an owner of a business in the UAE, you may have concerns about the new corporate tax and how it will affect your company. Dhanguard, a leading business setup and service consultant in the UAE, can help you clear up any doubts and learn more about the impact of corporate tax on your business. Give us a call or send us an email, and we will help you navigate the new tax regime.