Corporate tax in the UAE is a form of direct tax imposed on net income or business profit. The UAE introduced this tax with the aim of strengthening the country’s position as a leading global center for business and investment, in addition to accelerating the country’s development and transformation to achieve its strategic goals and renewing its commitment to meeting international standards of transparency tax and prevent harmful tax practices.
When will corporate tax come into effect?
Corporate tax will apply in the country for financial years starting on or after June 1, 2023, for example:
- Businesses whose financial year begins on July 1, 2023 and ends on June 30, 2024, will be subject to corporate tax in the UAE from July 1, 2023 (which is the start of the first financial year starting on or after June 1, 2023)
- Businesses that have a financial year (calendar) starting from January 1, 2023 and ending on December 31, 2023 will be subject to corporate tax in the country as of January 1, 2024 (which is the beginning of the first financial year starting on or after June 1, 2023).
What is the role of the Federal Tax Authority and the Ministry of Finance?
- The Federal Tax Authority is the entity responsible for managing, collecting and implementing the corporate tax in the country
- The Ministry of Finance will remain the competent authority for the purposes of bilateral or multilateral agreements and the international exchange of information for tax purposes.
Will foreign entities and foreign individuals be subject to corporate tax in the country? How to determine if an entity is subject to tax?
- Foreign entities and foreign individuals will be subject to corporate tax in the country only if they carry out a commercial activity or a continuous or regular business activity in the land of the United Arab Emirates.
- All activities under legal entity considered business activities and therefore these activities fall within the scope of corporate tax in the country.
If an individual owns a business in the country, how to determine if their business is taxable?
- This can generally determined by reference to the individual who holds a commercial license or permits to carry out the relevant commercial, industrial and professional activity in the country.
- The taxable income will be the net profit/accounting income of a business.
What is the rate of corporate tax?
- 0% for taxable income up to AED 375,000.
- 9% for taxable income over AED 375,000.
How to calculate corporate tax? if income of a business exceeds 400,000 dirhams in a given financial year
- Taxable income from 0 to 375,000 dirhams at 0% = 0 dirhams
- taxable income exceeding AED 375,000 (400.00 – 375,000 = AED 25,000) at 9% = AED 2,250
- Corporate tax payable for the financial year is 0 + 2,250 = 2,250 dirhams
Who are the entities that will be subject to corporate tax?
- All business and commercial activities within the United Arab Emirates.
- Income earned by an individual with a business license.
- Businesses established in free zones and which operate within the state.
- All banking operations (details will be provided later).
- Companies involved in real estate, construction, real estate development, real estate agencies and brokerage activities.
Who is exempt from corporate tax?
- The federal government, the governments of the Emirates, their departments, authorities, and other public institutions.
- Companies working in the field of extracting and exploiting the natural resources of the United Arab Emirates that are subject to taxes at the emirate level.
- Charitable societies and other public benefit institutions listed in the Cabinet Resolution.
- Public and private social insurance and pension funds.
- The individual’s salary or other income earned from the job.
- Investment in real estate by individuals in their personal capacity.
- Individuals’ income earned from the investment is taxable to the individual.
- The freelancer, unless his annual net income exceeds 375,000 dirhams.
- Interest and other types of income from bank deposits or savings programs that individuals earn for corporate tax.
- Eligible transactions between companies in the same tax group.
What are the tax implications of the previous year’s losses?
- The corporate tax system will allow a business to use losses incurred (from the effective date of the corporate tax) to reduce taxable income in subsequent financial periods.
- The excess tax losses are carried forward and used against taxable income for future years, Under certain conditions(we will provide details later).
- Tax losses of one company in the group can be used to offset the taxable income of another company within the same group, as long as certain conditions are met. (details will be provided at a later time).
- A group of companies in the country can apply to form a tax group and it is treated as a single taxable person provided that specific conditions are met, as the group must submit only one tax return on behalf of the whole group.
What is the withholding tax? Is it applicable in the UAE?
- Withholding tax is collected by the payer on behalf of the recipient at the source of income.
- Dividends, interest, franchises, and similar payments are commonly subject to withholding tax under many tax systems.
- It is not applicable in the United Arab Emirates.
Will foreign Tax paid outside of the UAE allowed as a corporate tax credit in the UAE?
The country’s corporate tax system will allow foreign taxes paid outside the country to get credit against corporate taxes paid within the country.
Will transfer pricing rules apply to businesses in the UAE?
Businesses in the UAE must comply with transfer pricing rules and documentation requirements in accordance with the Transfer Pricing Guidelines for the Economic Cooperation and Development Zone.
Is it necessary for businesses to register for corporate tax? What is the deadline for filing a tax return?
- A business must register for corporate tax (details will be provided later).
- It is mandatory to file a tax return for each financial period.
Are there any consequences for not complying with the corporate tax system?
As with other taxes levied in the UAE (eg value-added tax), businesses will be subject to fines for non-compliance with the new corporate tax system.
What is the role of experts in helping businesses to properly comply with the corporate tax system?
The introduction of the corporate tax law is new to everyone, and it can be a different experience and a step that you need to make sure of when you decide to do so, having the right person to guide you through the process is crucial to avoid such instances of fines and penalties, we at Abdullah Al Mulla Auditing of Accounts are ready To provide assistance, our experience has given us deeper insights into operations and we have become one of the most responsible and reliable tax advisors in the UAE, if you would like to know more about our qualified and experienced team, get in touch with our customer support team.